On May 24, 2010, Pharmaceutical Product Development, Inc. (NASDAQ: PPDI) announced the distribution date of the spin-off of Furiex Pharmaceuticals. Shares of Furiex Pharmaceuticals will be distributed via a tax-free distribution on June 14, 2010, to shareholders of record on June 1, 2010. Furiex Pharmaceuticals shares are expected to begin trading ‘regular way’ on the Nasdaq Global Market on June 15, 2010, under the ticker symbol ‘FURX.’ Shareholders of PPDI will receive one share of FURX for every twelve shares held.

We are maintaining our fair value estimate for Furiex Pharmaceuticals of $5 per share based on the finalized exchange ratio of 1:12, which we believe is an adequate margin of safety for those investors with a risk tolerance suitable for this speculative investment. Furiex will be capitalized with $100 million in cash, equivalent to just over $10 per share, which should fund research and development for close to two years. Further, the company has the potential to realize growth in royalty and milestone payments in the near-term, which could create shareholder value going forward. However, until there is greater visibility into the magnitude of the company’s sustainable revenues (i.e. royalty payments), we are recommending a significant degree of caution as evidenced by a fair value estimate that reflects a steep discount to cash on hand.

For those investors with a short-term trading focus, Furiex may present a compelling opportunity within the first few days of regular-way trading. Given the speculative nature of the spin-off and the discrepancies in market capitalization between spin-off and the parent company, shares of Furiex may be sold indiscriminately upon distribution. This may allow investors to purchase shares at a significant discount to our fair value estimate and capture the potential rebound in share price as Furiex shares begin to reflect the value of their $100 million net cash position.

Due to its expected market capitalization, we will not be providing coverage of Furiex Pharmaceuticals beyond the distribution date.

First American Financial Corp. (NYSE: FAF) and CoreLogic (NYSE: CLGX) have begun trading in the when-issued market. Shares of FAF will be distributed via a tax-free spin-off on June 1, 2010, to shareholders of record on May 26, 2010, with regular-way trading expected to begin trading on June 2, 2010. Shareholders of First American Corp. will receive one share of First American Financial Corp. and retain one share of CoreLogic, Inc.

There has been limited liquidity in the when-issued market for either company, however, both stocks are trading at significant discounts to our fair value estimates. As such, we recommend shares of both FAF and CLGX for purchase.

First American Financial Corp.
Shares of FAF are currently trading $15 per share intraday, or approximately 15% below the $17-$18 estimate that we believe the shares are worth in the current market. Further, if one considers that the current market reflects both trough earnings forecasts and valuation multiples that are below historical averages for the title insurance industry, shares of FAF are likely worth considerably more long-term.

At $15 per share, First American Financial has an estimated market capitalization of just over $1.5 billion relative to pro forma book value of $1.8 billion. First American Financial will have an estimated $400 million in net cash and marketable securities (holdings in CLGX) at the time of the spin-off; therefore, if one separates this $400 million from both the company’s market capitalization and its book value, FAF is found to be trading at less than 0.8x book value, whereas a target multiple of 1x book value is, arguably, more appropriate.

CoreLogic
Shares of CLGX are currently trading at $19 per share intraday, or approximately 10% below the $21 estimate that we believe the shares are worth in the current market. Further, as is the case with FAF, this valuation is based on trough earnings forecasts and valuation multiples that are both below historical averages and below other relevant comparable companies, implying that shares of CoreLogic are a compelling long-term investment at these levels.

At $19 per share, CoreLogic is trading at approximately 6.4x estimated 2010 EBITDA of $415 million. Although this valuation is comparable to Lender Processing Services (NYSE: LPS), one could argue that a significantly higher multiple is justified, as businesses that exhibit CoreLogic’s operating leverage and free cash flow generation typically trade at EV/EBITDA multiples of approximately 8x or higher. Further, CLGX should experience a higher growth rate as we move towards a rebound in the housing market (LPS, with significantly higher exposure to default management services, will likely see increased revenues from mortgage originations be offset by declines in revenues from default management). We estimate that CoreLogic’s existing business has the potential to earn approximately $500 million in EBITDA in a healthier mortgage environment, which, when combined with the possibility of multiple expansion, should lead to significant share price appreciation going forward.

On May 14, 2010, First American Corp. (NYSE: FAF) announced that the Securities and Exchange Commission has declared effective the Form 10 registration statement of First American Financial Corp (FAFC). Shares of FAFC will be distributed via a tax-free spin-off on June 1, 2010, to shareholders of record on May 26, 2010. First American Financial Corp. shares are expected to begin trading “”regular way”” on the New York Stock Exchange on June 2, 2010, under the ticker symbol “”FAF.”” Shareholders of First American Corp. will receive one share of First American Financial Corp. and retain one share of CoreLogic, Inc., which had previously been known as InfoCo. CoreLogic, Inc. will trade on the New York Stock Exchange under the symbol “”CLGX.””

We continue to recommend shares of FAF leading up to the spin-off, as we believe there is upside on a sum-of-the-parts basis. First American Financial Corp., at 1x book value, would be valued at $17-$18 per share, while CoreLogic, at a modest 7x EV/EBITDA multiple, would be valued at $21. Further, one could argue that both entities are attractive at these prices, as these valuations are based upon trough earnings estimates and valuation multiples that are below historical averages.

Lastly, we see significant upside to the value of CoreLogic at $21 per share. Although the 7x EBITDA target multiple used in this derivation is on par with its closest comparable, Lender Processing Services (NYSE: LPS), it is well below that of Verisk Analytics (NASDAQ: VRSK), which currently trades at approximately 12.4x 2010E EBITDA, and below the 8.5x-9.0x EBITDA multiple range seen among other comparable information solutions businesses. It would appear that CoreLogic could experience EBITDA growth at a level that would warrant these higher multiples, as we believe EBITDA from the company’s existing operations (i.e. before new business opportunities) could exceed $500 million in a healthier housing environment versus the company’s 2010 EBITDA guidance of $400-$430 million. Should investors value CoreLogic based on 8x-9x a 2010 EBITDA estimate of $415 million (the mid-point of company guidance), the fair value of this business increases to $24-$28 per share.

On April 29, 2010, Clearwater Paper Corp. (NYSE: CLW) announced 1Q10 earnings of $0.04 per share, inclusive of a one-time charge of $0.37 per share related to the Patient Protection and Affordable Care Act of 2010 and maintenance costs of $0.86 per share, or $16.9 million. The company had previously guided that it would realize this maintenance charge in the first quarter, and its full-year maintenance expense guidance of $20-$25 million remained unchanged. Using a normalized maintenance expense assumption of $5.5 million per quarter, we estimate that Clearwater’s current runrate EBITDA is approximately $135-$140 million.

While the company’s operating performance beat expectations, Clearwater’s progress in collecting its alternative fuel tax credit was also of note. The company finished the quarter with net cash and short-term investments of $102 million, but mentioned during its conference call that it had collected its remaining $62 million in tax credits subsequent to the first quarter. Further, although it reiterated that it did not believe these credits were taxable, Clearwater continued to accrue a tax reserve related to these credits, as it has yet to receive an official ruling from the IRS as to whether the alternative fuel tax credits are taxable. We estimate that the tax reserve related to these credits is approximately $66 million and believe these funds could be released (and accrue to cash) by the second quarter upon a favorable ruling from the IRS. Therefore, in total, Clearwater stands to have a net cash position of $164-$230 million (depending on the tax ruling) by the end of the second quarter, before any contribution from cash from operations.

This cash position is significant relative to the company’s current market capitalization of $730 million, and implies an enterprise value for Clearwater of $500-$565 million. Based on current runrate EBITDA, Clearwater is trading at an EV/EBITDA multiple of only 3.6x-4.2x, leaving considerable share price appreciation potential should multiples expand to a normalized range of 5x-to-7x. As such, we continue to recommend shares of CLW for purchase.

On April 27, 2010, Tyco International (NYSE: TYC) announced its intention to spin off its Electrical & Metal Products business via a tax-free distribution of shares during the first half of 2011. The proposed spin-off is subject to approval from the SEC, the Board of Directors, and Tyco International shareholders.

The Electrical & Metal Products business manufactures galvanized steel tubing and pipes, electrical support systems, and metal framing systems for the construction and modernization of non-residential structures. During the fiscal year ended September 25, 2009, the segment generated revenue of $1.3 billion and an operating loss of $5 million, adjusted for a $935 million goodwill impairment charge related to low sales volumes. That said, during fiscal year 2008, which represented a healthier market for commercial property development, as well as higher selling prices of steel products, the segment generated revenue of $2.3 billion and operating income of $342 million.

Following the completion of the spin-off, Tyco International will remain an industrial conglomerate with business interests that provide electronic security systems through ADT Worldwide, valves and piping systems for the oil and gas industry, fire protection services for commercial and industrial clients, and safety products, including fire suppression products.

On April 21, 2010, Questar Corporation (NYSE: STR) announced that its Board of Directors is considering the tax-free spin-off of its exploration and production (E&P) business, midstream field services business, and commodity marketing business from its natural gas utility operations. Questar expects that the spin-off, if approved by its Board of Directors, would be completed during the second half of 2010. The company is expected to provide further details regarding the possible transaction when it releases first quarter 2010 earnings on April 27, 2010.

As of December 31, 2009, Questar’s E&P business held estimated proved reserves of 2,746.9 billion cubic feet of natural gas equivalents located in the Rocky Mountain and Mid-Continent regions of the US and accounted for approximately 57% of the company’s average operating income during the period 2008-2009. The business segments within the proposed spin-off represented 70% of average operating income during this period.

One of the driving factors behind this potential transaction appears to be the competition for internal capital that exists under the current structure. In 2009, for example, the E&P business accounted for 74% of the company’s total $1.5 billion in capital expenditures, thus limiting Questar’s ability to fund expansion opportunities within its more stable, although slower growing, natural gas utility business.

Should the spin-off be enacted, Questar Corporation would become a pure-play, regulated natural gas utility comprising production, transportation, and retail distribution in Utah, Wyoming, and Idaho. This segment generated approximately $1.1 billion in revenue in 2009 and 30% of the consolidated company’s average operating income during the period 2008-2009.

On March 30, 2010, Reuters published an interview conducted with the CEO of Rowan Companies, Inc. (NYSE: RDC), Mr. W. Matthew Ralls, in which Mr. Ralls stated the company’s intention to seek the spin-off of RDC’s onshore drilling and manufacturing divisions. Mr. Ralls stated RDC’s intention to seek such a transaction within the context of transforming RDC into a pure-play offshore drilling company in the near future. RDC has made no formal announcement in regards to the potential spin-off.

RDC’s onshore drilling business consists of twenty-nine land rigs with specifications that are considered ideal for targeting shale and gas plays. The company’s rigs, twenty-four of which are currently contracted, are located in Texas, Louisiana, Oklahoma, and Alaska. During FY2009, this business generated 10% of consolidated revenues (approximately $177 million) and 6% of consolidated EBITDA (approximately $40 million).

RDC’s manufacturing operations, which are conducted via a wholly-owned subsidiary named LeTourneau Technologies, Inc. (‘LeTourneau’), manufactures drilling products and systems, as well as mining, forestry, and steel products. During FY2009, LeTourneau generated 31% of consolidated revenues (approximately $555 million) and 7% of consolidated EBITDA (approximately $47 million).

On March 22, 2010, First American Financial Corp. released an updated Form 10 and the parent company, First American Corp. (NYSE: FAF), issued an 8-K with pro forma financial statements for InfoCo. Based on these filings, we our updating our fair value estimates for First American Financial Corp., (‘FinCo’) and InfoCo, and adjusting our price target for First American Corp. to $41 per share. Our price target implies 20% share price appreciation from current levels and, as such, we continue to recommend FAF shares for purchase.

This fair value estimate, as it is based on current market multiples, should be considered to be the potential value to be unlocked once the spin-off is distributed and these entities begin trading independently. If one further considers that the fair value estimates for FinCo and InfoCo are based upon 2010 estimates (which, given the state of the real estate market, likely represent expected earnings that are at the low-end of the company’s long-term earnings potential) and on target valuation multiples that are near the low-end of historical trading ranges, the case for further upside to our fair value estimates can be made.

FinCo
According to the most recent filing, FinCo posted pro forma earnings per share of $1.14 in 2009 and finished the year with pro forma shareholder’s equity of $1,817 million. If one considers these metrics relative to Fidelity National Financial (NYSE: FNF), a fair value for FinCo of $18 per share appears reasonable. This estimate is based on a target price-to-book value multiple equal to Fidelity’s and implies a price-to-earnings multiple for FinCo that is slightly higher than Fidelity’s. If one considers that FinCo’s balance sheet is stronger than Fidelity’s, with a net cash position (excluding investments) of $157 million versus net debt of $660 million, a price-to-book value multiple for FinCo that is on par with Fidelity appears appropriate, if not conservative.

It should be noted that our 2010 earnings estimate for FinCo is flat to the company’s 2009 performance despite expectations for a slower mortgage market in 2010. This is based on expectations that FinCo will be able to manage expenses and maintain earnings, which is an assumption that appears in-line with expectations for Fidelity.

InfoCo
According to First American Corp.’s recent filing, InfoCo recorded pro forma EBITDA of $435 million in 2009, adjusting for $40.5 million of corporate expenses and $20-$25 million of unallocated expenses that are expected to be allocated to FinCo. We have estimated InfoCo’s 2010 EBITDA to be $425, which represents a slight decrease relative to 2009. By way of comparison, consensus expectations for Lender Processing Services (NYSE: LPS) call for the company to post 10% revenue growth and 12% EBITDA growth in 2010. LPS’s business is comparable to that of InfoCo, although LPS has greater exposure to foreclosure services, which could be beneficial in the current environment. If, however, one assumed a comparable level of EBITDA growth for InfoCo, projected 2010 EBITDA would approach $490 million.

Based on a comparable EV/2010E EBITDA multiple to that of Lender Processing Services, we arrive at a fair value estimate for InfoCo of $23 per share. This estimate assumes that an additional 11 million shares are issued to FinCo to fulfill the agreement that $250 million of InfoCo equity be distributed to FinCo in the spin off.

It should further be noted that our net debt estimate for InfoCo is based on pro forma net debt of $65 million (inclusive of deposits and debt security investments), plus an expected $459 million of additional debt that will be used to purchase the current noncontrolling interests in the company, including $314 million for Experian’s 20% equity stake in the FARES joint venture and an estimated $145 million for the minority interest in First American CoreLogic.

Based on the fair value estimates for FinCo and InfoCo, we arrive at a sum-of-the-parts valuation for First American Corp. of $41 per share, which implies 20% upside from current levels.

On February 18, 2010, Clearwater Paper Corp. (NYSE: CLW) announced 4Q09 earnings of $1.48 per share, excluding the impact of the alternative fuel tax credit, beating the consensus estimate of $1.33. The company also clarified its expansion plans, noting its intention to expand the geographic scope of its Consumer Products business to the East Coast and to increase its capacity to produce ultra quality tissue. The first phase of this expansion will be the construction of a new converting facility in the Southeast, which is expected to be completed by the second quarter of 2011 and cost approximately $30 million.

Clearwater also reported a very strong balance sheet, which, in our opinion, continues to be undervalued by the market. The company finished 2009 with $42.5 million in net cash, although, it should be noted, this number does not include a $101.3 million receivable related to the company’s alternative fuel tax credits. Further, Clearwater’s cash balance could grow by an additional $73.5 million, which is the current balance of its accrued taxes reserve, should the company not have to pay taxes on its alternative fuel tax credits. If Clearwater were to both receive the tax credits it is due and not have to pay taxes on these credits, the company’s net cash balance would grow to $217.3 million, which is 40% of its current market capitalization.

The tax credits to the pulp and paper industry have been controversial and investors appear reluctant to give companies credit for the expected cash payments. It should be noted, however, that Clearwater appears undervalued even when excluding these potential cash payments. We estimate that Clearwater posted 2009 EBITDA, excluding tax credits, of $174 million. If one considers its current market capitalization of $533 million and its current net cash position of $42.5 million, Clearwater currently trades at only 3.4x 2009 EBITDA. If Clearwater were to receive the additional cash payments, as outlined above, the company would trade at only 2.4x 2009 EBITDA. Comparable companies appear to trade at a range of 4.6x-to-7.5x 2009 EBITDA, placing Clearwater considerably below the low end of this range.

We would argue, therefore, that Clearwater, excluding any future potential benefits from the tax credits it is owed, is significantly undervalued. Further, we would argue that the tax credits do not appear to be priced in to the company’s current valuation. In this context, it would appear that investors are able to purchase, at a discount, a paper company that has demonstrated a stable top line through the recent economic downturn and that has significant expansion potential, while receiving a free option on a potential $175 million in additional cash related to the alternative fuel tax credit. Based on a target EV/EBITDA multiple of 5x, we estimate Clearwater is worth $78 to $93 per share, depending on the outcome of its 2009 tax credits.

On February 11, 2010, Motorola, Inc. (NYSE: MOT) announced its plans to separate its Enterprise Mobility Solutions and Networks Mobility businesses from its Mobile Devices and Home Mobility businesses. The transaction is expected to occur during the first quarter of 2011 via a tax-free dividend distribution to Motorola shareholders. In March 2008, Motorola had announced its intention to spin-off the Mobile Devices business, although the segment’s recent financial underperformance may have prompted the company to revise its separation plans.

The Enterprise Mobility business manufactures and services two-way radio, data, and voice communications products. This segment has historically achieved the highest margins within Motorola, generating operating income of $1.1 billion during 2009. The Networks Mobility business manufactures wireless access systems, including cellular infrastructure and wireless broadband systems. At the time of the separation, the Enterprise Mobility and Networks Mobility businesses are expected to assume all of Motorola’s existing public debt. As of December 31, 2009, Motorola carried debt of approximately $3.9 billion within its consolidated balance sheet.

The Mobile Devices business designs and manufactures mobile phones. During the period 2007-2009, the Mobile Devices segment generated operating losses and experienced a decrease in revenue of approximately 62%. The Home Mobility business provides video and data equipment to cable television and telecom service providers. The Mobile Devices and Home Mobility businesses would own the Motorola brand following the separation, although it is expected that the company would enter into a licensing agreement with the other separated entity for combined use of the Motorola brand name.

The Networks Mobility and Home Mobility businesses, which are currently reported within Motorola as one segment, would be split as part of the separation transaction. During 2009, the combined segment generated operating income of approximately $558 million. Therefore, even if one assumed that the entire Networks Mobility and Home Mobility segment were part of the separated Mobile Devices’ business, this entity would still generate operating losses.