WBD to Separate its Cable & Streaming Businesses in a Tax-Free Transaction by Mid-2026

On June 9, 2025, before the market open, Warner Bros. Discovery, Inc. (NASDAQ: WBD), a global media & entertainment company formed by the Reverse Morris Trust merger of WarnerMedia (previously a part of AT&T) and Discovery in April 2022, announced its intention to separate its Streaming & Studios and Global Networks businesses in a tax-free transaction expected to completed by mid-2026, subject to customary conditions, including final Board approval and the receipt of IRS/SEC assurances. The Streaming & Studios business, in which the parent company will retain a 20% stake, will include Warner Bros. Television, Warner Bros. Motion Picture Group, DC Studios, HBO & HBO Max, Warner Bros. Games, Tours, Retail & Experiences as well as existing studio production facilities (in CA and the UK) and the associated properties film & television content libraries while the Global Networks business will include WBD’s entertainment, sports & news brands, including CNN, TNT Sports and Discovery, along with the company’s digital products/properties, including Discovery+ and the Bleacher Report (B/R).

WBD’s current president & chief executive (CEO) David Zaslav is expected to take the helm at Streaming & Studios while WBD’s current chief financial officer (CFO) is expected to take the reins at Global Networks. Beyond the standard rationale, of more focused management and investor bases as well as better tailored capital structures & allocation policies we would note that this transaction’s announcement also comes in the context of Comcast’s decision to spin-off its cable networks business in November 2024 as well as WBD’s December 2024 move to reorganize its business into a holding company structure with two reportable operating divisions: 1) Global Linear Networks (~48% of consolidated sales and ~78% of adj. EBITDA in 2024); and 2) Streaming & Studios, albeit with three reportable segments, including Studios, Networks and DTC (or direct-to-consumer). In terms of guidance, the company has articulated the expectation that its Streaming business was on-track to generating “at least $1.3 billion” in adjusted EBITDA in 2025 and that Studios is “on a path back to their target of at least $3 billion in annual adjusted EBITDA”.

In terms of valuation, the Networks business could be imperfectly compared with AMC Networks Inc. (NASDAQ: AMCX) and EchoStar Corp. (NASDAQ: SATS), which acquired DISH Network in January 2024, as well as other linear network & broadcast peers, such as Tegna Inc. (NYSE: TGNA), Nexstar Media (NASDAQ: NXST), Gray Media (NYSE: GTN), FOX Corp. (NASDAQ: FOXA), Sinclair Inc. (NASDAQ: SBGI), and The E.W. Scripps Co. (NASDAQ: SSP), which trade at ~6.0x 2026E EV/EBITDA. Studios assets, such as DreamWorks, Pixar, Marvel, MGM, Twenty-First Century Fox, Lucas Films and Skydance, have, by our calculation, have historically garnered a low-to-mid teens average multiples (albeit in a wide range of ~10x-37x) while streaming assets, such as Netflix, Inc. (NASDAQ: NFLX), Spotify Technologies (NYSE: SPOT) and Roku, Inc. (NASDAQ: ROKU), trade at nearly 30x (in a range of 18.5x-37.0x).

Applying a ~6.5x blended multiple to 2026E adj. EBITDA yields segment value of ~$67 million. Accounting for corporate costs, capitalized at the segment average, as well as projected net debt yields a preliminary, sum-of-the-parts fair value estimate of more than $26 billion or ~$11 per share (based a diluted share count of 2,450 million).

SMG reaffirms F2025E guidance at an industry forum; reintroduces EPS guidance of “at least $3.50”; maintain $72 fair value estimate

Today, at an annual industry forum, SMG provided its customary mid-quarter update where it reaffirmed its previously articulated F2025E guidance calling for low-single digit growth in its U.S. Consumer business, an adjusted gross margin of ~30% (up 370 bps year-over-year) and adjusted EBITDA of $570-$590 million (implying year-over-year growth of 12%-16%; see Exhibit #1 on page 1). 

Management also reaffirmed its expectation for an additional $75 million of supply chain and costs savings (i.e., gross margin expansion) in F2026-F2027.

F2025 free cash flow (FCF) is still projected to be ~$250 million, including a capital spending budget of ~$100 million, and leverage is expected to fall to near 4.0x by year end (compared with 4.4x at the end of 1Q F2025 and its year-end covenant of 4.75x).  Anecdotally, the company still targets a leverage ratio of ~3.5x in F2027.

Additionally, the company reintroduced formal F2025E EPS guidance of “at least $3.50” (compared with consensus of ~$3.45), which implies a better than 50% year-over-year increase. Notably, the company also reduced its year-over-year dilution expectation to 1 million shares (from 2 million shares).

Interest expense is expected to be ~$30 million lower in F2025E (versus F2024A), which compares with the previous projection of $15-$20 million.

All told, our base case fair value estimate for Scotts Miracle Gro (SMG) remains $72 per share, which assigns de minimis value to its remaining cannabis-related supply asset, Hawthorne, and accounts for corporate costs and net debt (see Exhibit #2 on page 2).

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

HOLN Spin-Off AMRZ set to Begin Trading on June 23^rd (with a Record Date of the 20^th)

On June 2, 2025, Holcim AG (HOLN SW), which trades on the SIX Swiss Exchange, announced it plans to complete the tax-free separation of 100% (on a one-for-one basis) of its North American business, which will be called Amrize (and trade on the New York Stock Exchange under the ticker AMRZ with a secondary listing on the SIX Swiss Exchange), from its remaining International business (i.e., Europe, Latin America, North Africa & Australia), which will maintain the current corporate moniker (as well as its listing, domicile & ticker), on June 23^rd (with shares of AMRZ beginning to trade independently as of that day’s market open).  [Recall, on May 14, 2025, shareholders of Holcim AG (HOLN SW) overwhelmingly approved (i.e., 99.75% of the vote) the pending separation transaction.]

In terms of indexation, AMRZ will be included in the Swiss Market Index (SMI) and the Swiss Leader Index (SLI) on its first day of trading (and intends to seek inclusion in the relevant U.S. equity indices, most reasonably, in our view, the S&P 500).  Post-spin parent, HOLN, will remain in both the SMI and SLI indexes.

When thinking about valuation, we continue think investors will need to parse standalone Amrize’s specific end-market exposures, including aggregates, cement (i.e., Buildings Materials) and roofing (i.e., Building Envelope). On the Building Materials side, cement producers, such as Eagle Materials (NYSE: EXP) and CRH plc (NYSE: CRH), have traditionally traded at a discount to aggregates producers, such as Martin Marietta Materials (NYSE: MLM) and Vulcan Materials (NYSE: VMC), given the perception of, among other things, higher cyclicality, out-sized operating leverage and the perception of greater potential import competition; for its part, AMRZ management contends that the earnings profiles of its cement and aggregate businesses is not overly dissimilar and that its high exposure (i.e., 75%) to so-called “in-land” markets limits the competitiveness of/threat from imports. For our part, we think it most prudent to apply a blended multiple to 2026E EBITDA, based on 14.5x multiple for the Aggregates business (a modest discount to MLM & VMC), a 10x multiple for Cement (roughly in-line with EXP & CRH) and 12x for Roofing, a modest discount to Carlisle Cos. (NYSE: CSL), which, all told, yields a total segment value of ~CHF 36.75 billion (see Exhibit 1 on page 2). [Note: our forecast is based on a USD/CHF exchange rate of 0.82, as compared with 0.84 and 0.83 in our last two previous notes but markedly down from 0.88 just last month.  For context, by our calculation, every 0.01 change in the FX rate, all else being equal, pushes value up or down by slightly more than 1%.]

Post-spin Holcim is, in our view, likely to trade more in-line with more International-focused peers, such as Buzzi SpA (BUZ IM), Cie de Saint Gobain SA (SGO FP), CRH plc (NYSE: CRH), and Heidelberg Materials AG (HEI GR), which, trade on average at ~8.0x 2026E EV/EBITDA. Additionally, for its own part, we would note that legacy consolidated HOLN has, over the last 1-, 3-, 5- and 10-year periods, traded at an average forward multiple of 7.0x-8.0x. Further, simply for reference the average forward M&A multiple within the broader/global Building Materials sector has, per Chainbridge Research, been roughly 9.5x since 2015 (in a range of 6.5x-16.5x). For our part, applying a multiple of 7.0x to 2026E EBITDA, yields segment value of ~CHF 31 billion; see Exhibit 1).

All told, shares of pre-spin HOLN currently trade at ~8.0x 2026E EV/EBITDA and we continue to think the upcoming transaction is likely to unlock value as shares of each company garner appropriate valuations in their respective equity markets. Thus, we maintain our pre-spin BUY recommendation. On a post-spin basis, while we still await indications as to where the individual shares will ultimately begin trading in the so-called “when-issued” market, our initial bias leans toward Amrize (SpinCo), which offers higher growth, better margins, and, in our view, will eventually be added to the S&P 500 Index (potentially boosting demand for the shares). 

Please see the Spin-Off Report dated January 2, 2025 and Updates from 4/25/2025 and 5/24/2025, for more information.

Quick 2025 Investor Day Notes: New 2028E Financial Targets, an Upcoming Stock Split and Commentary Suggesting a Divestiture of Specialty Services is Possible (but not seemingly imminent); Fair Value Increased to $51 per share

Yesterday, we attended APG’s 2025 investor day in NYC where, as promised, the company provided new 2028E financial targets, including $10 billion-plus in consolidated sales, with an adj. EBITDA margin of 16%-plus and 60% of sales stemming from inspection, service & monitoring (as opposed to project-based) business and ~$2.5-$3 billion of cumulative free cash flow generation.

On the top-line, the company projects mid-single digit organic growth (to ~$8.5 billion) with ~$250 million of annual M&A spend (at ~6x EBITDA). Margins are expected to improve roughly 80 basis points per annum, in line with historical trends (i.e., 2021-2024) and the free cash flow conversion rate is expected to be 75% of adj. EBITDA and 120% of net income (see Exhibits on pages 2 through 5).

For context, for 2025, the company has guided to consolidated sales of $7.4-$7.6 billion, implying 5%-8% overall growth (with 2%-5% being organic) with adjusted EBITDA of $985 million-$1.035 billion, implying constant currency growth of 10%-15%, and free cash flow conversion of ~75% (as a % of adj. EBITDA).

Separately, the company announced a 3-for-2 stock split, to take effect on June 30, 2025, for shareholders of record June 16^th (after which the share count is expected to be ~415 million).

Anecdotally, as it relates to potential divestitures, which we note was not a huge topic of discussion at the event, management’s initial commentary seemed to suggest selective pruning was more likely at least in the near-term but subsequent comments acknowledged that everything was on the table toward the achievement of its 2028E goals (i.e., while the Specialty business does have some customer-related synergies it is dilutive towards the overall 16% margin effort).

Our base case fair value estimate for Api Group (APG) is revised to $51 per share, reflecting a blended multiple of ~13.5x on F2026E adjusted EBITDA of ~$1.1 billion along with projected net debt of ~$1.0 billion and a diluted share count of ~287 million (see Exhibit #8 on page 5).

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

MDT to Separate its Diabetes Business in late-2026 via a Tax-Free IPO/Split-Off 

On May 21, 2025, before the market open, Medtronic plc (NYSE: MDT), a global healthcare technology company based in Ireland but headquartered in Minneapolis, announced the intent to separate its Diabetes business into a standalone public company. The transaction, which is “generally” expected to be tax-free to shareholders, will preferably be accomplished via an initial public offering (IPO) and a subsequent split-off within the next 18 months (i.e., late 2026), subject to customary conditions, including final Board & regulatory approvals. The parent, MDT, expects the deal to be accretive to both gross and operating margins (by 50 bps & 100 bps, respectively) as well as EPS; management also plans to maintain its current dividend policy post-spin. As it relates to SpinCo (i.e. the so-called “New Diabetes Company”), which accounted for ~7.5% of consolidated sales and ~3.5% of operating profit in F2025, management envisions a “scaled” and more focused player in intensive insulin management industry that will be “appropriately” capitalized.

Currently, MDT reports four operating portfolios: 1) Cardiovascular (~37% of consolidated sales and operating profit), which is made up the Cardiac Rhythm & Heart Failure, Structural Heart & Aortic and Coronary & Peripheral Vascular divisions; 2) Neuroscience (~29.5% of sales and 33% of operating profit), which is comprised of the Cranial & Spinal Technologies, Specialty Therapies and Neuromodulation divisions; 3) Medical Surgical (26% of sales and 26.5% of operating profit), which includes the Surgical & Endoscopy and Care & Monitoring divisions; and 4) Diabetes (~7.5% of sales and ~3.5% of operating profit), which develops, manufactures and markets products (and services) for the management of Type 1 and Type 2 diabetes (i.e., insulin pumps & pens as well as glucose monitors).  In terms of guidance, the company forecasts full-year F2026E organic top-line growth of ~5% (in a range of 4.8%-5.1%) with diluted adj. EPS growth of ~4% to $5.50-$5.60.    

For its part, over the last 5- and 10-year periods, MDT has traded at ~13x-13.5x forward EV/EBITDA and 18x-18.5x forward EPS while the broader medical device cohort, which could imperfectly include Baxter International (NYSE: BAX), Becton, Dickinson & Co. (NYSE: BDX), GE Healthcare (NASDAQ: GEHC), and Stryker Corp. (NYSE: SYK), trade at ~15x and 17x forward EV and EPS, respectively (in ranges of 9.5x-20.5x and 12.5x-27.5x). 

Applying a blended multiple of 13x, based on individual segment margin profiles, to projected F2026E EBITDA and accounting for net debt yields a preliminary, base case, sum of the parts valuation of ~$128.5 billion or ~$100.00 per share (based on a diluted share count of ~1.286 billion).

HOLN Shareholders Approve Amrize Spin-Off on-track for June; Dates & WI-Trading Info TBA; Maintain Pre-Spin BUY

On May 14, 2025, shareholders of Holcim AG (HOLN SW), which trades on the SIX Swiss Exchange, overwhelmingly approved (i.e., 99.75% of the vote) the pending tax-free separation (on a one-for-one basis) of its North American business, which will be dubbed Amrize (and trade on the New York Stock Exchange under the ticker AMRZ with a secondary listing on the SIX Swiss Exchange), from its remaining International business (i.e., Europe, Latin America, North Africa & Australia), which will maintain the current corporate moniker (as well as its listing, domicile & ticker).  The transaction is on-track to be completed in June 2025 although specific dates and so-called “when-issued” trading information has yet to be definitively announced.

Additionally, at the 2025 Annual Meeting, HOLN (the parent) also approved the previously announced 11% increase in its annual dividend to CHF 3.10 as well as elected Kim Fausing as Chairman of post-spin HOLN (as current Chairman and former Chief Executive, Jan Jensich, will assume both of those roles at post-spin AMRZ).  

When thinking about valuation, we continue think investors will need to parse standalone Amrize’s specific end-market exposures, including aggregates, cement (i.e., Buildings Materials) and roofing (i.e., Building Envelope). On the Building Materials side, cement producers, such as Eagle Materials (NYSE: EXP) and CRH plc (NYSE: CRH), have traditionally traded at a discount to aggregates producers, such as Martin Marietta Materials (NYSE: MLM) and Vulcan Materials (NYSE: VMC), given the perception of, among other things, higher cyclicality, out-sized operating leverage and the perception of greater potential import competition; for its part, AMRZ management contends that the earnings profiles of its cement and aggregate businesses is not overly dissimilar and that its high exposure (i.e., 75%) to so-called “in-land” markets limits the competitiveness of/threat from imports. For our part, we think it most prudent to apply a blended multiple to 2026E EBITDA, based on 14.5x multiple for the Aggregates business (a modest discount to MLM & VMC), a 10x multiple for Cement (roughly in-line with EXP & CRH) and 12x for Roofing, a modest discount to Carlisle Cos. (NYSE: CSL), which, all told, yields a total segment value of ~CHF 37.5 billion (see Exhibit 1 on page 2). [Note: our forecast is based on a USD/CHF exchange rate of 0.84, up from 0.83 in our last note but down from 0.88 just last month.  For context, by our calculation, every 0.01 change in the FX rate, all else being equal, pushes value up or down by slightly more than 1%.]

Post-spin Holcim is, in our view, likely to trade more in-line with more International-focused peers, such as Buzzi SpA (BUZ IM), Cie de Saint Gobain SA (SGO FP), CRH plc (NYSE: CRH), Heidelberg Materials AG (HEI GR), which, trade on average at ~8.0x 2026E EV/EBITDA. Additionally, for its own part, we would note that legacy consolidated HOLN has, over the last 1-, 3-, 5- and 10-year periods, traded at an average forward multiple of 7.0x-8.0x. Further, simply for reference the average forward M&A multiple within the broader/global Building Materials sector has, per Chainbridge Research, been roughly 9.5x since 2015 (in a range of 6.5x-16.5x). For our part, applying a multiple of 7.0x to 2026E EBITDA, yields segment value of ~CHF 31 billion; see Exhibit 1).

All told, shares of pre-spin HOLN currently trade at ~8.5x 2026E EV/EBITDA and we continue to think the upcoming transaction is likely to unlock value as shares of each company garners appropriate valuations in their respective equity markets. Thus, we maintain our pre-spin BUY recommendation. On a post-spin basis, while we still await indications as to where the individual shares will ultimately begin trading in the so-called “when-issued” market, our initial bias leans toward Amrize (SpinCo), which offers higher growth, better margins, and, in our view, will eventually be added to the S&P 500 Index (potentially boosting demand for the shares). 

Please see the Spin-Off Report dated January 2, 2025 and Updates from 4/25/2025, for more information.

HCI Eyes a Potential Tax-Free Spin-Off of its IT Solutions Business, Exzeo, by Year-End 2025 

On May 8, 2025, after the market close, HCI Group (NYSE: HCI), a Florida-based property & casualty (P&C) insurer, announced the potential tax-free spin-off of its IT Solutions business (i.e., advanced underwriting, data & analytics and insurance management services), Exzeo (formally TypTap), from its core insurance operations via a potential tax-free separation that if ultimately enacted would be targeted for completion by the end of 2025, subject to customary conditions, including the filing & effectiveness of a Form 10 filing with the Securities & Exchange Commission (SEC).

Per management, Exzeo “already has attractive margins, is solidly profitable, and generates strong operating cash flows. For the first quarter, Exzeo reported $52 million in revenue and $24 million in pretax income, assuming Exzeo operated as a standalone entity”.  Per filings, Exzeo generated $134.5 million in sales in 2024 with $35.2 million in income before taxes compared with $88 million in sales and $424K in EBIT for 2023.  Management expects the separation will allow Exzeo to deliver its technology solutions to a market well beyond what it would otherwise be able to under the HCI umbrella and unlock value for all shareholders.  (Anecdotally, management indicates that it considered a range of options, including an initial public offering, but concluded a potential spin off was the best path forward.)  In describing its business model, which is focused on helping insurance clients reduce their loss and expense ratios, HCI highlighted that, “Exzeo collects a fee every time a policy is bought and administered. If you don’t bind a policy, there is no cost. So it’s a very much a variable cost model, and it’s a solution in that fashion. But when you do that at great volume, right, it suddenly becomes incredibly powerful and incredibly valuable. You see other marketplaces of this nature, whether you think of Uber or Lyft, or if you were to think of Amazon or Spotify, or any of those kinds of distribution platforms, you’re paying for by the transaction, but the transactions add up”.

In terms of valuation, the broader group of property & casualty (P&C) insurers, trade at ~2.5x book value and ~12.5x 2026E EPS while M&A activity in the non-Life Insurance sector, the average purchase multiple has been around ~16.5x in recent years, per Chain Bridge Research.  For its own part, HCI, which has seen its share appreciate materially in 2025, have generally traded at a premium to peers.  Applying a 12.5x multiple to 2026E EPS yields a preliminary fair value of $181.75 per share (based on a diluted share count of ~12.8 million). 

MCK Intends to Separate its Medical-Surgical Solutions Business; “Form and Timing” Remain to be Determined albeit with the Goal of Maximizing Shareholder Value  

On May 8, 2025, after the market close, McKesson Corporation (NYSE: MCK), a pharmaceutical/medical supply distributor, announced its intention to separate its Medical-Surgical Solutions segment into an independent company. The company is “committed to exploring all opportunities to execute a separation in a manner that maximizes shareholder value and anticipates providing more information as appropriate on the form and timing as the process progresses” (i.e., a seemingly dual-track spin/sale scenario). Management contends the separation will help the remaining company “focus its capital deployment priorities on opportunities that best align with its long-term enterprise strategies” and further invest in higher growth, higher margin opportunities, namely Oncology & Biopharma Solutions.  On the other hand, NewCo is expected to be “a differentiated medical surgical supply and solutions company with a compelling leadership position, attractive margins, and potential for growth acceleration across all the alternate sites of care markets”.  Relatedly, we would note that the company has transacted several divestitures in recent years aimed at focusing on its core distribution business, including Change Healthcare (in 2020) and its European and Canadian retail businesses (in 2021 and 2024, respectively).

In conjunction with the announcement, the company reported full-year F2025 results (March-ending), reflecting a 16% increase in consolidated sales to $359.1 billion with adjusted EPS up ~20% to $33.05 increased 20%. Cash flow from operations was $6.1 billion and free cash flow (FCF) of $5.2 billion. Looking into F2026, management projects sales growth of 11%-15% with year over year operating profit growth of 8%-12%. Adjusted EPS is expected to be $36.75-$37.55, implying 11%-14% growth year-over-year (or 13%-16% growth, ex-net gains from the cuts and ventures in fiscal 2025, which exceeds the company’s long-range growth target of 12%-14%). On the latter front, the company also reaffirmed its previously disclosed long-term targets, including long-term adj. EPS growth of 12%-14%, while updating its long-term margin target for its U.S. Pharmaceutical business to 6%-8% (previously 5%-7%). The long-term margin target for its Prescription Technology Solutions business remains 11%-12%.

Currently, MCK currently reports in four segments: 1) U.S. Pharmaceutical (91.5% of consolidated sales and 73.5% of operating profit); 2) Prescription Technology Solutions (1.5% of sales & 16% of op. profit); 3) Medical-Surgical Solutions (3.0% of sales and 14% of EBIT); and 4) International (4% of sales). By segment, for F2026E, the company forecasts the U.S. Pharmaceutical and Medical-Surgical Solutions businesses to grow sales & EBIT at 12%-16% and 2%-6%, respectively, with Prescription Technology Solutions posting sales growth of 4%-8% with op. profit up 9%-13% and International posting top-line growth of (2%)-2% with adj. operating profit being flat to down 5%.

In terms of valuation, the U.S. Pharmaceutical and International segment’s largest competitors, per filings, are Cencora, Inc. (NYSE: COR) and Cardinal Health, Inc. (NYSE: CAH), which trade at ~16.5x 2026E EPS and ~12x 2026E EV/EBITDA. The Prescription Technology Solutions (or RxTS) and Medical -Surgical Solutions businesses compete with a broad range of national & regional players. For its own part, MCK has traded at ~20.5x and ~12.5x forward earnings and EBITDA, respectively, over the last 10-years and ~27.0x & ~12.5x over the last 5-years. Applying a blended multiple of ~20.5x to estimated 2026E EPS of ~$37.15 implies an preliminary per share value of $761.50 (based on a diluted share count of ~125 million).  

SNDK Reports Solid 3Q F2025 Results & 4Q F2025 Guidance while Downplaying the Impact of Tariffs on its First Quarterly Conference Call as a Standalone Company

Last night, after the market close, SNDK reported 3Q F2025 results, its first as a standalone public company following the separation from Western Digital Corp. (NASDAQ: WDC) in February 2025, demonstrating sales of $1.695 billion (versus consensus of $1.606 billion) with an adjusted EPS loss of $0.30 (versus the consensus loss projection of $0.38).

As well, the company projected 4Q F2025 sales of $1.75-$1.85 billion, which assumes shipments will flat with ASPs up “mid-to-high single digits (suggesting the supply dynamic continues to tighten), with adjusted EPS of ($0.10)-$0.15 (based on a diluted share count of ~146 million). The non-GAAP gross margin is expected to be 25.5%-27% while adjusted operating expenses and total interest/other costs are projected to be $395-$405 and $45-$50 million, respectively.  

Anecdotally, despite the “ongoing macroeconomic uncertainty” the company remains bullish on long-term demand growth within what it estimates will be a ~$100 billion NAND market by the end of the decade.

On tariffs, the company assumes that current conditions remain “unchanged” during the upcoming quarter but highlighted that, “at present, there are no tariffs on our products except for shipments from China to the U.S., which have tariffs of 27.5%. For perspective, approximately 20% of our products shipped to the United States and over 95% of that revenue is sourced from countries other than China.”.

Recall, in April 2025 we upgraded shares of SNDK to BUY (from NEUTRAL) under the broad thesis that the impact of tariffs was overstated (considering its two main geographic suppliers are Japan & Malaysia, the potential for exemptions and that the vast majority of its business was outside the U.S.) and that given the secular demand trends and competitive environment the industry’s supply/dynamic (i.e., pricing) was unlikely to materially deteriorate (see the upgrade note dated 4/14/2025 for more our more comprehensive thesis).

Our current fair value estimate remains $41 per share based on F2026E sales of ~$7.35 billion and an 8.0x multiple on F2026E adj. EPS of ~$5.15 (see Exhibit 3 on page 3). 

Again, please see the Spin-Off Report dated February 5, 2025 and Updates from 2/13/2025 & 2/24/2025, and 4/14/2025 for additional information.

NPKI reported solid 1Q 2025 results, modestly raised full-year guidance (amid robust demand, share gains and zero tariff exposure); ended 1Q 2025 with net cash despite repurchasing 2% of shares during the quarter

Last night, after the market close, NPK International (NYSE: NPKI), which changed its corporate moniker from Newpark Resources (old ticker NR) in December 2024 following the sale of its Fluid Systems (or oil field services) business, reported 1Q 2025 results with sales from continuing operations up ~32% to $64.8 million (versus consensus of $56.2 million), driven by strength in demand for rentals of its core-composite matting products (among utility and critical infrastructure customers) as well as share gains (versus the wood & stone alternatives).  Operating income and adj. EBITDA were up ~93% and 59%, respectively, to $13.5 million and $19.7 million (versus consensus of $15.125 million) on margin expansion of 670 bps to 20.9% and 510 bps to 30.4%).  EPS more than doubled to $0.12 (up from $0.05 in the prior year and consensus of $0.08).

The company ended 1Q 2025 with net cash of $12.8 million, including ~$20.8 million of cash and ~$8.1 million of debt.  Notably, the company repurchased ~2% of its outstanding shares during the March quarter and announced an increase in its buyback authorization to $100 million.  

In terms of guidance, management increased its full-year 2025 outlook, calling for full-year 2025 sales of $240-$252 million (up from $230-$250 million and versus current consensus of $238.25 million) with adj. EBITDA of $64-$72 million (previously $60-$70 million and compared with consensus of $65.5 million).  Capital spending is still expected to be in the $35-$40 million range, of which ~80% will be deployed toward the expansion of the composite matting rental fleet (where we note investments have historically garnered 25%-plus cash-on-cash returns).

Anecdotally, on this morning’s conference call, the company noted that with 100% of its manufacturing footprint and raw material sourcing located within the U.S. the impact of tariffs, at least on cost, will be essentially zero. 

Longer-term, the company remains bullish on the durability of demand within its utility/transmission and critical infrastructure verticals as well as its ability to continue gaining share (i.e., indications its wood & stone competitors are now buying composite matting from NPKI given the on-going shift in customer preferences)  

As it relates to the recent sale of the Fluid Systems (i.e., oil field services) business NPKI, despite having already changed its corporate moniker & ticker to reflect its status as a pure-play specialty rental & services business focused on utilities & critical infrastructure, the company is still classified (e.g., CUSIP), at least on Bloomberg, as an “oilfield & equipment” concern.  The company is apparently still working on rectifying this misclassification (in our previous understanding it was supposed to be completed by the end of 1Q 2025).

In that context, we think investors can still look forward to a potential re-rating of NPKI’s stock toward a valuation more in-line with specialty rental & services peers as opposed to a legacy oilfield services provider (i.e., high single-digit to low double-digit multiples versus low- to mid-single digit-type valuations), which, in our estimation, has perplexingly not yet appropriately materialized despite both today’s stock reaction and the company’s current position as a pure-play provider of work access solutions (most notably via its DURA-BASE composite matting, which we think will continue to displace legacy wood & stone options) focused on the global critical infrastructure complex, including the utility & energy transmission markets.  

Our base case fair value for NPKI (formerly NR) remains ~$9.50 per share based on a 10.5x multiple on 2026E adjusted EBITDA of ~$75.5 million (previously $73 million), while accounting for corporate costs and projected net debt/cash (see Exhibit #1).

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

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