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The Weekly Wrap-Up – September 20, 2024

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 


HIGH-CONVICTION RECOMMENDATIONS (LONG):


RECENT INITIATIONS:


LATEST PUBLICATIONS & UPDATES:

UPDATE – Newpark Resources (NYSE: NR)

August 6, 2024

NR beats across the board in 2Q 2024 as strength at the higher-margin Industrial Solutions (IS) segment offset weakness at Fluid Systems (FS)

Newpark Resources posted 2Q 2024 consolidated sales down 2.35% to $179 million (compared with consensus of $169.25 million) with adj. EBITDA up ~18% to $23.4 million (compared with consensus of $18.5 million) on 230 basis points of margin improvement to 13.1%. Adjusted EPS increased ~50% to $0.12 (compared $0.08 in the prior year period and consensus of $0.08) while free cash flow (FCF) was ~$21.9 million (versus ~$0.6 million in 2Q 2023 and consensus of $5.2 million).

By segment, Fluid Systems posted 2Q 2024 sales down ~17% to $112.2 million (in-line with previous commentary) with adj. segment EBITDA of ~$5.2 million (compared with $8.6 million in the year ago period), implying ~200 bps of margin deterioration to 4.6%.  Industrial Solutions posted 2Q 2024 sales up ~39% to $66.8 million, driven by strength in both product sales and specialty rentals, with adj. segment EBITDA growth of ~$36.5% to ~$24.8 million, implying 60 bps of margin contraction to 37.1%.

The company maintained its initial guidance for the Industrial Solutions segment, which calls for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%. Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet.

Management indicated that while taking longer than expected, it is optimistic the on-going strategic review of its Fluid Systems business (managed by Lazard) will be completed by the end of 3Q 2024 (versus previous commentary targeting mid-year 2024). Net working capital at Fluid Systems was ~$160 million at the end of 3Q 2024.  We estimate a deal would precipitate a significant re-rating of NR shares 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).

Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $99.2 million (previously $98.1 million), reflecting a 5.0x multiple at Fluid Systems (previously 5.5x) and 9.5x (unchanged) at Industrial Solutions, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).


Radar Screen – September 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – September 13, 2024

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.


UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

  • Jacobs Solutions Inc. (J) / Critical Mission Solutions – September 27, 2024
  • Spectrum Brands (SPB) / Home & Personal Care Business – 3Q 2024
  • Western Digital (WDC) / HDD Business – 2H 2024
  • MDU Resources Group (MDU) / Everus Construction Group (ECG) – 2H 2024
  • Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 2H 2024
  • Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
  • DuPont Inc. (DD) / Electronics and Water Business – 2H 2025
  • Topgolf Callaway Brands Corp. (MODG) / Topgolf – 2H 2025
  • Fortive Corp. (FTV) / Precision Technologies Business – Mid 2025

RECENT PUBLICATIONS:

Update:  Jacobs (J) Sets September 27th Distribution Date for the Amentum Spin-Off/Merger

September 13, 2024

On September 13, 2024, Jacobs Solutions Inc. (NYSE: J) announced that the spin-off of its Critical Mission Solutions (CMS) & Cyber Intelligence (CI) businesses, which will simultaneously merge with privately held Amentum (AMTM) in a Reverse Morris Trust (RMT) transaction, will be completed after the market close on Friday, September 27, 2024. Shareholders of record on September 23rd are set to receive one share of AMTM for every one share owned of J.

So-called “when-issued” (WI) trading for Amentum, which will trade on the New York Stock Exchange (NYSE), is expected to begin on (or about) September 24, 2024 (under the ticker AMTM WI) with “regular-way” trading beginning on Monday, September 30, 2024. Following completion, post-spin J will continue to trade “regular-way” under the NYSE ticker J although on (or about) September 24th it is expected that there will be two avenues to trade Jacbos common stock (J and J WI); to that end, shareholders that sell shares of J from the record date through the distribution date will relinquish their right to receive shares of Amentum while shareholders selling shares in the so-called “ex-distribution” market, under the ticker J WI, will be selling their Jacobs stock while retaining the right to receive shares of AMTM. (Additionally, shareholders selling in the “when issued” AMTM WI shares will be selling their right to receive the distribution of AMTM shares while retaining their Jacobs shares.)

As previously announced, immediately upon completion of the transaction, Jacob’s shareholders will own ~51% of Amentum with Jacobs’ owning 7.5% and an additional 4.5% of Amentum shares being placed in escrow as a continent consideration (to be released to shareholders depending on the achievement of certain F2024 operating profit targets with the first 0.5% being delivered to Jacobs and the remainder, to the extent required/earned, being earmarked for the company and its shareholders). All told, Jacobs shareholders are ultimately expected to own 58.5%-63% of Amentum.

Our Sum-of-the-Parts (SOTP) valuation for Jacobs Solutions is based on the derived valuations for both RemainCo (J) and CombineCo (AMTM). This includes the midpoint ownership in CombineCo and the retained equity stake within RemainCo. The Exhibit below shows that the midpoint of the SOTP valuation—14x EV/2025E EBITDA for RemainCo and 11x EV/2025E EBITDA for CombineCo—comes out to $143. This is roughly where Jacobs Solutions has recently been trading, in the mid-to-high $140s. In other words, the current market valuation for Jacobs aligns with the assumed valuation ranges for the two companies, post-separation.

Broadly, we think the upcoming spin-off of Jacobs Solutions into two focused companies mirrors many characteristics of successful past spin-offs. To that end, the high-growth, higher-margin business will be listed independently and is expected to achieve a higher valuation over time as it establishes itself as a leader in the infrastructure engineering and technical solutions sectors, bolstered by strong secular tailwinds in its markets. Meanwhile, the lower-growth, lower-margin government services business will benefit from increased scale, diversification, and a renewed focus on higher-margin, value-added projects, positioning it to potentially catch up to its better-valued peers. That said, our current sum-of-the-parts (SOTP) valuation for Jacobs Solutions does not suggest a significant upside, in and of itself, ahead of the impending separation. However, with the usual shareholder turnover that could be expected post-spin-off, we think investment opportunities are likely to arise post-spin for both short-term and long-term investors. Please see the Spin-Off Report dated September 6, 2024, for more information.

 

Comprehensive Report:  Jacobs Solutions Inc. (J)

September 4, 2024

On May 9, 2023, Jacobs Solutions Inc. (NYSE: J) announced its intention to spin-off its Critical Mission Solutions (CMS) business into an independent, standalone, publicly traded company, subject to customary closing conditions.  Subsequently, on November 20, 2023, Jacobs announced a definitive agreement to spin off CMS (along with the Cyber & Intelligence portion of its Divergent Solutions business) and merge it with privately held Amentum in a tax-free, Reverse Morris Trust (RMT).

The combined CMS, C&I and Amentum (CombineCo) business generated ~$13.7 billion of annual sales (& ~$1.1 billion of adj. EBITDA, including $50-$70 million of synergies) for the last twelve months, and “create a leading provider of system integration & technology solutions” and “deliver expertise in the government’s highest priority areas of energy, space exploration, intelligence & analytics, and digital modernization”, at scale. On the flip side, management indicated that the post-separation parent (RemainCo) will be a “higher value” company focused on “technology-enabled solutions” for the “world’s most complex critical infrastructure & sustainability challenges” with “leading positions in the attractive water and environment, energy transition, transportation and advanced manufacturing sectors” with ~$11.4 billion in trailing annual sales.

Post-spin parent, Jacobs, and its shareholders were expected to own 58.5%-63% of the combined spin entity, Amentum, consisting of 51%-55% for J shareholders and the parent’s retainment of 7.5%-8.0%. The final ownership stakes will be determined based on reaching certain operating targets at CMS and C&I. Further, RemainCo will receive a ~$1 billion cash dividend, which is expected to primarily be directed toward debt repayment (in an effort to maintain an investment grade credit rating).

The company filed its initial Form 10 in late-July (16th), held a capital market day for Amentum on August 13, 2024 and expects to complete the transaction toward the second-half of its September-ending F2024. More recent commentary indicates the separation will be completed in the latter half of September 2024 (as the company has cleared all regulatory approvals for the transaction, save the private letter ruling from the IRS).

John Heller, the current chief executive of Amentum will serve as the combined company’s CEO (as well have a seat on the Board), while Dr. Steve Arnette, the current president of CMS, will serve as CombineCo’s chief operating officer (COO). Steve Demetriou, J’s current Executive Chairman, and former CEO from 2015 until 2023, will assume the same role at Amentum. Mr. Robert (Bob) Pragada, J’s chief executive from early-2023, will remain the CEO of the parent (and will assume the role of Board Chairman).

Our valuation analysis indicates that J’s current pre-spin stock price roughly aligns with our estimate of its fair value, suggesting limited immediate upside. However, depending on post-spin-off trading activity, there may be compelling opportunities for both the parent company and the spin-off entity.

 

ALERT:  Fortive (FTV) to Spin-Off its Precision Technologies Business – September 5, 2024

 

ALERT:  Topgolf Callaway Brands Corp. (MODG) to Spin-Off Topgolf – September 5, 2024

 


Radar Screen – September 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Crown Castle Inc. (CCI),  FedEx Corporation (FDX),  Goodyear Tire & Rubber Co., Luxfer Holdings (LXFR), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

 


Spin-Off Report Calendar -September 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.


Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.


European Spin-Off Compendium – September 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 


Bits & Pieces – September 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – September 13, 2024

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 


HIGH-CONVICTION RECOMMENDATIONS (LONG):


RECENT INITIATIONS:


LATEST PUBLICATIONS & UPDATES:

UPDATE – Newpark Resources (NYSE: NR)

August 6, 2024

NR beats across the board in 2Q 2024 as strength at the higher-margin Industrial Solutions (IS) segment offset weakness at Fluid Systems (FS)

Newpark Resources posted 2Q 2024 consolidated sales down 2.35% to $179 million (compared with consensus of $169.25 million) with adj. EBITDA up ~18% to $23.4 million (compared with consensus of $18.5 million) on 230 basis points of margin improvement to 13.1%. Adjusted EPS increased ~50% to $0.12 (compared $0.08 in the prior year period and consensus of $0.08) while free cash flow (FCF) was ~$21.9 million (versus ~$0.6 million in 2Q 2023 and consensus of $5.2 million).

By segment, Fluid Systems posted 2Q 2024 sales down ~17% to $112.2 million (in-line with previous commentary) with adj. segment EBITDA of ~$5.2 million (compared with $8.6 million in the year ago period), implying ~200 bps of margin deterioration to 4.6%.  Industrial Solutions posted 2Q 2024 sales up ~39% to $66.8 million, driven by strength in both product sales and specialty rentals, with adj. segment EBITDA growth of ~$36.5% to ~$24.8 million, implying 60 bps of margin contraction to 37.1%.

The company maintained its initial guidance for the Industrial Solutions segment, which calls for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%. Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet.

Management indicated that while taking longer than expected, it is optimistic the on-going strategic review of its Fluid Systems business (managed by Lazard) will be completed by the end of 3Q 2024 (versus previous commentary targeting mid-year 2024). Net working capital at Fluid Systems was ~$160 million at the end of 3Q 2024.  We estimate a deal would precipitate a significant re-rating of NR shares 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).

Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $99.2 million (previously $98.1 million), reflecting a 5.0x multiple at Fluid Systems (previously 5.5x) and 9.5x (unchanged) at Industrial Solutions, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).


Radar Screen – September 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – September 6, 2024

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.


UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

  • Jacobs Solutions Inc. (J) / Critical Mission Solutions – Late September 2024
  • Spectrum Brands (SPB) / Home & Personal Care Business – 3Q 2024
  • Western Digital (WDC) / HDD Business – 2H 2024
  • MDU Resources Group (MDU) / Construction Services – 2H 2024
  • Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 2H 2024
  • Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
  • DuPont Inc. (DD) / Electronics and Water Business – 2H 2025
  • Topgolf Callaway Brands Corp. (MODG) / Topgolf – 2H 2025
  • Fortive Corp. (FTV) / Precision Technologies Business – Mid 2025

RECENT PUBLICATIONS:

Comprehensive Report:  Jacobs Solutions Inc. (J)

On May 9, 2023, Jacobs Solutions Inc. (NYSE: J) announced its intention to spin-off its Critical Mission Solutions (CMS) business into an independent, standalone, publicly traded company, subject to customary closing conditions.  Subsequently, on November 20, 2023, Jacobs announced a definitive agreement to spin off CMS (along with the Cyber & Intelligence portion of its Divergent Solutions business) and merge it with privately held Amentum in a tax-free, Reverse Morris Trust (RMT).

The combined CMS, C&I and Amentum (CombineCo) business generated ~$13.7 billion of annual sales (& ~$1.1 billion of adj. EBITDA, including $50-$70 million of synergies) for the last twelve months, and “create a leading provider of system integration & technology solutions” and “deliver expertise in the government’s highest priority areas of energy, space exploration, intelligence & analytics, and digital modernization”, at scale. On the flip side, management indicated that the post-separation parent (RemainCo) will be a “higher value” company focused on “technology-enabled solutions” for the “world’s most complex critical infrastructure & sustainability challenges” with “leading positions in the attractive water and environment, energy transition, transportation and advanced manufacturing sectors” with ~$11.4 billion in trailing annual sales.

Post-spin parent, Jacobs, and its shareholders were expected to own 58.5%-63% of the combined spin entity, Amentum, consisting of 51%-55% for J shareholders and the parent’s retainment of 7.5%-8.0%. The final ownership stakes will be determined based on reaching certain operating targets at CMS and C&I. Further, RemainCo will receive a ~$1 billion cash dividend, which is expected to primarily be directed toward debt repayment (in an effort to maintain an investment grade credit rating).

The company filed its initial Form 10 in late-July (16th), held a capital market day for Amentum on August 13, 2024 and expects to complete the transaction toward the second-half of its September-ending F2024. More recent commentary indicates the separation will be completed in the latter half of September 2024 (as the company has cleared all regulatory approvals for the transaction, save the private letter ruling from the IRS).

John Heller, the current chief executive of Amentum will serve as the combined company’s CEO (as well have a seat on the Board), while Dr. Steve Arnette, the current president of CMS, will serve as CombineCo’s chief operating officer (COO). Steve Demetriou, J’s current Executive Chairman, and former CEO from 2015 until 2023, will assume the same role at Amentum. Mr. Robert (Bob) Pragada, J’s chief executive from early-2023, will remain the CEO of the parent (and will assume the role of Board Chairman).

Our valuation analysis indicates that J’s current pre-spin stock price roughly aligns with our estimate of its fair value, suggesting limited immediate upside. However, depending on post-spin-off trading activity, there may be compelling opportunities for both the parent company and the spin-off entity.

 

ALERT:  Fortive to Spin-Off its Precision Technologies Business

On September 4, 2024, after the market close, Fortive Corporation (NYSE: FTV) announced its Board of Directors would pursue a tax-free spin-off of its Precision Technologies (PT) business from its Intelligent Operating Solutions (IOS) and Advanced Healthcare Solutions (AHS) businesses. The company expects the transaction will be competed in 4Q 2025.

FTV currently operates three business segments: 1) Intelligent Operating Solutions (43% of consolidated sales in 2023 and ~49% of adjusted EBITDA); 2) Precision Technologies (35% of 2023 sales and 33% of adj. EBITDA); and 3) Advanced Healthcare Solutions (22% of consolidated sales in 2023 and ~18% of adj. EBITDA).

In terms of leverage and capital allocation, management indicated that it intends to use ~75% if the free cash flow generated between now and the spin toward share repurchases and while not finalized the current plan is to set both companies up with similar, investment-grade credit ratings and leverage ratios in the ~1.4x-1.7x.

In terms of post-spin leadership, upon completion of the transaction, James Lico will retire as president & chief executive (CEO) and the current head of the IOS business, Olumide Soroye, will take the helm at Fortive while Tami Newcomb, the current head of PT, will assume the chief executive role at SpinCo.

Management indicates the transaction will highlight RemainCo’s ~50% recurring revenue base (and ability to growth through M&A) as well as SpinCo’s leverage to key end-markets with long-term secular/organic growth prospects (i.e., mission critical technologies in test & measurement, specialty sensors and aerospace & defense subsystems).

In terms of valuation, Intelligent Operating Solutions (IOS) could be compared with Ametek, Inc. (NYSE: AME), Keysight Technologies (NYSE: KEYS) and Rockwell Automation (NYSE: ROK), which trade at nearly 17.5x 2025E EV/EBITDA while Advanced Healthcare Solutions (AHS) could be compared with Steris PLC (NYSE: STE), which trades at ~15.5x. Applying peer multiples to each segment’s respective 2025E EBITDA forecasts yields a combined (i.e., IOS & AHS) value of ~$22 billion. Precision Technologies (PT) could be compared with Keysight Technologies and Zebra Technologies (NASDAQ: ZBRA), which trade at nearly 17x 2025E EV/EBITDA (although Emerson acquired National Instruments in October 2023 the purchase price represented ~20.4x and 18.7x 2023E and 2024E consensus estimates, respectively).

Applying a 16.5x multiple to our 2025E segment EBITDA forecast implies segment value of nearly $5.5 billion. Accounting for corporate costs, capitalized at the weighted segment average, as well as net debt yields an initial, pre-spin, sum-of-the-parts value of ~$26.65 billion or ~$77.50 per share, representing 9% upside from the current share price.

 

ALERT:  Topgolf Callaway Brands Corp. (NYSE: MODG)

On September 4, 2024, after the market close, Topgolf Callaway Brands Corp. (NYSE: MODG) announced its Board of Directors intended to pursue a separation of its Callaway and Topgolf businesses into two publicly traded entities. At least initially, the company is envisioning the transaction as a tax-free spin-off although management will continue to evaluate a range of options to maximize shareholder value (i.e., a sale). In pursuit of the contemplated transaction, MODG will look to spin off at least 80.1% of Topgolf, a key threshold in qualifying for tax-free status, but is considering retaining a “limited ownership for a “period of time”.)  MODG expects the transaction will be competed in 2H 2025.

MODG’s Callaway business, which primarily provides golf equipment (i.e., clubs, where it is the #1 player, balls, where it is #2, & accessories), generated ~$2.45 billion in trailing 12-month (TTM) sales with adjusted EBITDA of ~$268 million while Topgolf, which was acquired in March 2021, operates golf-related entertainment venues (i.e., gamified driving ranges), comprised ~$1.8 billion of TTM sales with adj. EBITDA of ~$333 million (or $245 million, excluding VFCI or cash venue financing interest). For 2024E, management has guided Callaway segment sales of $2.4-$2.5 billion with adj. segment EBITDA of $260-$280 million while Topgolf is projected to generate segment sales of ~$1.8 billion with adj. EBITDA of $310 million (or $210 excluding VFCI). [Note: 2024E guidance does not include $25 million and $50 million of expected net dis-synergies and transaction expenses, respectively.]

This announcement comes in the broader context of MODG’s stock having been under significant pressure in recent months (off a high around $16 per share), partly driven (as evidenced by analyst commentary on recent quarterly conference calls) by declining/disappointing same store sales (SSS) trends at Topgolf (i.e., SSS was up 7% in full-year 2022, 11% in 1Q 2023 and 1% in 2Q 2023 before turning negative in 3Q 2023 and 4Q 2023 with declines of 3% before accelerating to 7% and 8% declines in 1Q 2024 and 2Q 2024, respectively). To that end, the company announced a strategic review on its 2Q 2024 earnings conference call (in early-August) to evaluate “both organic and inorganic”, including a potential spin, to improve performance and maximize shareholder value. At the time, management indicated that “we have been disappointed in our stock performance for some time, as well as the more recent same venue sales performance. As a result, we are in the process of conducting a full strategic review of Topgolf”. (Anecdotally, the company thinks that recent trends are largely driven by cyclicality as well as a “post-Covid reversion” and that it sees the long-term sales store sales trends for the business as being positive. That said, management acknowledges that a return to consistent positive comparisons will likely “take some time.)

While not finalized, commentary on management’s conference call was that Callaway would likely retain all company debt and that Topgolf will be spun out debt-free (other than its venue-related financing obligations) with roughly ~$200 million in cash. Despite the lopsided allocation of debt, management plans, via a combination of free cash flow and the monetization of its retained stake in Topgolf, to reduce parent-company leverage to 3.0x or lower within 12-months following the separation transaction (which it thinks will mitigate the risk of any potential downgrades to its investment grade by the rating agencies).

In terms of valuation, as mentioned earlier Calloway is the #1 player in clubs and #2 in balls (behind Acushnet), could be compared with golf-focused public-players, such as Acushnet (NYSE: GOLF) and Mizuno (8022 JT), as well as, to a lesser degree, a broader set of sporting good peers, such as Thule Group (THULE SS), Yeti Holdings (NYSE: YETI) and Amer Sports (NYSE: AS), which, on average trade at ~11x 2025E EV/EBITDA (in a range of 8.5x-12x). Applying a slightly discounted peer multiple of ~10.0x, reflecting the post-spin entities leverage profile, to forecasted 2025E Calloway segment EBITDA implies a valuation of $2.7 billion. Standalone Topgolf, for its part, could be imperfectly compared with a range of entertainment/leisure concerns, including Six Flags, which is in the process of being acquired by Cedar Fair (NYSE: FUN), Life Time Group (NYSE: LTH), MSG Entertainment (NYSE: MSGE), and Vail Resorts (NYSE: MTN), which trade at ~9.0x 2025E EV/EBITDA (in a range of ~6.0x-12x). Applying a lower-end multiple of ~6.5x, which we think is warranted awaiting more clarity of the resiliency on same store trends, implies Topgolf segment value of ~$1.95 billion. Accounting for projected net debt of ~$2.35 billion yields an initial, pre-spin, sum-of-the-parts value of ~$2.3 billion or ~$12.50 per share, representing 21% upside from the current share price. 


Radar Screen – September 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Crown Castle Inc. (CCI),  FedEx Corporation (FDX),  Goodyear Tire & Rubber Co., Luxfer Holdings (LXFR), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

 


Spin-Off Report Calendar -September 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.


Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.


European Spin-Off Compendium – July 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 


Bits & Pieces – August 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – September 6, 2024

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 


HIGH-CONVICTION RECOMMENDATIONS (LONG):


RECENT INITIATIONS:


LATEST PUBLICATIONS & UPDATES:

UPDATE – Newpark Resources (NYSE: NR)

August 6, 2024

NR beats across the board in 2Q 2024 as strength at the higher-margin Industrial Solutions (IS) segment offset weakness at Fluid Systems (FS)

Newpark Resources posted 2Q 2024 consolidated sales down 2.35% to $179 million (compared with consensus of $169.25 million) with adj. EBITDA up ~18% to $23.4 million (compared with consensus of $18.5 million) on 230 basis points of margin improvement to 13.1%. Adjusted EPS increased ~50% to $0.12 (compared $0.08 in the prior year period and consensus of $0.08) while free cash flow (FCF) was ~$21.9 million (versus ~$0.6 million in 2Q 2023 and consensus of $5.2 million).

By segment, Fluid Systems posted 2Q 2024 sales down ~17% to $112.2 million (in-line with previous commentary) with adj. segment EBITDA of ~$5.2 million (compared with $8.6 million in the year ago period), implying ~200 bps of margin deterioration to 4.6%.  Industrial Solutions posted 2Q 2024 sales up ~39% to $66.8 million, driven by strength in both product sales and specialty rentals, with adj. segment EBITDA growth of ~$36.5% to ~$24.8 million, implying 60 bps of margin contraction to 37.1%.

The company maintained its initial guidance for the Industrial Solutions segment, which calls for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%. Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet.

Management indicated that while taking longer than expected, it is optimistic the on-going strategic review of its Fluid Systems business (managed by Lazard) will be completed by the end of 3Q 2024 (versus previous commentary targeting mid-year 2024). Net working capital at Fluid Systems was ~$160 million at the end of 3Q 2024.  We estimate a deal would precipitate a significant re-rating of NR shares 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).

Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $99.2 million (previously $98.1 million), reflecting a 5.0x multiple at Fluid Systems (previously 5.5x) and 9.5x (unchanged) at Industrial Solutions, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).


Radar Screen – September 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – August 29, 2024

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.


UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

  • Jacobs Solutions Inc. (J) / Critical Mission Solutions – 3Q 2024
  • Spectrum Brands (SPB) / Home & Personal Care Business – 3Q 2024
  • Western Digital (WDC) / HDD Business – 2H 2024
  • MDU Resources Group (MDU) / Construction Services – 2H 2024
  • Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 2H 2024
  • Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
  • DuPont Inc. (DD) / Electronics and Water Business – 2H 2025

RECENT PUBLICATIONS:

UPDATE: Baxter International (BAX) Agrees to Sell Vantive Kidney Care to Carlyle; Drop Coverage

August 13, 2024

BAX Agrees to Sell its Vantive Kidney Care Business to Carlyle for $3.8 billion; Drop Coverage Effective Immediately

On August 13, 2024, before the market open, Baxter International (NYSE: BAX) announced a definitive agreement to sell (rather than spin) its Vantive Kidney Care business to Carlyle (NASDAQ: CG) for $3.8 billion (of which ~$3.5 billion will be paid in cash).

Upon closing, which is expected in “late 2024 or early 2025”, BAX expects to receive net after tax proceeds of ~$3.0 billion.

Following the transaction, standalone Baxter is targeting operational sales growth of 4%-5% annually and an operating margin of ~16.5% in 2025. Additionally, the company expects to achieve its investment grade leverage target of less than 3.0x by the end of 2025.

For context, in January 2023 Baxter announced that it would spin-off its Kidney Care business into a standalone publicly traded company; subsequently, in March 2024, following reports in the business press, management disclosed in an 8-K filing that “it has been in recent discussions with select private equity investors to explore a potential sale of the Kidney Care asset in lieu of the proposed spin-off of the business.”

Given the sale announcement, we DROP coverage of Baxter International (BAX) effective immediately. Our prior estimates and fair value for BAX should no longer be relied upon.

 

Update:  Howard Hughes Holdings Inc. (NYSE: HHH)

August 1, 2024

HHH completes the spin-off of Seaport Entertainment (SEG)

On July 31, 2024, at 11:59 pm (ET), Howard Hughes (NYSE: HHH) completed the separation of Seaport Entertainment (NYSE American: SEG), which primarily owns real estate assets centered in and around New York City’s South Street Seaport (along with a 25% stake in Jean-Georges Restaurants, air rights above the Las Vegas Fashion Mall as well as ownership of The Las Vegas Aviators, a Triple-A minor league baseball team) into a separate, publicly traded company via a tax-free spin-off.

Shareholders received one share of SEG for every nine shares of HHH owned. (Cash will be paid in lieu of fractional shares, which, while the overall transaction was tax free could trigger a taxable gain/loss for some shareholders.)

While noting that we think a fair degree of value has seemingly been pulled forward ahead of the separation, we do think the transaction better positions post-spin HHH (i.e., the parent) both from a simplification and cash flow perspective, which should make it more attractive to investors and benefit its valuation over time. To those ends, the separation of SEG positions post-spin HHH as a pure-play real estate company (i.e., MPCs, landbank and development) and removes the “cash drag” of the money losing Seaport business (i.e., it generated an ~$18 million NOI loss in 1H 2024 and ~$32.5 million when including the losses from unconsolidated joint ventures, such as The Tin Building by Jean-Georges), which should facilitate incremental capital allocation options (e.g., buybacks and/or investments in its MPCs).

As for the Seaport, low occupancy, negative cash flow, and the need to fund the 250 Water Street project will likely remain a concern for those outside of deep value real estate-focused investors.
Overall, in approaching valuation, we acknowledge the majority of value in both the parent and post spin entities is largely derived from the future value of land along with the earnings potential of its operating assets (versus HHH’s current earnings profile). As highlighted in management’s estimated NAV, the largest ascribed value is placed on future MPC land sales, some of which are forecasted to persist into 2086, which obviously requires myriad assumptions to be made (all are subject to challenge but ultimately it seems the assets clearly have some value).

For additional information please see our initiation reported dated July 8, 2024

 


Radar Screen – August 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI),  FedEx Corporation (FDX),  Luxfer Holdings (LXFR)*, Goodyear Tire & Rubber, Inc. (FLT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

*New Entry this Month


Spin-Off Report Calendar – August 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.


Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.


European Spin-Off Compendium – July 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 


Bits & Pieces – August 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – August 29, 2024

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 


HIGH-CONVICTION RECOMMENDATIONS (LONG):


RECENT INITIATIONS:


LATEST PUBLICATIONS & UPDATES:

UPDATE – Newpark Resources (NYSE: NR)

August 6, 2024

NR beats across the board in 2Q 2024 as strength at the higher-margin Industrial Solutions (IS) segment offset weakness at Fluid Systems (FS)

Newpark Resources posted 2Q 2024 consolidated sales down 2.35% to $179 million (compared with consensus of $169.25 million) with adj. EBITDA up ~18% to $23.4 million (compared with consensus of $18.5 million) on 230 basis points of margin improvement to 13.1%. Adjusted EPS increased ~50% to $0.12 (compared $0.08 in the prior year period and consensus of $0.08) while free cash flow (FCF) was ~$21.9 million (versus ~$0.6 million in 2Q 2023 and consensus of $5.2 million).

By segment, Fluid Systems posted 2Q 2024 sales down ~17% to $112.2 million (in-line with previous commentary) with adj. segment EBITDA of ~$5.2 million (compared with $8.6 million in the year ago period), implying ~200 bps of margin deterioration to 4.6%.  Industrial Solutions posted 2Q 2024 sales up ~39% to $66.8 million, driven by strength in both product sales and specialty rentals, with adj. segment EBITDA growth of ~$36.5% to ~$24.8 million, implying 60 bps of margin contraction to 37.1%.

The company maintained its initial guidance for the Industrial Solutions segment, which calls for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%. Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet.

Management indicated that while taking longer than expected, it is optimistic the on-going strategic review of its Fluid Systems business (managed by Lazard) will be completed by the end of 3Q 2024 (versus previous commentary targeting mid-year 2024). Net working capital at Fluid Systems was ~$160 million at the end of 3Q 2024.  We estimate a deal would precipitate a significant re-rating of NR shares 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).

Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $99.2 million (previously $98.1 million), reflecting a 5.0x multiple at Fluid Systems (previously 5.5x) and 9.5x (unchanged) at Industrial Solutions, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).


Radar Screen – August 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Luxfer Holdings (LXFR)*, Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)

*New Entry This Month


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – August 23, 2024

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 


HIGH-CONVICTION RECOMMENDATIONS (LONG):


RECENT INITIATIONS:


LATEST PUBLICATIONS & UPDATES:

UPDATE – Newpark Resources (NYSE: NR)

August 6, 2024

NR beats across the board in 2Q 2024 as strength at the higher-margin Industrial Solutions (IS) segment offset weakness at Fluid Systems (FS)

Newpark Resources posted 2Q 2024 consolidated sales down 2.35% to $179 million (compared with consensus of $169.25 million) with adj. EBITDA up ~18% to $23.4 million (compared with consensus of $18.5 million) on 230 basis points of margin improvement to 13.1%. Adjusted EPS increased ~50% to $0.12 (compared $0.08 in the prior year period and consensus of $0.08) while free cash flow (FCF) was ~$21.9 million (versus ~$0.6 million in 2Q 2023 and consensus of $5.2 million).

By segment, Fluid Systems posted 2Q 2024 sales down ~17% to $112.2 million (in-line with previous commentary) with adj. segment EBITDA of ~$5.2 million (compared with $8.6 million in the year ago period), implying ~200 bps of margin deterioration to 4.6%.  Industrial Solutions posted 2Q 2024 sales up ~39% to $66.8 million, driven by strength in both product sales and specialty rentals, with adj. segment EBITDA growth of ~$36.5% to ~$24.8 million, implying 60 bps of margin contraction to 37.1%.

The company maintained its initial guidance for the Industrial Solutions segment, which calls for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%. Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet.

Management indicated that while taking longer than expected, it is optimistic the on-going strategic review of its Fluid Systems business (managed by Lazard) will be completed by the end of 3Q 2024 (versus previous commentary targeting mid-year 2024). Net working capital at Fluid Systems was ~$160 million at the end of 3Q 2024.  We estimate a deal would precipitate a significant re-rating of NR shares 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).

Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $99.2 million (previously $98.1 million), reflecting a 5.0x multiple at Fluid Systems (previously 5.5x) and 9.5x (unchanged) at Industrial Solutions, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).


Radar Screen – August 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Luxfer Holdings (LXFR)*, Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)

*New Entry This Month


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – August 23, 2024

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.


UPCOMING SPIN-OFFS AND EXPECTED COMPLETION DATES:

  • Jacobs Solutions Inc. (J) / Critical Mission Solutions – 3Q 2024
  • Spectrum Brands (SPB) / Home & Personal Care Business – 3Q 2024
  • Western Digital (WDC) / HDD Business – 2H 2024
  • MDU Resources Group (MDU) / Construction Services – 2H 2024
  • Berry Global Group Inc. (BERY) / HH&S And Films Businesses (to merge w/ Glatfelter) – 2H 2024
  • Holcim Ltd. (HOLN SW) / North American Business – 1H 2025
  • DuPont Inc. (DD) / Electronics and Water Business – 2H 2025

RECENT PUBLICATIONS:

UPDATE: Baxter International (BAX) Agrees to Sell Vantive Kidney Care to Carlyle; Drop Coverage

August 13, 2024

BAX Agrees to Sell its Vantive Kidney Care Business to Carlyle for $3.8 billion; Drop Coverage Effective Immediately

On August 13, 2024, before the market open, Baxter International (NYSE: BAX) announced a definitive agreement to sell (rather than spin) its Vantive Kidney Care business to Carlyle (NASDAQ: CG) for $3.8 billion (of which ~$3.5 billion will be paid in cash).

Upon closing, which is expected in “late 2024 or early 2025”, BAX expects to receive net after tax proceeds of ~$3.0 billion.

Following the transaction, standalone Baxter is targeting operational sales growth of 4%-5% annually and an operating margin of ~16.5% in 2025. Additionally, the company expects to achieve its investment grade leverage target of less than 3.0x by the end of 2025.

For context, in January 2023 Baxter announced that it would spin-off its Kidney Care business into a standalone publicly traded company; subsequently, in March 2024, following reports in the business press, management disclosed in an 8-K filing that “it has been in recent discussions with select private equity investors to explore a potential sale of the Kidney Care asset in lieu of the proposed spin-off of the business.”

Given the sale announcement, we DROP coverage of Baxter International (BAX) effective immediately. Our prior estimates and fair value for BAX should no longer be relied upon.

 

Update:  Howard Hughes Holdings Inc. (NYSE: HHH)

August 1, 2024

HHH completes the spin-off of Seaport Entertainment (SEG)

On July 31, 2024, at 11:59 pm (ET), Howard Hughes (NYSE: HHH) completed the separation of Seaport Entertainment (NYSE American: SEG), which primarily owns real estate assets centered in and around New York City’s South Street Seaport (along with a 25% stake in Jean-Georges Restaurants, air rights above the Las Vegas Fashion Mall as well as ownership of The Las Vegas Aviators, a Triple-A minor league baseball team) into a separate, publicly traded company via a tax-free spin-off.

Shareholders received one share of SEG for every nine shares of HHH owned. (Cash will be paid in lieu of fractional shares, which, while the overall transaction was tax free could trigger a taxable gain/loss for some shareholders.)

While noting that we think a fair degree of value has seemingly been pulled forward ahead of the separation, we do think the transaction better positions post-spin HHH (i.e., the parent) both from a simplification and cash flow perspective, which should make it more attractive to investors and benefit its valuation over time. To those ends, the separation of SEG positions post-spin HHH as a pure-play real estate company (i.e., MPCs, landbank and development) and removes the “cash drag” of the money losing Seaport business (i.e., it generated an ~$18 million NOI loss in 1H 2024 and ~$32.5 million when including the losses from unconsolidated joint ventures, such as The Tin Building by Jean-Georges), which should facilitate incremental capital allocation options (e.g., buybacks and/or investments in its MPCs).

As for the Seaport, low occupancy, negative cash flow, and the need to fund the 250 Water Street project will likely remain a concern for those outside of deep value real estate-focused investors.
Overall, in approaching valuation, we acknowledge the majority of value in both the parent and post spin entities is largely derived from the future value of land along with the earnings potential of its operating assets (versus HHH’s current earnings profile). As highlighted in management’s estimated NAV, the largest ascribed value is placed on future MPC land sales, some of which are forecasted to persist into 2086, which obviously requires myriad assumptions to be made (all are subject to challenge but ultimately it seems the assets clearly have some value).

For additional information please see our initiation reported dated July 8, 2024

 


Radar Screen – August 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI),  FedEx Corporation (FDX),  Luxfer Holdings (LXFR)*, Goodyear Tire & Rubber, Inc. (FLT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International (TFII), TriMas Corporation (TRS)

*New Entry this Month


Spin-Off Report Calendar – August 2024

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.


Spin-Off Report Compendium – August 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations.


European Spin-Off Compendium – July 2024

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 


Bits & Pieces – August 2024

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up – August 16, 2024

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 


HIGH-CONVICTION RECOMMENDATIONS (LONG):


RECENT INITIATIONS:


LATEST PUBLICATIONS & UPDATES:

UPDATE – Newpark Resources (NYSE: NR)

August 6, 2024

NR beats across the board in 2Q 2024 as strength at the higher-margin Industrial Solutions (IS) segment offset weakness at Fluid Systems (FS)

Newpark Resources posted 2Q 2024 consolidated sales down 2.35% to $179 million (compared with consensus of $169.25 million) with adj. EBITDA up ~18% to $23.4 million (compared with consensus of $18.5 million) on 230 basis points of margin improvement to 13.1%. Adjusted EPS increased ~50% to $0.12 (compared $0.08 in the prior year period and consensus of $0.08) while free cash flow (FCF) was ~$21.9 million (versus ~$0.6 million in 2Q 2023 and consensus of $5.2 million).

By segment, Fluid Systems posted 2Q 2024 sales down ~17% to $112.2 million (in-line with previous commentary) with adj. segment EBITDA of ~$5.2 million (compared with $8.6 million in the year ago period), implying ~200 bps of margin deterioration to 4.6%.  Industrial Solutions posted 2Q 2024 sales up ~39% to $66.8 million, driven by strength in both product sales and specialty rentals, with adj. segment EBITDA growth of ~$36.5% to ~$24.8 million, implying 60 bps of margin contraction to 37.1%.

The company maintained its initial guidance for the Industrial Solutions segment, which calls for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%. Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet.

Management indicated that while taking longer than expected, it is optimistic the on-going strategic review of its Fluid Systems business (managed by Lazard) will be completed by the end of 3Q 2024 (versus previous commentary targeting mid-year 2024). Net working capital at Fluid Systems was ~$160 million at the end of 3Q 2024.  We estimate a deal would precipitate a significant re-rating of NR shares 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).

Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $99.2 million (previously $98.1 million), reflecting a 5.0x multiple at Fluid Systems (previously 5.5x) and 9.5x (unchanged) at Industrial Solutions, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).


Radar Screen – August 2024

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Castle Inc. (CCI), FedEx Corporation (FDX), Luxfer Holdings (LXFR)*, Goodyear Tire & Rubber, Inc. (GT), Masimo Corp. (MASI), Matthews International Corp. (MATW), Natura & Co. (NTCO), Netgear Inc. (NTGR), Newpark Resources (NR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), TFI International Inc. (TFII), TriMas Corporation (TRS)

*New Entry This Month


Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566