On December 11, 2015, DowDuPont Inc. (NYSE: DWDP) announced its intention to separate into three independent, publicly traded companies: Corteva Inc. (agriculture), Dow Holdings Inc. (materials science), and DuPont Inc. (specialty products). The spin-offs are expected to be tax-free to shareholders. The spin-off of Dow is expected to occur by the end of 1Q 2019, with the Corteva spin-off expected to take place by June 1, 2019. The transaction is subject to the approval of the DowDuPont Board of Directors and any required regulatory approvals. The multi-spin-off strategy was announced in conjunction with the merger of Dow Chemical and DuPont (completed in 2017). A break-up was essentially the only means of gaining regulatory approval for the merger.

DowDuPont, with annual sales of $80 billion, is an industrial conglomerate focused on agricultural technology, polymer manufacturing, and specialty materials used in electronics and food ingredients. The company currently conducts its operations via eight segments: Agriculture; Performance Materials & Coatings; Industrial Intermediates & Infrastructure; Packaging & Specialty Plastics; Electronics & Imaging; Nutrition & Biosciences; Transportation & Advanced Polymers; and Safety & Construction.

Corteva, a global provider of agricultural products, will consist of two reportable segments— seed and crop protection—and will include the DuPont Pioneer, Dow AgroSciences, and DuPont Crop Protection businesses. Of DWDP’s three businesses, agricultural technology has been the weakest, experiencing considerable volume declines, owing to weather-related disruptions, economic headwinds, trade tensions with China (an important export market for agricultural products), declines in corn and soybean acreage, and increasing pressures on farmers globally (e.g., rising input costs and reduced selling prices). Based on the most recently filed Form-10, Corteva generated $14 billion in 2017 revenue (FY ended December 31), with a 15% operating margin.

Based on an analysis of revenue and EBITDA growth and free cash flow yield, a pre-spin sum-of-the-parts fair value estimate of $67can be derived for DWDP. Post-spin, DuPont, Dow Holdings, and Corteva can be fairly valued at $28, $27, and $13, respectively, based on a 1:1 distribution ratio and an estimated 2.3 billion shares outstanding. Note that these estimates are preliminary; as of this writing, final distribution ratios, as well as post-spin capitalization information, have not been disclosed in full. As such, fair value estimates are subject to revision as more information becomes available. With the pre-spin fair value estimate representing 21% upside to DWDP’s current share price ($55 as of this writing), the transaction appears to unlock incremental upside. While potential deceleration in several end-markets (e.g., autos, electronics, and infrastructure) is a concern, the post-spin companies may be able to offset fundamental weakness via significant revenue and earnings synergies from cost savings. Therefore, pre-spin shares are recommended for purchase. We note that any delays associated with the spin-off transactions could pose material downside risk to the shares.

Viad Corp. (NYSE: VVI) operates two distinct business segments: (1) GES (85% of sales and 53% of EBITDA in 2018E), a full-service provider to the live events industry; and (2) Pursuit (15% of revenue and 47% of EBITDA), which owns a portfolio of travel experiences. While VVI shares have returned ~61% since our initial recommendation in May 2016 (outpacing increases of 17% and 16.5% in the S&P 500 and Russell 2000 indexes), the shares have declined ~22% since their August 2018 highs (versus declines of 13.5% and 22.5% in the S&P and Russell) and now trade at ~6.5x 2020E EV/EBITDA and with a FCF yield of ~8.5%, which we think provides an opportunity for us to reintroduce the name to clients. To that end, it remains our view that VVI’s GES and Pursuit businesses offer negligible synergies and have clearly divergent margin, growth, and capital-intensity profiles. Thus, a separation could benefit longer-term operating performance, unlocking incremental value above any potential re-rating, particularly of the Pursuit segment, which generates 35%-plus EBITDA margins and could be reasonably expected to attract acquisition interest as a standalone or via a more tax-efficient Morris Trust transaction. Since our initial publication, we think a framework for an eventual separation at VVI has, at least anecdotally, emerged. To that end, we discern the achievement of a $250 million sales base at Pursuit as the clearest benchmark, while at GES it seems less about size than about a more stable business mix, including ~$250 million of high-margin A/V and event technology business as well as an increased contribution from non-exhibition/corporate events (to ~50% of segment sales), which would support a higher than historical margin profile (~8%) through the course of a cycle. Based on management commentary, peer and M&A valuations, and a discounted cash flow (DCF) analysis, value of $28 per share and $40 per share can be assigned to VVI’s GES and Pursuit businesses. Accounting for corporate costs and projected net debt of $7 per share yields a base case sum-of-the-parts fair value of roughly $61 per share (with bull and bear cases of $69 and $41, respectively).

On February 27, 2018, after the market close, KAR Auction Services Inc. (NYSE: KAR) announced its intention to separate its IAA Salvage Auction business into an independent publicly-traded company, Insurance Auto Auctions (IAA), via a tax-free spin-off. The transaction is anticipated to be completed in 1Q 2019, and is subject to final approval by KAR Board of Directors. Jim Hallett, CEO of KAR, will remain CEO of post-spin KAR and chairman of its board of directors. IAA will continue to be led by its current president and CEO John Kett. IAA will also retain its North American salvage vehicle operations and the HBC Vehicle Services business in the United Kingdom.

KAR is the second largest provider of wholesale vehicle auction services in North America (behind privately-held Cox Automotive, which generated an estimated $7 billion in 2017 revenues). On a consolidated basis, KAR had 2017 revenue and EBITDA of $3.5 billion and $841.5 million, respectively. The company operates approximately 250 physical auction sites throughout North America and also hosts Internet auctions. KAR generates revenue primarily through auction fees charged to vehicle buyers and sellers and by providing add-on services, such as inspections, storage, transportation, reconditioning, salvage recovery, and titling and financing. The company sold 3.2 million vehicles in 2017 and operates in 75 auction locations and more than 100 finance locations. The company is nearly tied as the largest provider of salvage car auction services, and is the only company ranking either first or second in both whole- and salvage-car auctions. KAR operates three business segments: ADESA Auction Services (whole car auction), IAA Salvage Services, and AFC (whole car finance). IAA accounted for 34% of KAR’s consolidated 2017 revenues.

Given the limited operational overlap between IAA and KAR’s core whole car business, the separation allows post-spin KAR to focus on its whole car auction marketplaces and technology solutions. Moreover, the spin-off should allow the company to focus increasingly on acquisitions, which has been an important growth strategy for its primary competitor, Cox. For post-spin KAR, the market for auto auctions remains very attractive with high barriers to entry—creating strong pricing and margins and strong free cash flow given low working capital and capital expenditure requirements. The company is expected to experience improved earnings growth over the next several years, driven by a recovery in whole car auction volumes. Specifically, there is expected to be a strong increase in vehicles coming off-lease in the next several years (given rebounding new vehicle sales and lease penetration rates).

On a sum-of-the-parts basis, shares of pre-spin KAR are fairly valued at approximately $65 per share, consisting of $30 per share in value from IAA Spinco and $35 in value from post-spin KAR. The fair value estimate implies over 25% of potential upside could be unlocked from the separation. Considering the recent pull back in shares, the impending spin-off and potential for value to be unlocked in the transaction, shares of KAR are recommended for purchase prior to the spin-off.

Everi Holdings (NYSE: EVRI), an equipment and services supplier to the casino industry, operates two reportable business segments: (1) Games (54% of sales and EBITDA in 2017), which primarily provides gaming (or slot) machines to casino operators; and (2) Financial Technology Solutions (formerly called Payments; 46% of revenue and EBITDA in 2017), which provides cash access (i.e., ATM withdrawals/cash advances) services and equipment as well as credit check and compliance solutions to casinos. In our view, at ~6x 2020E EV/EBITDA and a better than 15% free cash flow yield, EVRI is undervalued relative to the sum value of its parts, particularly its recurring-revenue/high-margin FinTech business. While EVRI internally views its two businesses as having certain inter-segment sales synergies, management acknowledges that the businesses are separable and has expressed a commitment to evaluating all options in its efforts to unlock value. In that context, particularly if the current undervaluation persists, it could be reasonably asserted that EVRI might ultimately seek (or face pressure from shareholders) to unlock value by monetizing its assets either separately or as a whole. In the absence of any potential strategic alternatives, we think the achievement of recently articulated financial targets, particularly with regard to leverage reduction, could drive an organic re-rating of EVRI shares higher over time. Considering our financial projections as well as peer and M&A valuations, value of $11.50 per share can be assigned to EVRI’s Games segment, while its FinTech business could be valued at ~$13 per share. Accounting for projected net debt of ~$14.50 per share yields a sum-of-the-parts valuation of ~$10 per share.

On May 21, 2018, General Electric Company (NYSE: GE) announced its intention to separate its Transportation business via a spin-off or split-off. The separated business will then merge with Westinghouse Air Brake Technologies Corp. (NYSE: WAB) (“Wabtec”) in a deal valued at $11.1 billion, based on WAB stock’s closing price on April 19, 2018, the last day prior to the appearance of media reports about the potential deal. The transaction, which is expected to be tax-free to WAB and GE shareholders, is forecast to close in early 2019.

Based on market conditions, corporate finance considerations, and timing considerations, GE will determine whether the distribution will be effected via a spin-off or a split-off. In a spin-off, GE shareholders will receive one share of WAB for every 110.2 shares of GE owned as of the record date; GE will receive 19.4 million shares of WAB (representing 19.75% of WAB) and a $2.9 billion distribution from WAB.

In a split-off, GE would offer its stockholders the option to exchange shares of GE common stock for shares of SpinCo common stock in an exchange offer, resulting in a reduction in GE’s outstanding shares. This report assumes the distribution takes place via a spin-off, with GE shareholders holding a 19.75% ownership interest in post-spin WAB. 

GE, the large multi-industry industrial conglomerate, with current annual revenue exceeding $120 billion, has operating segments spanning Power, Oil & Gas, Aviation, Lighting, and Transportation, among others. (See Exhibit 1.) GE has long been thought likely to spin off some of its business units, as many market observers have suggested that the sheer size and complexity of its operations have been a hindrance to internal execution, resulting in subpar stock price performance. Shares of GE have declined almost 60% year–to-date, while the S&P 500 index is approximately flat.  In early 2018, it was reported that the company, in an effort to simplify operations and generate cash, had sought to sell or spin off up to $20 billion of its businesses over a two-year period under the leadership of former CEO John Flannery. (Flannery has since been replaced by Lawrence [“Larry”] Culp, former CEO of Danaher Corp.)

GE’s Transportation unit manufactures a variety of products, including motors for oil and gas drilling applications, locomotives, marine applications, output, and safety and energy-efficient equipment for mining, among others. GE Transportation is projected to generate EBITDA of about $750 million in 2018, with a significant rebound in 2019 as the industry benefits from a positive cyclical turn. Management has pointed to a significant order backlog of $18 billion, which should enable 2019 EBITDA to increase to a range of $900 million to $1 billion.

For its part, Wabtec, with a current market capitalization of $8.9 billion and 2017 revenue of $3.9 billion, is a manufacturer of technology-based products and services for freight rail, passenger transit, and selected industrial markets. The company sells its products into the locomotive, freight car, passenger transit vehicle, and power generation end-markets, serving both OEM and aftermarkets. Wabtec has been a long-time supplier to GE’s Transportation segment. The company generated $628 million in EBITDA in 2017, and consensus estimates expect growth to $729.2 million in 2019 on revenue of $4.4 billion.

On the surface, the transaction appears to make sense for both companies. For GE, the spin-off is part of an ambitious asset-divestiture plan, as the company seeks to improve its balance sheet following a long stretch of share underperformance. The separation should allow GE to simplify its operations to some extent, while WAB should see significant operational synergies from the vertical integration with GE Transportation. WAB states it expects run-rate synergies of $250 million, and an NPV (net present value) of approximately $1.1 billion of net tax benefits will accrue to the combined company. We anticipate that New WAB should benefit from the same industry benefits expected at GE Transportation.

GE’s current market capitalization, at $67 billion, is approximately $300 billion below 2015 levels. The shares have declined over 70% from the peak of $30 in November 2016, owing to liquidity concerns, with the company carrying over $100 billion in liabilities and zero enterprise free cash flow even after a 95% dividend cut. Year-to-date, the shares have declined almost 60% versus a 6% decline in the Industrial Select Sector Index (SPDR ETF (XLI) during the same period. At current levels, GE’s investment-grade bonds are trading at a valuation approximating high-yield debt, as the market anticipates continued deterioration and the potential for a junk rating. (See Exhibit 2.)

Based on an analysis of projected revenue, EBITDA, and free cash flow, and including the ownership interest in New WAB by GE shareholders, GE can be fairly valued at $9 on a pre-spin, sum-of-the-parts basis. Post-spin, assuming a 19.75% ownership interest in new WAB, GE can be fairly valued at $8. While the pre-spin fair value estimate represents 22% upside to GE’s current share price ($8 as of this writing), the significant recent underperformance of the shares, coupled with deteriorating fundamentals, and considerable risk to forward  estimates warrants caution, in our view, and as such, we do not recommend the shares at this time. While the spin-off of GE Transportation is a positive sign of the potential for a less complex GE, the size of the separation is not likely to have a significant impact on the company’s overall valuation. Moreover, the post-spin company will remain under pressure to raise cash and accelerate further asset sales. In addition, forward consensus estimates appear to be at risk, particularly given the potential for weakening conditions in GE’s underperforming Power business.

New Wabtec can be fairly valued at $114. With the fair value estimate implying 24% upside to WAB’s current price ($92 as of this writing), pre-spin shares are recommended for purchase.  In our view, the potential earnings and revenue synergies associated with the transaction, coupled with what appears to be a cyclical strengthening in the rail and transit equipment industry, are potential catalysts for the post-spin shares .In the near term, however, we note potential selling pressure on New WAB shares owing to investor turnover, given the divergent nature of the market capitalizations and focus of the two businesses.

TiVo Corp. (NASDAQ: TIVO), an entertainment technology company, operates two reportable business segments: (1) Products (51% of sales and 13% of EBITDA in 2017); and (2) Intellectual Property Licensing (49% of revenue and 87% of EBITDA in 2017). In our view, a combination of factors, including a broad misconception of TIVO as a consumer-focused hardware company (as opposed to its actual software and IP focus), the  transitory declines in 2018 financial performance (due, in part, to accounting changes and expected/planned declines in some legacy revenue streams), as well as overblown concerns surrounding TIVO’s ongoing litigation with Comcast, have presented investors with an attractive risk/return scenario ahead of the conclusion of an on-going strategic review, which we increasingly think will result in either the separation (and sale) of the two businesses, a take-over or a go-private transaction. Even in the less probable event that the status quo is maintained, we think upside exists as investors get a better sense of TIVO’s longer-term growth profile/earnings power, which we believe supports low- to mid-single-digit top-line growth off a core sales base of ~$600-$700 million and a margin profile of 40%-plus.  Considering our financial projections as well as peer and M&A valuations, value of $4 per share can be assigned to TIVO’s Products segment, while its IP Licensing segment could be valued at $21 per share. Accounting for corporate costs and projected net debt of ~$9 per share yields a sum-of-the-parts valuation of ~$16 per share. (An LBO analysis suggests a buyer could reasonably achieve a 20%-plus IRR at this valuation.)

On February 21, 2018, EQT Corporation (NYSE: EQT) announced its intention to separate its midstream business into an independent publicly traded company via a tax-free spin-off. The separation of the midstream and upstream businesses will occur by means of a pro-rata distribution of 80.1% of the outstanding shares of the company’s common stock to holders of EQT common stock as of the record date of November 1, 2018. EQT shareholders of record will receive 0.8 shares of ETRN for each share of EQT held. EQT’s current upstream business will continue to operate under the EQT name, with continued listing on the New York Stock Exchange. The midstream business, to be named Equitrans Midstream Corp., will be listed on the NYSE under the symbol “ETRN”. When-issued trading began on the NYSE on October 31, 2018 under the symbol “ETRN-WI”. The distribution is to be completed on November 12, 2018, with regular-way trading scheduled to begin on November 13, 2018.

Both companies will remain headquartered in Pittsburgh, PA. Initially, Steve Schlotterbeck, CEO of EQT, was to become CEO of EQT upon completion of the separation. However, on March 15, 2018, EQT announced Schlotterbeck’s abrupt resignation and the appointment of David Porges, the former chairman and CEO, as interim president and CEO of post-spin EQT. Similarly, Jerry Ashcroft, who was initially announced as ETRN’s chief executive officer, was relieved of all duties in August of 2018 and replaced by board member Thomas Karam.

In the period leading up to the spin-off, EQT performed a series of midstream restructuring transactions, which included: (1) the formation a new publicly traded midstream C-Corp (ETRN) that will be spun out to EQT shareholders on a tax-free basis; (2) the acquisition of Rice Midstream Partners LP (NYSE: RMP) by EQM (completed July 3, 2018); and (3) the acquisition of RMP incentive distribution rights (IDRs) from EQT by EQGP Holdings LP (NYSE: EQGP). In addition, EQT dropped down its retained midstream business to EQM. Accordingly, EQT will have three midstream currencies (two LPs and one C-Corp), and it intends to focus on simplifying its IDR structure.

Sector simplification has become a key theme in recent MLP sector reorganization—in other words, collapsing multiple entities and elimination of IDRs. Conceptually, IDRs make sense, as they incentivize the GP to increase distributions. However, with time, IDRs can become cumbersome, particularly when the LP is giving up the bulk of marginal distributions to the GP. Eliminating IDRs reduces the need to issue equity and ultimately lowers the cost of capital. It is also attractive to the GP, as it increases transparency around the value of the LP.

There is some investor discussion of the possibility that the three MLPs may eventually consolidate into one C-Corp entity; however, this scenario would have tax implications. Most likely, the company’s GP-LP simplification and IDR elimination represent the first steps of a broader simplification process, and we anticipate that the company will pursue a consolidation-type transaction following the spin-off. EQT is not expected to retain its 19.9% ownership interest in ETRN for the long term; management has noted it will likely exercise the option to sell the shares in the next two years, with an estimated tax impact of $100 million.

Following these transactions, post-spin EQT will become the largest domestic gas producer, with an asset base expected to deliver double-digit free cash flow growth. The new midstream business, Equitrans Midstream Corp., will become the third largest natural gas gatherer in the U.S., with a premier asset footprint in the Appalachian Basin. The transaction should allow each of the two pure-play companies to attract an investor base attuned to its respective business, while simplifying financial results and more efficiently allocating capital.

EQT, with a market capitalization of $8.6 billion, is the largest natural gas producer in the U.S., with a focus on the Appalachian area. The company’s integrated operations, which include natural gas, transmission, and distribution, consist of 680,000 core Marcellus acres and 65,000 core Ohio acres—among the industry’s most attractive positions in the core of the southern Marcellus Shale. In a natural gas environment that is likely to remain challenging for the next several years, EQT’s industry-leading cost structure is a key competitive advantage relative to other producers. That said, EQT shares have historically maintained a sum-of-the-parts discounted valuation, spurring activist investors Jana Partners and D.E. Shaw & Co. LP to push for monetization of the company’s midstream assets following the company’s $6.7 billion acquisition of midstream company Rice Energy (completed in November 2017).

In September 2017, D.E. Shaw recommended in a public letter the separation of EQT’s production and upstream assets from its midstream assets, followed by a merger of EQT Midstream Partners and Rice Management Partners, which EQT Midstream would control. In turn, EQT Midstream itself would be a potential takeover target. Jana similarly opposed the Rice acquisition, contending that splitting EQT’s natural gas production and transportation business would better reward EQT shareholders. Following D.E. Shaw’s letter, EQT established a committee of the Board of Directors to evaluate strategic options for addressing the shares’ discounted valuation, with an anticipated decision by early 2018. In October 2017, EQT appointed two new Board members with extensive midstream expertise to serve on the committee. With the Board having yielded to mounting pressure, the spin-off may placate investors who opposed the Rice acquisition.

Based on an analysis of estimated production, EBITDAX, and yield, EQT can be fairly valued at $45 per share on a pre-spin sum-of-the-parts basis. Post-spin, based on a 19.9% ownership interest in ETRN, EQT can be fairly valued at $23, while post-spin ETRN can be fairly valued at $21 per share. While the pre-spin sum-of-the-parts fair value estimate suggests over 30% upside from EQT’s current consolidated price ($34 as of this writing), pre-spin shares are not recommended for purchase at this time. Note that EQT shares have significantly underperformed the market, having declined approximately 44% year-to-date, versus a 2% increase for the S&P 500 over the same period. Significant de-rating in the MLP sector—triggered largely by natural gas price softness—has contributed to disappointing share price performance. In a market in which abundant low-cost U.S. shale supply is likely to keep gas prices range-bound for the foreseeable future, coupled with general sector underperformance, we see little in the way of near-term catalysts for EQT shares, and see potential risk to forward production and distribution estimates. Current short interest is 5.4%.

Please find attached the corrected Honeywell / Resideo Spin-Off Report.

On October 10, 2017, Honeywell International Inc. (NYSE: HON) announced its intention to separate its Homes and Global Distribution (ADI) business (“Homes”) and its Transportation Systems business into two independent publicly traded companies via a tax-free spin-off.

The Transportation Systems business, named Garrett Motion Inc. (NYSE: GTX), is a leader in turbocharger technology for a broad range of engine types across global automobile, truck, and other vehicle markets. The spin-off of GTX was completed on October 1, 2018. For more information on GTX, refer to The Spin-Off Report dated September 13, 2018. This report will focus solely on the Homes business, which is to be named Resideo Technologies Inc.

Resideo Technologies Inc. is a leader in the home heating, ventilation and air conditioning (HVAC) controls and security markets and is a leading global distributor of security and fire protection products (ADI). The business generated 2017 sales of $4.5 billion. The company is expected to have a non-investment grade credit rating, approximately 13,000 employees, and financial responsibility for certain Honeywell legacy liabilities. Each HON shareholder will receive a distribution of one share of Resideo common stock for every six shares of common stock of HON held as of the record date of October 16, 2018. When-issued trading is expected to begin on or about October 15, 2018.  On October 29, 2018, Resideo will begin to trade regular-way on the NYSE under the symbol “REZI”.

The announced spin-offs represent the culmination of an extensive portfolio review triggered by pressure from activist investor Third Point LLC. The activist had argued that Honeywell could unlock significant value by spinning off its Aerospace business. Honeywell’s decision to retain its Aerospace business (approximately 40% of consolidated sales) is in direct contradiction to Third Point’s proposal. The Aerospace segment, which experienced a 3% revenue decline last year amid weak demand for commercial aircraft and defense budget cuts, has been a drag on HON’s earnings and valuation. Peers such as Emerson Electric Co. (NYSE: EMR) and Rockwell Automation Inc. (NYSE: ROK) trade at an approximately 15% premium to HON based on forward price-to-earnings multiples. Third Point has since exited its ownership position in HON.

The separation follows a trend among industrial peers, including Johnson Controls International Plc (NYSE: JCI), Ingersoll-Rand Plc (NYSE: IR), and Danaher Corp. (NYSE: DHR), which have similarly completed spin-offs in an effort to unlock shareholder value. Notably, HON shares have modestly outperformed over the past year, having appreciated approximately 20% versus 17% for the S&P 500—based largely on fundamental outperformance across the portfolio and evidence of margin leverage. Recent earnings growth supports the potential to deploy cash in accretive mergers and acquisitions.

Following the spin-offs, Honeywell should benefit from accelerating core organic growth going into 2019 (3%-5%), improving free cash flow conversion, a higher margin profile, approximately $3 billion in incremental cash, and the transfer of its asbestos-related liabilities to the spin entities.

Pre-Resideo spin, Honeywell is fairly valued at $171 per share, consisting of $166 per share in value from post-spin Honeywell and $5 per share in value from Resideo operations. Post-spin shares of Resideo Technologies are fairly valued at $31 per share based on 124.7 million shares outstanding (1-for-6 share distribution ratio). With the pre-spin sum-of-the-parts fair value estimate representing 10% potential upside to HON’s current share price ($156 as of this writing), we recommend HON shares for purchase ahead of the Resideo spin-off.

We note, however, post-spin Resideo shares may be under near-term pressure given: 1) potential for shareholder churn, as core HON shareholders tend to own the shares for exposure to the aerospace and industrial sectors, as opposed to the home sector; and 2) evidence of recent weakness in the building materials industry. Notably, new building permits, a lead indicator of construction trends, declined almost 6% in August—the largest decline since February 2007. The SPDR S&P Homebuilders ETF (NYSE: XHB) home builder index has declined 20% year-to-date, and iShares U.S. Home Construction ETF (NYSE: ITB) has declined approximately 22% year to date.

On December 12, 2017, Trinity Industries Inc. (NYSE: TRN) announced its intention to separate its infrastructure-related business into an independent publicly traded company via a tax-free spin-off. The new company will be named Arcosa Inc. The transaction is expected to be completed on November 1, 2018, and is subject to finalization of the entity structure of the spun-off business, finalization of the capital structure of the two companies (parent and spin-off), the effectiveness of appropriate SEC filings, and final approval from Trinity’s Board of Directors. Trinity shareholders will receive one share of Arcosa Inc. for every three shares of TRN held as of October 17, 2018, the record date for the transaction. “When-issued” trading is expected to begin shortly before the record date. Shares of Arcosa Inc. are expected to trade on the NYSE under the symbol “ACA”. Shares of post-spin Trinity Industries will continue to trade on the NYSE under the symbol “TRN”.

For post-spin Trinity, despite current railcar industry trends, industry forecasts expect stabilizing fundamentals, increasing demand—particularly in growth end-markets (e.g., energy)—and increased railcar retirements to support pricing stabilization. Current operations generated margins of less than 10% through 1H 2018; however, in 2015 operating margins approached 21%. Increased backlog and orders augur well, in our view, for rising revenue and widening margins through 2019-2020.

Similarly, the company is seeing an increase in leasing and management fees as a result of an expanding lease fleet size and higher asset management advisory fees. Much like the rail segment, leasing industry growth is expected to be fueled by specific end-markets, including food and beverage manufacturers and oil producers. In particular, agricultural, grains, and coal appear to be key demand drivers. Additionally, a growing economy that includes demand for expanding infrastructure projects, including oil and gas exploration, is anticipated to continue to drive demand for railcar leases.

For Arcosa, the construction segment should generally benefit from higher infrastructure spending, primarily focused on highway and street safety. Since 2013, U.S. expenditure in these areas has generally increased, with 2018 showing particular strength. The bull case for greater spending is supported by the current Trump administration’s call for $1.5 trillion in new infrastructure projects over the next decade. It is widely reported that the U.S. infrastructure is in dire need of repair, with roads and bridges most often cited, which would suggest that spending on repairs and new projects cannot be delayed indefinitely. However, more than 18 months into the administration, legislation that even approaches that level of spending has yet to be presented.

In contrast, over the past several years, the inland barge industry has suffered from an oversupply of barges, and declining freight rates meant the industry could not support the excess capacity. While potentially at a trough in terms of orders, it may be reasonable to assume that margins will take time to return toward peak levels as utilization of resources plays catch-up to orders before the segment again approaches a ~$100 million sustainable EBITDA run rate. ACA’s growth opportunity lies in the energy infrastructure business, however the company has yet to fully capitalize on this. The renewable energy industry’s wind capacity additions did continue at a rapid pace in 2017. According to the Department of Energy, $11 billion was invested in wind power projects in 2017, representing 25% of electric generating capacity additions that year. ACA will be well capitalized, receiving a cash contribution of $200 million from TRN, in conjunction with the separation. Management has commented that the new standalone company expects incremental costs of $10-$15 million annually above what is included in the pro forma results for standalone corporate expenses.

On a pre-spin basis, Trinity is fairly valued at $44 per share, consisting of $31 in value from post-spin Trinity and $12 in value from Arcosa. Post-spin shares of Arcosa are fairly valued at $37 per share, accounting for the 1:3 share distribution ratio. Given implied upside approximating 20% from the current share price, shares of TRN are recommended for purchase. Post-spin shares of the parent entity (Trinity) are preferable to Arcosa, in our view, as railcar industry fundamentals appear to have hit an inflection point, whereas ACA’s cyclical businesses may take some time to reach a similar place.

Eagle Materials (NYSE: EXP), a diversified construction materials and building products supplier, operates three broad segments, Heavy Materials, Light Materials, and Oil & Gas Proppants, comprised of five distinct business units: (1) Cement (41% of sales and 47% of EBITDA in F2018); (2) Concrete & Aggregates (10% of sales and 5% of EBITDA); (3) Gypsum Wallboard (31% of revenue and 36% of EBITDA); (4) Recycled Paperboard (11.5% of revenue and 8% of EBITDA); and (5) Oil & Gas Proppants (5.5% of revenue and 4% of EBITDA in F2018). In our estimation, at ~8.5x F2020E EV/EBITDA and a ~7.5% free cash flow yield, EXP’s unique set of assets are undervalued relative to the sum value of their parts and offer attractive exposure to an impending supply/demand imbalance in the U.S. cement market. Moreover, EXP’s decentralized business model – which, in part, allows its five businesses units to generally operate as the lowest-cost/highest-margin providers in their respective niches – could also (along with EXP’s robust free cash flow generation) provide optionality should the cement and wallboard markets continue to experience consolidation. Considering our financial projections as well as peer and M&A valuations, value of $62 per share, $5 per share, $47 per share, $7 per share, and $3 per share can be assigned to EXP’s Cement, Concrete & Aggregates, Wallboard, Paperboard, and Proppants businesses, respectively. Accounting for corporate costs and projected net debt of ~$14 per share yields a sum-of-the-parts value of roughly $110 per share.