Drop Coverage of J, Effective as of Today’s Market Close

On September 27, 2024, after the market close, Jacobs Solutions Inc. (NYSE: J) completed the spin-off of its Critical Mission Solutions (CMS) & Cyber Intelligence (CI) businesses, which simultaneously merged with privately held Amentum (AMTM) in a Reverse Morris Trust (RMT) transaction.

Considering the time that has elapsed since the transaction (i.e., past our coverage mandate) and the shares having traded down to a level roughly in-line with our initial fair value estimate, we DROP coverage of Jacobs Solutions (J), as of today’s close.

Simply for context, shares of post-spin J declined ~8.7% during our coverage/recommendation period (compared with a 4.6% decline in the S&P 500 and a ~1.8% rise in the Russell 2000).

For more information, please see the comprehensive Spin-Off Report dated September 6, 2024, and Updates from 9/13/2024, 9/30/2024 and 5/9/2023.

On a more personal note, we here at The Spin-Off Report hope everyone enjoys their “Pi Day” today, particularly ahead of having to “Beware the Ides of March” tomorrow.

Continental AG To Spin-Off its Automotive Division by the End of 2025  

On December 18, 2024, the Executive Board of Continental AG (CON GR) informed the Supervisory Board of its decision to proceed with the spin-off of 100% of CON’s Automotive Group (i.e., Automotive & Contract Manufacturing). The transaction, which is expected to be completed by the end of 2025, is subject to the approval of the Supervisory Board along with a resolution at the company’s Annual Shareholders’ Meeting in April 2025. The company expects to provide additional financial details, including short- and medium-term targets for the standalone Automotive Group, which is expected to be listed on the Frankfurt stock exchange, at a Capital Markets Day in the “summer of 2025”.

Continental AG is the world’s third-largest automotive supplier. It operates across four segments: 1) Automotive; 2) Contract Manufacturing; 3) Tires; and 4) ContiTech (i.e., non-tire rubber and industrial plastics). Following the spin-off, Continental will have two fully independent, publicly traded entities: 1) Automotive Group (or SpinCo); and 2) New Continental (or RemainCo). SpinCo will operate under a new brand, which is expected to be introduced by the end of April 2025, and will be led by Philipp von Hirschheydt, who has headed the group’s Automotive sector as a member of Continental’s Executive Board since May 2023. The company recently appointed Karin Dohm, former chief financial officer (CFO) of the Hornbach Group, as the CFO of the Automotive Group effective April 1, 2025.

As a standalone entity, SpinCo will be a pure-play automotive technology & contract manufacturing company. In 2024, the assets proposed to be separated generated sales of €19.7 billion (or ~49% of Continental AG’s total sales), leveraging its advanced technological expertise, vertical integration, and a strong position in software-defined and autonomous vehicle solutions. Management expects the spin-off to unlock agility amid fluctuating market conditions as well as drive cost-efficiencies through more focused R&D investments and facilitate portfolio optimization. Per management, SpinCo is expected to achieve sales of €22-€24 billion in the short term and €26-€29 billion over the medium term, with EBIT margins improving from 2% in 2024 to >6% in the short term and 6% to 8% in the medium term. However, in 2025, management’s guidance is for Automotive segment sales to remain under pressure, with a projected revenue base of €18-€20 billion and an adjusted EBIT margin of 2.5%-4.0%.   

Meanwhile, RemainCo will consist of the Tires and ContiTech businesses, which together recorded €20.0 billion of sales in 2024 (or ~51% of total Continental AG sales). Post spin, RemainCo is expected to benefit from higher margins (i.e., EBIT margins of 11% in 2024 compared with ~2% at SpinCo), improved cash generation (i.e., a medium-term EBITDA margin target of >60%), and higher return on capital employed (i.e., 24.9% at the Tire business compared with 2.6% at the Automotive segment), strengthening Continental’s financial position and supporting long-term growth plans.  Additionally, RemainCo is expected to grow its revenue to €22-€24 billion and €25-€27 billion in the short and medium term, respectively, based on the preliminary guidance provided by management.   All told, the spin-off will allow Continental to focus on its higher-margin Tire segment. The parent company currently holds an investment-grade credit rating, which we expect RemainCo will maintain, given its strong margin profile, higher replacement demand and relatively stable outlook. However, at SpinCo, we await more clarity on its ultimate post-spin capital structure, which we expect will be fleshed out at the Capital Markets Day in the “summer of 2025”. That said, at least initially, we expect SpinCo’s capital structure should remain broadly aligned with the requirements for an investment-grade rating.

In terms of the most relevant peers, SpinCo could be compared with Aptiv (NYSE: APTV), Autoliv (NYSE: ALV), Faurecia (EPA: FRVIA), Gestamp (BME: GEST), OPMobility (EPA: OPM), Schaeffler (ETR: SHA), and Valeo (EPA: FR), which, on average, trade at ~7.1x 2025E EV/EBIT (in a range of 6.7-9.5x).  Meanwhile, RemainCo could be compared with other pure-play tire concerns, such as Michelin (ENXTPA: ML), Pirelli & C. S.p.A. (BIT: PIRC), and Bridgestone Corporation (TSE: 5108) which trade at ~8.5x median 2025E EV/EBIT (in a range of 7.0-8.8x).

Applying a 7.1x multiple to the mid-point of SpinCo’s 2025E EBIT guidance of €617.5 million implies a segment value of ~€4.4 billion, while applying an 8.5x multiple to RemainCo’s 2025E EBIT of ~€2.4 billion implies a segment value of ~€20.0 billion. Accounting for the net debt of ~€5.6 billion and pension liabilities of ~€2.8 billion, yields a preliminary pre-spin valuation of ~€15.6 billion or ~€78 per share (based on a diluted share count of ~200 million).

MIDD Intends to Separate its Food Processing Business in Early-2026

The Middleby Corporation (NASDAQ: MIDD), a global foodservice provider of cooking equipment, industrial processing equipment, and residential appliances, intends to pursue the separation of its Food Processing business into a new, independent, publicly traded company via a tax-free spin-off that is expected to be completed, subject to customary conditions, including final Board, SEC, IRS and other regulatory approvals, in “early-2026”. Concurrent with the announcement, MIDD also added activist investor, Ed Garden (formerly of Trian and a ~1.4% holder) as well as Julie Bowerman (the chief marketing officer at J&J spin-off Kenvue) to its Board (while announcing the retirement of long-time director, John Miller, at the 2025 Annual Meeting).

Currently, MIDD operates three primary business segments: 1) the Commercial Foodservice Equipment Group (~62.5% of consolidated sales and ~72% of adj. EBITDA in 2024); 2) the Food Processing Equipment Group (~19% of sales and ~20% of adj. EBITDA); and 3) the Residential Kitchen Equipment Group (18.5% of consolidated sales and 8% of adj. EBITDA in 2024).  On a consolidated basis, MIDD has anecdotally guided to “at least low single-digit organic growth” in 2025 sales at Commercial & Residential with “modest margin expansion” while at Food Processing “organic revenue growth is expected to be in the mid-single digits for the year” although margins are likely to lag the strong levels experienced in 2024 (due to several factors, including acquisition integration).  In terms of cash generation, MIDD expects “free cash flow to again exceed operational net income. Capital spending in ’25 will be back up to more typical levels, around 2% of revenues”. Longer-term, the company has anecdotally targeted segment margin profiles at Commercial, Residential and Food Service of 30%, 25%, and 25%, respectively (with a time frame for realization of two years at Commercial & Food Processing and a 3-4 year horizon at Residential Kitchen).  

Per management (and filings), in 2024, the Food Processing assets contemplated to be separated (i.e., SpinCo) generated sales of $732 million with adjusted EBITDA of $187 million (on a margin profile of ~25.5%) while at RemainCo the Commercial business produced 2024 sales of ~$2.4 billion with $664 million of adjusted EBITDA (on a margin of nearly 27.5%) and the Residential business posted sales of ~$725 million with $74 million of adj. EBITDA (on a ~10% margin).  Anecdotally, the Food Processing business is expected to come to market with less leverage than the parent due to a robust acquisition pipeline. (For context, MIDD ended 2024 with a net leverage ratio of 2.0x compared with its leverage ratio of 3.75x, which can be flexed up to 4.25x in conjunction with qualified acquisitions.)

Beyond the standard rationale of enhanced focus & operational flexibility, optimized capital structures & allocation policies as well as the potential for multiple expansion, management indicates that SpinCo “will become an even more focused and scaled entity, with best-in-class solutions serving attractive markets supported by favorable industry trends” with significant growth potential both organically and via M&A (where the pipeline of deals remain “robust”) while RemainCo is poised to extend its “market leadership in commercial foodservice and residential kitchens” as well as fully capitalize on its “synergistic portfolio of product innovations and premium brands as we further expand our top-tier margins and continue to grow our cash generation”. 

In terms of valuation, RemainCo (i.e., the Commercial & Residential businesses) competes with a range of companies, including Electrolux AB (ELUXB SS), Haier Smart Home (600690 CH), Hoshizaki Corp. (6465 JT), Illinois Tool Works Inc. (NYSE: ITW), which owns Hobart & Vulcan-Hart, Midea Group Co. (000333 CH), Panasonic Holdings Corp. (6752 JT), and Rational AG (RAA GY) as well as, more so on the residential front, LG Electronics Inc. (066570 KS), Samsung Electronics Co. (005930 KS), Whirlpool Corp. (NYSE: WHR), Bosch Ltd. (BOS IN), and Thermador Group (THEP FP) while the Food Service business, at least in the public markets, could be compared with JBT Marel Corp. (NYSE: JBTM) and GEA Group AG (G1A GY), which trade at ~10.5x. 

Applying a blended multiple of ~12.0x EV/EBITDA to 2026E EBITDA for RemainCo and a ~10.5x multiple at SpinCo implies values of ~$9.55 billion and nearly $2.1 billion, respectively. Accounting for corporate costs, capitalized at the blended corporate average, as well as projected net debt yields a preliminary, base case, sum-of-the-parts valuation of ~$9.25 billion or ~$170.50 per share (based on a diluted share count of ~54.2 million).

TFX Intends to Separate its Urology, Acute Care & OEM Businesses by Mid-2026 

Teleflex Incorporated (NYSE: TFX), a global medical technology/device company, announced that its Board had authorized management to pursue the separation of its Urology, Acute Care and OEM businesses into a new, independent, publicly traded company via a tax-free spin-off that is expected to be completed, subject to customary conditions, including final Board, SEC, IRS and other regulatory approvals, in “mid-2026”.

Concurrently, TFX announced the acquisition of privately held Biotronik SE & Co.’s vascular interventions business, which is projected to generate €91 million of sales in 4Q 2024, for ~€760 million.  To that end, RemainCo, including the Biotronik assets, is expected to generate pro forma sales of ~$2.1 billion with operations focused on “attractive, high-growth end markets addressing emergent procedures performed primarily in the hospital setting across the Intensive Care Unit, Emergency Department, Catheter Lab, and Operating Room” while SpinCo is expected to generate ~$1.4 billion in revenue (as well as benefit from a “simplified operating model, increased management focus, and a tailored investment and capital allocation strategy”).  Following the separation, RemainCo is projected to post “constant currency revenue growth of 6%+” and “deliver double digit EPS growth in the first full year following the separation”.  In that context, the separation is expected to be “accretive” to TFX’s adjusted gross margin and “neutral” to its adj. operating margin, at least initially, partially due to “higher” anticipated R&D investments. That said, RemainCo is expected to have “a simplified and nimble operating model with a streamlined manufacturing footprint, transitioning from 19 manufacturing facilities” at year-end 2025 to 7 facilities” (with 12 being transferred to SpinCo).  Management targets a post-spin leverage ratio of less than 3.0x by the end of 2026 at RemainCo.  At SpinCo, top-line growth is projected to be in the “low-single” digits on a constant currency basis with a gross margin in the “mid-50%” range. 

In terms of additional guidance, in conjunction with full-year 2024 results, the company, on a consolidated basis, projected top-line “adjusted constant currency growth of 1% to 2%”, which excludes a ~$13.8 million negative impact from the reserves required by the Italian Healthcare System but assumes ~$55 million (or ~180 bps) of headwinds from foreign currency translation (based on a euro to dollar exchange rate of ~103).  Adjusted EPS is expected to be $13.95-$14.35.  Anecdotally, the outlook assumes “continued pressure on our Interventional Urology business due to softness in UroLift”. In the OEM business, the company is starting to “increasingly experience temporary delays in customer orders due to a focus on inventory management”, which, along with some previously announced contract losses, will result in “negative growth for the year”. Additionally, TFX expects the see an impact from “volume-based procurement on our surgical business in China during the year”.  All told, management indicates that it has established its full-year outlook for revenue and adjusted EPS to reflect what it believes is a “realistic and achievable” level and is company highly confident in its ability to deliver at least the low-end of each range.  In terms of modeling commentary, 2025 guidance assumes adjusted gross margin of 60.25%-61%, an adjusted operating margin of 26.6%-27.0%. Net interest expense, including the impact of the recently announced $300 million accelerated share repurchase authorization as well as the Biotronik acquisition, is projected to be $75 million, while the adjusted tax rate and share count are contemplated to be ~13.5% and ~45.5 million, respectively.  Anecdotally, 2025 guidance includes tariffs that have already been enacted but does not contemplate any newly proposed tariffs.  To that end, TFX’s “most significant exposure to tariffs on U.S. imports is associated with our manufacturing facilities in Mexico. Any implementation of tariffs on medical device products in this geography would have a negative impact on the financial results”.  Lastly, the company’s full-year outlook incorporates the expectation of 1Q 2025 sales down 3%-4% on a constant currency basis, excluding the estimated negative impact from changes in foreign currency exchange rates of $14 million.

In terms of valuation, Teleflex could be compared with a wide range of medical device/technology companies, including Align Technology (NASDAQ: ALGN), The Cooper Companies (NASDAQ: COO), Edward Lifesciences (NYSE: EW), Globus Medical (NYSE: GMED), Hologic Inc. (NASDAQ: HOLX), ICU Medical (NASDAQ: ICUI), Integra LifeSciences (NASDAQ: IART), Intuitive Surgical (NASDAQ: ISRG), LivaNova (NASDAQ: LIVN), ResMed Inc. (NYSE: RMD) and Steris Plc (NYSE: STE), which trade at ~17x 2026E EPS (albeit in a range of ~8.0x-22.0x).  Applying 12.5x and 8.0x multiples to the estimated pro-rata share of forecasted 2026E earnings for RemainCo and SpinCo implies segment values of $128 and ~$29 per share, respectively, or an initial pre-spin sum-of-the-parts valuation of ~$157 per share (based on a diluted share count of 45.5 million).

NPKI (formerly NR) reports full-year 2024 results; provides initial standalone 2025 guidance and expects its re-branding efforts post the Fluid Systems sale to be completed by the end of 1Q 2025

Last night, after the market close, NPK International (new ticker 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 full-year 2024 sales from continuing operations up ~5% to $217.5 million with operating income and adj. EBITDA up ~41% and 12%, respectively, to $32.4 million and $54.9 million (on margin expansion of 390 bps to 14.9% and 160 bps to 25.2%).

Free cash flow was essentially neutral for the full year, but the company ended 2024 with net cash of ~$10 million, including ~$18 million of cash and ~$8 million of debt.  

In terms of guidance, management projects full-year 2025 sales of $230-$250 million (compared with our initial forecast of $238.5 million and consensus of $244.5 million) with adj. EBITDA of $60-$70 million (versus our initial ~$68 million forecast and consensus of $69 million).  Capital spending is 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).  The company also intends to continue to return capital to shareholders via its $50 million share repurchase authorization.

Longer-term, the company remains bullish on the durability of demand within its utility/transmission and critical infrastructure verticals  

As it relates to the recent sale of the Fluid Systems (i.e., oil field services) business NPKI, besides having already changed its corporate moniker & ticker, expects its “industry re-classification” (e.g., CUSIP) efforts to be complete by the end of 1Q 2025.

To that end, 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 come to fruition/gained traction within the investment community despite 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 ~$73 million, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).

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

LXFR reports full-year 2024 results modestly ahead of expectations, in part due to some demand “pull-forwards” in its Defense markets; issues initial 2025E guidance; still sees the sale of Graphics Arts sale closing in 1H 2025 as “exclusive” talks with a new buyer

Last night, after the market close, LXFR reported 3Q 2024 consolidated sales up 2.1% to $99.4 million (a marked inflection from the 10.7% top-line declines posted in 1H 2024 albeit largely driven by currency and some customer pull-forwards ahead of hurricane season and potential port strikes) with adj. EBITDA and EPS of $15.4 million and $0.32, respectively. (Excluding legal/insurance recoveries of litigation costs related to the so-called U.S. Ecology case, adj. EBITDA was up ~23% year-over-year to $13.5 million and EPS grew ~35% to $0.27 in 3Q 2024). 

By segment, sales at the Elekton segment increased 7% to $48.8 million with adj. segment EBITDA of $10.8 million while the Gas Cylinders segment posted a top line decline of ~5% to $42.6 million with adjusted segment EBITDA. [The discontinued Graphic Arts segment posted sales of $8 million and was roughly flat from an EBITDA perspective in 3Q 2024.]

Free cash flow (FCF) was $9.3 million in 3Q 2024, and the company ended the September quarter with net debt of $66 million (down from $69.9 million in 2Q 2024), including $3.5 million of cash and debt of $69.5 million.  LXFR’s net leverage ratio at quarter-end was 1.4x (or 1.3x, excluding the Graphic Arts segment), versus ~1.8x at end of 2023 and 2Q 2024. Notably, the company closed the sale of a land property in Lakehurst, NJ late in 3Q 2024 and expects to bank cash proceeds of $7.3 million in 4Q 2024.  The company expects to end 2024 with a leverage ratio of 1.2x (or 1.1x, ex-Graphic Arts).

In terms of financial guidance, management LXFR increased its full year guidance for adj. EBITDA, EPS and FCF to $52-$54 million, $1.09-$1.14 and $35-$37 million, respectively (compared with previous guidance of $47-$50 million, $0.90-$1.00 and $24-$27 million; see Exhibit 1 on page 2).  Excluding the recovery of prior period legal expenses, LXFR’s adj. EBITDA and FCF forecasts would be $45-$47 million, $0.88-$0.94, respectively (versus its previous guide of $42-$45 and $0.75-$0.85). 

In terms of the Graphic Arts sale process, management indicated the timing for the closing of the sale of its Graphic Arts is now expected to be in 1H 2025 (versus previous commentary suggesting 2H 2024). Anecdotally, on this morning’s conference call, management further indicated that the “original buyer” it had identified on last quarter’s earnings call ultimately did not meet the company’s valuations expectations and management is now re-engaged with other interested parties.  [For context, on the 2Q 2024 conference call, LXFR indicated that it was in the last stages of a competitive bid process (that included ~100 prospective buyers) and it had entered exclusive discussions with a single (but unnamed) counterparty.] When pressed on its confidence in the new timing for a transaction management responded that given the level of interest it thought 1H 2025 was a “reasonable” expectation.

Tangentially, the company also reiterated its cognizance that the Gas Cylinders and Elektron businesses have “no material synergies” and that it is committed to continuously evaluating market conditions for opportunities to unlock value (that said, the divestment of the Graphic Arts business is seemingly its top current priority).

Our base case fair value estimate for LXFR remains $16.50 per share, reflecting values of ~$8 per share, ~$10 per share, and ~$0.50 per share for the Gas Cylinders, Elektron and Graphic Arts businesses, respectively. Accounting for projected net debt of ~$2 per share yields a base case sum-of-the-parts fair value of ~$16.50 per share (with bull and bear cases of ~$19 per share and ~$14 per share, respectively; 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.

Correction:  The previous email incorrectly stated 2024 sales, which has been corrected below.

MODG reports full-year 2024 results and provides initial 2025E guidance incorporating myriad headwinds, particularly FX, in a “reset” year as management continue to work toward the spin/sale of Topgolf

Last evening, after the market close, MODG reported full-year 2024 results with consolidated sales down ~1% to $4.39 billion (versus consensus of $4.198 billion and guidance of $4.20-$4.26 billion) with adjusted EBITDA down a similar amount to $587.7 million (compared with consensus of $561.4 million and guidance of $560-$570 million).  Adjusted EPS were $0.23 (compared with consensus of $0.14, guidance of $0.08-$0.13 and $0.45 in 2023) with adj. free cash flow (FCF) of ~$203 million (versus consensus of $66 million and guidance of $115 million; see Exhibit #1 on page 2).  

By segment, Topgolf posted adj. EBITDA up nearly 11% to $337.2 million (compared with guidance of $315 million) implying that the so-called Non-Topgolf (or Core) portion of the business (i.e., golf equipment, active lifestyle apparel and corporate) generated $250.5 million of adjusted EBITDA (versus guidance of $250 million).

The company ended 2024 with net debt of ~$2.2 billion, including $445 million in cash (and total liquidity up ~$54 million to nearly $800 million), and a leverage ratio of 3.9x (compared with 4.1x at the end of 3Q 2024, 3.8x at the end of 2023 and 3.4x at the end of 2022).  On a REIT adjusted basis, MODG’s leverage ratio was 1.7x (versus 1.8x at the end of 3Q 2024, 1.9x at the end of 2023 and 2.0x at the end of 2022).  During 4Q 2025, the company took a $1.452 billion non-cash write down of goodwill & intangibles at Topgolf, which had no impact on liquidity or operational flexibility and left the carrying value of remaining assets at ~$1.6 billion.

In terms of guidance (see Exhibit #2 on page 2), management provided an initial full-year 2025 outlook calling for consolidated sales of $4.0-$4.18 billion (compared with consensus of $4.3 billion) and adjusted EBITDA of $415-$505 million (compared with our initial forecast of ~$530 million and consensus of ~$560 million). Anecdotally, the outlook includes significant headwinds from foreign currency fluctuations (and to a lesser degree tariffs and the timing of product launches) at the Core business while Topgolf is being relatively evenly impacted by both FX and the loss of four operating days in 2025 (given the change from a Gregorian to a Retail calendar). Excluding these “headwinds”, management noted that Core organic sales would be down about ~2% with adj. EBITDA up ~6% while Topgolf sales would be up ~1% with adj. EBITDA down ~7%, at the mid-point (with adj. EBITDAR margins roughly flat).

In terms of cash flow, without providing specific guidance management anecdotally indicated the expectation MODG would be free cash flow positive in 2025 (based on a capital spending budget of $150-$160 million, of which ~$90-$100 million will be directed toward Topgolf) as it was in 2024 and 2023.

Our base case fair value estimate for MODG is revised to $11.00 per share (from $11.50 per share), reflecting a blended multiple of ~8.5x multiple on our 2026E adjusted EBITDA of ~$523.5 million (previously $548.5 million) and net debt of ~$2.2 billion (see Exhibit #3 on page 3).

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

WDC Completes the Spin-Off of SNDK; Initiate Post-Spin WDC at BUY & SNDK at NEUTRAL

Distribution: On February 21, 2025, at 11:59 p.m. (ET), Western Digital Corp. (NASDAQ: WDC) completed the tax-free spin-off of Sandisk Corporation (NASDAQ: SNDK).  Shareholders of record received one-third of one share of SNDK for every WDC share owned with WDC (the post-spin parent) retaining a 19.9% stake in SpinCo (albeit with definitive plans for its disposal over the subsequent twelve months following completion). 

Regular-way Trading & Indexation: Shares commence so-called “regular way” trading this morning with Sandisk set to replace Leslie’s Inc. (NASDAQ: LESL) in the S&P Small Cap 600 Index as of the open on February 25^th while post-spin Western Digital will remain in the S&P 500 Index.

When-issued Trading: For perspective, in the so-called “when-issued” trading shares of Sandisk (SNDKV) debuted on 2/13 at ~$36 per share (on volume of nearly 370K shares) and were relatively volatile in the  following days with closing prices ranging between ~$36.50-$48.25 per share (on average volume of ~340K shares per day) before ultimately closing on 2/21 at $50.37 (on trading volume of ~1.25M shares). Conversely, shares of post-spin Western Digital (WDCVV) were comparatively more stable having debuted in the “when-issued” market at $56 per share (on volume of 97.5K shares) and subsequently closing between $55-$57.25 per share (on an average daily volume of ~140K) before ultimately closing Friday, 2/21 at $52.15 per share (with ~228K shares changing hands).

Pre- & Post-spin Recommendations: Following our initial pre-spin BUY recommendation earlier this month, shares of consolidated/pre-spin WDC appreciated ~8% (outperforming the S&P 500 and Russell 200 by ~8% and ~11%, respectively.

That said, in many ways, we think our broader pre-spin thesis holds into initial post-spin trading; to that end, investors need to evaluate the disparate near-term outlooks for the HDD and Flash businesses (as well as recent management changes) against the backdrop of solid longer-term demand trend given the accelerating need for data storage capacity, in part driven by the needs of hyperscalers and artificial intelligence (AI) computing models. On the first point, as a standalone, WDC’s hard disk drive (HDD) business will clearly be the more stable of the two, in terms of near-term sales, margins and cash flow trends. It also has a robust outlook, driven by increased data-center and cloud storage demand. Additionally, there is a relatively oligopolistic nature of the underlying competitive market, where WDC and Seagate Technology (NASDAQ: STX) essentially control ~80% of the  share, while the Flash (or NAND, as it is commonly referred) business is grappling with pricing pressure driven by excess inventory and “choppy” demand (or what management terms as a “mid-cycle pause”) within its core personal computer (PC) and smartphone end-markets, as well as increased foreign competition (e.g., China-based Yangtze Memory Technologies). For its part, it should be noted that management expects the supply/demand dynamic within its Flash business will begin to improve during the back-half of calendar 2025, as excess industry inventory is drained and a potential refresh cycle in the personal computer (PC) space driven by the Windows 11 roll-out and the addition of AI capabilities ramps as well as improved capital/capacity discipline within the industry writ large (as postulated in company’s recent webcast on the subject dubbed “The New Era of NAND”).

All told, given initial indications for today’s commencement of “regular way” trading, which signal a relatively orderly opening at prices near Friday’s closing prices (compared with our fair value estimates of ~$49.50 per share and ~$61.50 per share, respectively), we assign initial ratings of BUY for post-spin WDC and NEUTRAL for post-spin SNDK (see Exhibit 1 on page 3) .

Following the distribution, we continue to see heightened potential risk for initial trading volatility at post-spin SanDisk (SNDK) due to the seemingly dour near-term investor sentiment on the Flash space, which could be modestly exacerbated by any index-related shareholder rotation (i.e., the S&P 500 for WDC versus the Small Cap 600 for SNDK). That said, this dynamic could ultimately present a more compelling entry point for long-term investors (particularly in front of the potential for a re-rating ahead of a cyclical recovery in 2H 2025, a more disciplined pricing environment and a seemingly solid longer-term secular demand backdrop, particularly in enterprise SSD).  Moreover, we would highlight (see Exhibit 2 on page 2) that there is clearly a significant amount of leverage, in terms of post-spin SNDK’s share price performance, based on the broad range of potential profitability outcomes implied by management’s ~20% adjusted operating margin target (as well as its top-line goal of ~$10 billion), which, we note, could, all else being equal, a fair value estimate up to ~$59.50 per share (and ~$79 per share at the aspirational revenue target).

Please see the Spin-Off Report dated February 5, 2025 and Updates from February 13, 2025, for more information as well as the Reference section on pages 5-6.

In conjunction with the favorable repricing of its 2029 Term Loan, APG broadly affirmed 2024E guidance and set initial 2025E benchmarks; management foreshadows the establishment of “meaningfully” higher long-term targets at its Investor Day set for May 2025; fair value increased to $44 per share (from $42 per share)

In conjunction with the “successful” repricing of its 2029 Term Loan, which reduced the applicable margin by 25 basis points and implies ~$5 million of incremental annual cash interest savings, APG broadly re-affirmed its 2024E financial guidance as well as provided an initial outlook for 2025E (see Exhibit #1 on page 2).

For full-year 2024E, the company expects consolidated net sales “will be above” its most recent guide of ~$7.0 billion with adjusted EBITDA “in-line with the midpoint” at its $890-$900 million forecast (compared with consensus of $6.99 billion and $893 million, respectively).  As well, management expects to end the year with a net leverage ratio “below 2.5x”.

Actual results for 4Q and full-year 2024 are expected to be discussed on an earnings call scheduled for February 26, 2025.

For 2025E, based on current exchange rates, APG forecasts consolidated net sales of $7.3-$7.5 billion, excluding any acquisitions or divestitures, with adj. EBITDA of $970 million-$1.02 billion (compared with our previous $975 million forecast), representing a margin of ~13.4% at the mid-point (above the company’s previous long-term target of ~13% by 2025). 

Additionally, we would highlight that management anecdotally foreshadowed the provision of “meaningfully higher financial targets” at an Investor Day scheduled for May 21, 2025.

Our base case fair value estimate for Api Group (APG) is revised to $44 per share (up from ~$42 per share), reflecting a blended multiple of ~13.5x on F2025E adjusted EBITDA of ~$985 billion (previously $975 million) along with projected net debt of ~$1.12 billion and a diluted share count of ~283.5 million (see Exhibit #2 on page 2).

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GTX posts in-line full-year 2024 results and issues initial 2025 guidance, which, at the mid-point, implies an ~17.5% FCF yield; in our estimation, robust capital returns to shareholders will persist over the long-term despite fluctuating underlying market conditions; base case fair value remains ~$12 per share

This morning, GTX reported full-year 2024 sales down 11% (or 10% on a constant currency basis) to $3.475 billion amid soft light vehicle production (particularly in Europe & China), competitive pressures on OEM’s globally as well as headwinds from commodity deflation & currency fluctuations. Adj. EBITDA fell ~5.8% to $598 million (on 90 bps of margin improvement to 17.2%) while adj. free cash flow (FCF) was $358 million (versus $422 million in 2023). GAAP net income improved 8% to $282 million (on 140 bps of margin improvement to 8.1%).

On the capital allocation front, GTX generated $358 million of adj. FCF in 2024, repurchased an additional $296 million worth of shares (or ~13% of the total shares outstanding) and reduced debt by ~$200 million ending the year with a net leverage ratio of 2.2x (as well as no significant debt maturities until 2032).  The company’s relative near-term leverage target remains ~2.0x.

Looking into 2025, as outlined in the company’s recently articulated long-term capital allocation framework, GTX intends to return of “75% or more” of adj. free cash flow (FCF) to shareholders, primarily via dividends and share repurchases.

On the dividend front, the company announced a $0.06 per share quarterly dividend (or ~$50 million annually), of which the first was paid on January 31, 2025. On the share repurchase front, GTX’s Board authorized a new $250 million share repurchase program for 2025, which if fully exhausted would further reduce the outstanding share count by an additional ~12.5%, by our calculation.

In terms of initial 2025 guidance, (see Exhibit #1 on page 2), based on the assumption that industry fundamentals remain relatively anemic, management projects full-year 2025 sales of $3.3-$3.5 billion with GAAP net income and adjusted EBITDA of $209-$254 million and $545-$605 million, respectively. Cash flow from operations is projected to be $357-$447 million, resulting in adj. free cash flow (FCF) of $300-$390 million.  (Importantly, we highlight that, at the midpoint, management’s FCF outlook implies a current yield of nearly ~17.5%; see Exhibit #2 on page 2).

Underlying assumptions for the 2025 guide include global light & commercial vehicle production being flat to up 2%, a Euro/Dollar exchange rate of 1.05 (versus 1.08 in 2024), RD&E investments and capital expenditures at 4.6% (a slight step up from ~4.5% in 2024) and 2.8% of sales, respectively (of which ~50% and 25% will be focused on zero emission technology).  [Note: on a constant currency basis, management anecdotally indicated that adj. EBITDA would be flat year over year in 2025.]

On the latter electric vehicle (EV) or zero-emission vehicle (ZEV) front, GTX continues to garner pre-development projects for its E-Powertrain, E-Cooling Compressor and H2 Fuel Cell solutions/systems and it indicates it is “on target to achieve” ~$1 billion of EV/ZEV sales (at or above the company’s existing margin profile) by 2030.  As well, the company is optimistic about the prospects within its budding power generation vertical following the securement of several awards for its large industrial turbo product set (where demand is being driven, in large part, by the global expansion of data center infrastructure).

In terms of the longer-term outlook, on which we remind investors that management has solid visibility (with ~80% of sales over next 5-years having already been award by its OEM customers and a historical win rate on new business of greater than 50%), we broadly concur with management’s contention that the core turbocharger business is likely to be larger in 2030 than it is today and that GTX could generate free cash approximating the company’s current market capitalization over the next five years.

Our base case fair value estimate for GTX remains ~$12 per share, reflecting an 8.5x multiple on our 2026E adjusted net income forecast of $257.5 million and a fully diluted share count of ~186 million (see Exhibit #3 on page 2).

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