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Late last year ITT Corporation (NYSE:ITT) broke itself apart into 3 different companies. Much of this was due to pressure from institutional investors concerned about the lack of growth and return of the defense part of the company. By separating into three different groups the company concentrated its higher return assets in ITT. Defense became ITT Exelis (NYSE:XLS), which also assumed a large portion of the pension debt for the corporation as a whole. Finally there is Xylem (NYSE:XYL), the water management part of the company.

Last week the three former components reported their first quarter as separate companies and the results were encouraging that the division could work.

The core ITT, which focuses on aerospace and automotive components and IT services, has traded at about $24 a share since the break up. Prior to the split the ITT holistic stock was at about $43. This part reported in-line earnings of 36 cents but revenue was up 10% year-to-year and was $7 million above projections. More importantly the company is predicating that for 2012 earnings should be above $1.62 a share or up 2 cents over 2011, with revenue growing at least 5%. Full-year results for 2011 were just over $2 billion.

Exelis had a rougher quarter with income down almost $80 million from the previous year. Part of this included a $30 million charge related to the separation. Projected 2012 sales will be lower than 2011 at $1.80 to $1.86 a share on sales of $5.4 to $5.5 billion, or down almost half-a-billion dollars from 2011.

Finally, Xylem while it improved over the previous year did miss analyst projections. Per share it was only 40 cents compared with expectations of about 45. Revenue for 2011 was $3.8 billion or about $700 million more then 2010. Xylem saw good return from its water and waste water products. Its results also included a $5 million charge related to the break up.

Exelis especially is entering a period of uncertainty. The U.S. military, which is its core customer, is preparing cuts to defense and security spending. It has lost bids on some recent major contracts related to aircraft and helicopter countermeasures. The criticism of ITT as whole being held back by defense seems to be continuing with the three companies. Interestingly the stock is tracking up to a recent close of over $11 from its 52-week low of $8.50 in December. All three parts of the company pay a 10 cent dividend quarterly, which could explain some of the interest but the long-term trend does not seem to support a good return from this stock.

The other two parts are doing better financially but the stock prices are not reflecting it. ITT is up slightly this year while Xylem is declining. This really doesn't make sense compared with the performance of ITT. Their futures are probably brighter due to the markets they are in and over the next several months their stock prices should reflect this performance.

The other issue facing Exelis is merger and acquisition. With the expected declines in defense spending this should be picking up in the next several months. The former ITT defense is valued at about $2.27 billion, which should go down as the stock price suffers. It offers some key businesses and markets that would be desirable for other defense contractors. Any of the big U.S. ones like Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT) or General Dynamics (NYSE:GD) could buy it and it might also be attractive to the large European ones like BAE Systems and EADS. This too might explain some of the interest in holding the stock. This could also be true for Xylem, although its market capitalization is well over twice Exelis. ITT had over the last 20 years become a major force in the water industry by acquiring many worldwide pump and water treatment companies. Any of its rivals in this industry could look at adding its portfolio to theirs.

The plan to divide the company once again following the much larger breakup of the early 90s is just a reflection of the current state of the defense industry. It is allowing ITT to focus on its profitable product lines while jettisoning the low performing defense business that is facing an uncertain future. This is yet to be reflected in stock performance but over the next 12 months expect it to be.

Source: Is ITT's Break Up Going To Plan?