Fair value revised to $30 (from $33) on lower 2016 guidance; we think risk/return remains attractive with FRGI trading at less than 6x 2017E EBITDA, making it among the cheapest restaurant stocks despite margins and growth prospects at high-end of the peer group; spin-off looks to be on track for late-2017/early-2018.

• FRGI reported 2Q 2016 revenue up 5.6% to $181.5 million (versus consensus of $183.3 million) with EPS of $0.34, which lagged the prior year result of $0.42 and consensus of $0.40. Consolidated adjusted EBITDA fell 9% to $24.5 million (versus consensus of $26.5 million).
• At Pollo Tropical (PT), sales increased 13.7% to $101.9 million while adjusted EBITDA fell almost 12% to $14 million on a 13.7% margin. Comparable restaurant sales fell 1.4% while the company opened 11 stores (in TX, FL and GA) during 2Q 2016.
• At Taco Cabana (TC), revenue and segment EBITDA declined 3.5% and 5%, respectively to $79 million and $10.6 million, implying a 13.4% margin. Comparable restaurant sales fell 3.8% while the company opened 2 stores in TX during 2Q 2016.
• At the mid-point, FRGI lowered comparable restaurant sales guidance at both Pollo Tropical and Taco Cabana to roughly flat and down 2%, respectively (versus the prior expectation of low single digit growth at both brands). That said, the company maintained new store openings guidance and reduced its G&A expense forecast to $54-$57 million (versus previous forecast of $58-$60 million). Anecdotally, the company now expects consolidated restaurant EBITDA will contract in 2016.
• On the conference call, FRGI indicated it has begun a formal search for a CEO of the standalone Taco Cabana and that the separation remains on track for late-2017 or early-2018.
• Fair value of $30 per share, which implies better than 35% upside, is derived by applying a 10x multiple to Pollo Tropical 2017E segment EBTIDA of $66.5 million and a 6x multiple to Taco Cabana 2017E segment EBITDA of $41 million.
• At less than 6x revised 2017E EBITDA, FRGI remains among the cheapest stocks in the restaurant sector despite a margin profile and growth prospects at the high-end of the peer group. To that end, we think that with near-term expectations re-set to more reasonable levels the risk/return dynamic remains attractive ahead of improved operational performance and the potential value-unlocking separation of its Pollo Tropical and Taco Cabana brands.

HW’s conference call commentary portends strong F2017 results, in our view; with ~30% upside to fair value we continue to view pullbacks as buying opportunities

• In our view, HW’s commentary on the 3Q F2016 conference call was very encouraging for F2017 results, in terms of both earnings and free cash flow.
• At Building Products (BP), the addition of Krestmark, which has posted double-digit organic compound annual sales growth over the last 8 years and is expected to generate $125 million of revenue with EBITDA margins better than 19% in 2017, looks to be an attractive addition to the segment’s portfolio.
• At Construction Materials (CM), management expects fly ash volume growth of 9%-20%, which along with our expectation that the pricing environment will remain conducive to mid-single digit rate increases suggest a dynamic ripe for continued strength in incremental margins (i.e. 25%-plus).
• Anecdotally, HW’s commentary suggested that the consolidated EBITDA margin could top 20% in F2017 and free cash flow could be in the $140-$150 million range.
• For our part, we currently project consolidated F2017 EBITDA and free cash flow of $240 million and $115 million, respectively. For context, HW’s F2016 EBITDA and FCF guidance is $185-$200 million and $80-$90 million, respectively.
• Fair value remains $24 per share, based on 8.5x F2017E BP segment EBITDA of $157 million and 12x F2017E CM segment EBITDA of $110 million less corporate costs and projected net debt of $585 million. (Note: that our current forecast assumes the Krestmark acquisition closes at year-end F2016.)
• HW shares have appreciated 14.5% since our initial recommendation (versus an about 7% rise in the S&P 500) but with ~30% of implied upside to fair value we continue to view pullbacks as attractive buying opportunities.

HW reaffirms F2016 adjusted EBITDA guidance of $185-$200 million; acquisition of Krestmark Industries will add scale to BP segment; we recommend using any weakness in the shares as a buying opportunity.

• HW reported 3Q F2016 revenue up 8% to $262 million, compared with consensus of $276 million, with adjusted EBITDA and EPS up 11% and 20%, respectively, to $54 million and $0.30 (versus consensus of $58 million and $0.39).
• By segment, Building Products (BP) posted sales growth of 10% to $148 million with adjusted EBITDA of ~$33 million on a 22.4% margin. Revenue at Construction Materials (CM) grew 6% to $98.8 million with adjusted EBITDA of $25.6 million on a 26.2% margin, a company record.
• The company reaffirmed F2016 adjusted EBITDA guidance of $185-$200 million, implying 12%-20% growth, and anecdotally indicated the expectation of further top-line growth and margin expansion in F2017.
• HW also announced it has entered an agreement to acquire Krestmark Industries, a niche windows manufacturer in South Central U.S. with expected 2017 revenue of ~$125 million (and accretive EBITDA margins), for $240 million (or an implied purchase multiple of ~9.6x based on our estimate of ~$25 million in annual EBITDA).
• On a pro-forma basis, HW’s net leverage ratio will be ~3.15x at the end of F2016 but management expects to de-lever below 2.5x by the end of F2017.
• The company will hold a conference call this morning at 11 a.m. (ET), after which we may make further updates to our forecasts.
• Our fair value estimate remains $24, which represents an 8.5x multiple on 2017E BP segment EBITDA of $161 (previously $126 million) and a 12x multiple on F2017E CM segment EBITDA of $107 million less corporate costs and projected net debt of $586 million (previously $253 million).

Fair value increased to $39 (from $38); shares up 11% on solid 2Q 2016 results; full-year segment EBITDA guidance of $120-$126 million was substantively maintained.

VVI reported consolidated 2Q 2016 revenue up 2.4% to $325 million with EPS of $1.04, which was down from $1.18 in the prior year but well ahead of the $0.82 consensus estimate. Total adjusted segment EBITDA fell by about 2% to $45 million.

By segment, M&E revenue was essentially flat at $285 million while adjusted operating income and EBITDA fell about 9% to $27 million and $34 million, respectively. At T&R, revenue increased 33% to $40.5 million with 20% and 32% growth in adjusted EBIT and EBITDA to $7 million and $11 million, respectively.

VVI generated $24 million of free cash flow in 2Q 2016 and reduced net debt by more than $20 million to ~$101 million.

On a consolidated basis, VVI essentially maintained its 2016 adjusted segment EBITDA guidance of $120-$126 million (previously $119-$126 million). At M&E, management expects mid-to-high single digit revenue growth and adjusted segment EBITDA of $76-$79 million (previously $77-$80 million). For T&R, revenue is expected to increase 30%-32% (previously 20%-25%) with adjusted segment EBITDA of $44-$47 million (previously $42-$46 million).

Our fair value estimate is increased to $39 (from $38), which represents a 5.5x multiple on M&E 2017E segment EBITDA of $78 million (previously $80 million) and an 8.5x multiple on T&R 2017E segment EBITDA of $50 million (previously $48).

Anecdotally, VVI’s conference call commentary backed our contention that the achievement of $225 million in revenue at T&R remains the starkest benchmark precipitating a split of the company’s two businesses. To that end, management indicated it was an active pipeline of acquisition opportunities at both M&E and T&R.

Shares present an attractive entry point with ~35% upside to our $26 fair value; revised 2016 guidance is roughly in-line with our initial outlook; new CEO has strong operational and M&A background.

TRS reported 2Q 2016 EPS of $0.34, which was up 13% year over year and in-line with consensus, on an almost 10% decline in consolidated sales to $203.3, which lagged consensus of $220 million. Broadly, revenue disappointed across the portfolio while margins outperformed in all segments except Aerospace.

TRS’s net debt and leverage ratio declined to $383 million and 2.8x, respectively (from $412 and 3.0x at the end of 1Q 2016).

On a consolidated basis, the mid-point of TRS’s revised guidance calls for 2016 sales to be down 5.5% (versus the previous expectation of flat) with EPS of $1.26 (versus the previous guide of $1.40 and our initial forecast of $1.23) and FCF of $60 million (versus the previous guide of $65 million and our initial forecast of $57 million).

TRS appointed Thomas Amato to replace David Wathen as CEO. Mr. Amato was most recently the chief executive of Metaldyne and has a strong operational improvement and M&A background (in both “acquisitions and divestitures”). Our initial take is his appointment is a net positive for both future operating results as well as the potential for portfolio rationalization.

Our fair value estimate remains $26, which represents an about 9.5x blended multiple on 2017E EBITDA of $152 million (previously $156 million). With ~35% of implied upside to fair value and near-term expectations now tempered we think the current quote presents an attractive entry point ahead of improved internal execution and a range of potential value-unlocking alternatives.

Fair value increased to $56 (from $53) on initial F2017 guidance; M&A activity is still likely to ramp in C2017 with MDP being an aggressive consolidator.

This morning, MDP reported F2016 revenue up about 3.5% to $1.65 billion while full-year EPS and EBITDA remained relatively flat at $3.30 and $320 million, respectively.

Net debt fell by more than $100 million to $670 million at the end of F2016 (versus $772 million at the end of F2015). MDP’s balance sheet remains flexible with a leverage ratio of 2.3x (and weighted interest costs of 2.7%).

For F2017, MDP guided for consolidated sales to rise in the mid-single digits, comprised of 20% growth at Local and a low-single digit decline at National, with EPS of $3.50-$3.80, implying year-over-year growth of 6%-15%.

On the transactional front, in recent months MDP has expressed increased openness to the separation of its Broadcasting & Publishing assets, which would likely be accomplished via a spin/merger with a strategic player to gain further scale on either side of the business. In that context, management also indicated the expectation that another round of “aggressive” consolidation in the Broadcasting arena could begin to emerge looking into “early-calendar 2017”.

Our current fair value estimate ascribes $51 per share of value to MDP’s Broadcasting business assuming a 9.5x multiple on F2107E/F2018E EBITDA of ~$240 million and $22 per share to the company’s Publishing assets at a 6.5x multiple on F2017E EBITDA of ~$156 million. For context, Broadcasting peers currently trade at about ~9.5x and the purchase multiple being paid for NXST for MEG was about 9.9x (ex-CVRs). On the Publishing side, GCI’s most recent bid for TPUB represents an about 6.4x multiple, by our calculation.

MDP has returned about 30% since our initial publication in September 2015 (versus an about 15% advance in the S&P 500).

On July 18, 2016, Lockheed Martin Corporation (NYSE: LMT) announced details associated with the split-off its Information Systems and Global Solutions (IS&GS) business, which will then merge with Leidos Holdings, Inc. (NYSE: LDOS) in a Reverse Morris Trust (RMT) transaction. Under the terms of the split-off, Lockheed Martin will offer its stockholders the option to exchange some, all or none of their shares of Lockheed Martin common stock for common units of Abacus Innovations Corporation (Splitco), an LMT subsidiary formed to hold LMT’s IS&GS business (which will convert into shares of LDOS common stock). LMT expects to issue approximately 76.959 million Splitco common units.

LMT shareholders may exchange their LMT shares for a number of shares of Abacus common stock that corresponds to a 10 percent discount in value, meaning that LMT shareholders will receive approximately $111 in value of Abacus common stock for every $100 of LMT common stock. Shareholders electing to participate in the exchange will receive a yet-to-be-determined number of shares of Splitco, which will then be exchanged at a ratio of 1:1 into shares of LDOS. The LMT-to-Splitco exchange ratio is subject to an upper exchange limit of 8.2136 Splitco common units for each share of LMT common stock tendered in the exchange offer.

Based on the indicative exchange ratio noted in the most recent filing, LMT shareholders electing to exchange their shares would receive 8.0032 shares of Splitco for each share of LMT, which reduces LMT’s share count by approximately 9.6 million shares (76.959 million shares divided by 8.0032). If the split-off is not fully subscribed, LMT’s share count would decrease by an amount equal to amount of shares exchanged, and the remainder of the 76.959 million Splitco shares would be distributed ratably among LMT shareholders as a dividend, similar to a spin-off.

The exchange offer is scheduled to expire at 8:00 a.m. on August 16, 2016, unless Lockheed Martin extends or terminates the exchange offer.

The value of LMT common stock and Splitco common stock will be determined by Lockheed Martin by average VWAP (volume-weighted average prices) of LMT and LDOS on each of the Valuation Dates, or the last three trading days ending on and including the third trading day preceding the expiration date of the exchange offer. The value of LDOS common stock will equal the average of the LDOS Daily VWAP on the NYSE on each of the Valuation Dates, minus the Leidos special dividend of $13.64 per-share, which will be issued prior to the closing of the merger. The Valuation Dates are expected to be August 9, 10 and 11, 2016. As of July 18, 2016, the three-day VWAP for LDOS is $49.7530 per share. Netting out the $13.64 special dividend, the LDOS dividend-adjusted per share value is $36.1130.

We have updated our post-spin fair value estimate for LMT assuming the indicating exchange ratio (which implies 9.6 million LMT shares are exchanged), the company’s most recently-reported balance sheet as of Q2 2016, and recent multiple expansion for LMT and aerospace and defense comparables. Note that LMT recently reported better-than-expected Q2 results and raised full year revenue and earnings guidance. Accordingly, the fair value estimate for LMT has been revised to $251 from $236 previously. The post-merger fair value estimate for LDOS remains unchanged at $60. The fair value estimate for LDOS represents 23% upside to the current share price, implying the transaction should unlock considerable incremental value for LDOS. As such, we continue to recommend shares of LDOS for purchase. We view shares of LMT as fairly valued at current levels. For more details, please refer to the Lockheed Martin Spin-Off Report dated July 20, 2016.

On July 18, 2016, Hawaiian Electric Industries Inc. (NYSE: HE) reaffirmed financial guidance as an independent company and announced it is no longer proceeding with the previously proposed spin-off of its bank subsidiary, American Savings Bank (ASB). This announcement follows a 2-0 vote against the merger of Hawaiian Electric and NextEra Energy Inc. (NYSE: NEE) by the Hawaii Public Utilities Commission (PUC) on Friday, July 15th. Specifically, the PUC highlighted five areas of concern, including benefits to taxpayers, risks to ratepayers, clean energy commitments by NextEra, the effect the deal would have on local governance and the effect it would have on competition in the Hawaii market.

As previously disclosed, the spin-off of American Savings Bank (ASB) was contingent upon the completion of the combination of Hawaiian Electric with NextEra Energy. As such, we will no longer follow the transaction going forward.

Under the terms of the merger agreement, NextEra Energy will pay HEI a $90 million termination fee and up to $5 million for reimbursement of expenses associated with the transaction.

For more details, please refer to the Hawaiian Electric Spin Off Report dated June 24, 2016.

On July 11, 2016, Emergent BioSolutions Inc. (NYSE: EBS) approved the spin-off of Aptevo Therapeutics Inc. and announced key dates associated with the spin-off. The distribution of Aptevo shares will take place on August 1, 2016, to EBS shareholders of record as of the close of business on July 22, 2016, the record date for the spin off. EBS stockholders will receive one share of Aptevo common stock for every two shares of EBS common stock held on the record date.
 

“When-issued” trading of Aptevo common stock will begin shortly before July 22, 2016, on the NASDAQ Global Market, under the symbol “APVO WI.” On August 1, 2016, Aptevo common stock is expected to begin “regular way” trading on NASDAQ under the symbol “APVO.” 
 

EBS will continue to trade on the New York Stock Exchange under the ticker symbol “EBS.” An ex-distribution market for EBS common stock is expected to start on July 21, 2016, assuming that APVO “when issued” trading begins on July 20, 2016.
The spin entity, Aptevo Therapeutics, is a biotechnology company focused on novel oncology and hematology therapeutics. Its core technology is the ADAPTIR™ (modular protein technology) platform. Aptevo has four revenue-generating products in the areas of hematology and infectious diseases, as well as various investigational stage product candidates in immuno-oncology.
 

Emergent BioSolutions is a biopharmaceutical company that offers specialized products to healthcare providers and governments to address medical needs and emerging health threats. The company has two operating divisions—Biodefense and Biosciences. The Biodefense division is a pharmaceutical business focused on countermeasures that address CBRNE (chemical, biological, radiological, nuclear andexplosives) threats. The company’s primary product is BioThrax, which is the only vaccine approved by the FDA for the prevention of anthrax.
 

The decision to spin out the money-losing Biosciences group represents a realistic appraisal of the cost-benefit tradeoff of continuing to fund what has been a significant cash drain on EBS for years. EBS has historically funded biosciences product development through internally generated cash flow from BioThrax sales. Accordingly, the post-spin parent, which will maintain its medical countermeasure focus, is likely to experience considerable earnings leverage following the spin-off.
 

The pre-spin sum-of-the-parts fair value estimate for EBS remains unchanged at $30 (previously updated from $49 per share in the July 2016 Spin-Off Calendar to reflect the downward revision in the company’s BioThrax contract with the Department of Health and Human Services). Net-net, the new contract for 29.4 million BioThrax doses over 5 years is disappointing relative to EBS’ current five-year contract, under which the company has delivered approximately 39 million of 44.75 million doses through 1Q 2016. Note that the capitalization structure for Aptevo has been updated to reflect balance sheet information for the quarter ended March 31, 2016. Post-spin, EBS and APVO can be fairly valued at $23.72and $12.71, respectively. With the pre-spin fair value estimate approximating EBS’s current share price ($30.04 as of this writing), the shares appear to be fully valued for the transaction. As such, the pre-spin shares are not recommended for purchase. For more details, please refer to The Spin Off Report dated May 16, 2016.