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.
HIGH-CONVICTION RECOMMENDATIONS (LONG): Vestis Corporation (VSTS), WK Kellogg (KLG)
UPCOMING SPIN-OFFS: Lions Gate Entertainment Corp. (LGFA/B)/Studio Business, General Electric (GE)/Renewable Energy, Baxter International Inc. (BAX)/KidneyCo, Medtronic (MDT)/Patient Monitoring & Respiratory Interventions, 3M Co. (MMM)/Health Care Business, Jacobs Solutions Inc. (J)/Critical Mission Solutions, Western Digital (WDC)/HDD Business, MDU Resources Group (MDU)/Construction Services, Edwards Lifesciences Corp.(EW)/Critical Care Business
RECENT PUBLICATIONS
ALERT: Edwards Lifesciences to Spin-Off Critical Care Business
December 7, 2023
On December 7 Edwards Lifesciences Corp. (NYSE: EW) announced the spin-off its Critical Care business at the end of 2024.
EW describes itself as “the global leader in patient-focused medical innovations for structural heart disease and critical care monitoring.” In 2022, the company generated revenue, EBITDA and EPS of $5.4 billion, $1.9 billion, and $2.48 per share, respectively. EW’s products are focused on four areas: Transcatheter Aortic Valve Replacement (“TAVR”) and Transcatheter Mitral & Tricuspid Therapies (“TMTT”), which combined accounted for 67.5% of revenue in 2022, Surgical Structural Heart (“Surgical”), representing 16.6% of revenue in 2022, and Critical Care, which contributed 15.9% of sales in 2022.
TAVR products are used in minimally invasive replacement surgeries for aortic heart valves and include the Edwards SAPIEN family of valves and delivery systems for catheter-based valve repair and replacement in patients. TMTT, which contributes only 2.2% of current revenue, has many products in development to treat mitral and tricuspid valve diseases. Surgical Structural Heart therapies aim to improve the quality of life for patients with aortic valve replacement. The Critical Care business provides monitoring systems for management of patient’s heart function and fluid status in surgical and intensive care settings. EW reports operating segments based on geographic regions and not by product category, as such operating performance, aside from revenue, is not disclosed.
EW itself was a spin-off from Baxter International Inc. (BAX) in April of 2000. In terms of rationale for the separation, it appears that given the differing end market growth rates between the product categories, separating out the more mature Critical Care business will result in, at least optically, a higher top line growth for the parent company, while the spin-company can focus on its core business. In conjunction with today’s announcement and investor conference, EW issued initial 2024 guidance, which included revenue growth of 8% – 10% over 2023 levels of $6.3 billion to $6.6 billion, and adjusted EPS growth of 9%-11% over 2023 levels of $2.70 to $2.80 per share. In terms of product categories, management is expecting 2024 sales growth of 8% – 10% at TAVR and mid-single digit growth at both Surgical Structural Heart and Critical Care businesses. Management is hosting its investor conference at 8:30 a.m Pacific Time today. Given a lack of disclosures on the post spin companies’ operating performance, we abstain from assigning a preliminary fair value estimate at this time. We will revisit a preliminary sum-of-the-parts fair value estimate upon further disclosures.
UPDATE: Worthington Enterprises Inc.
December 1, 2023
WOR Completes Worthington Steel Spin-Off; Rate Worthington Enterprises at NEUTRAL with a $44 FVE; Rate Worthington Steel at NEUTRAL with a $28 FVE
On December 1, 2023, before the market open, Worthington Industries completed the previously announced spin-off of its steel businesses. WOR shareholders of record as of November 21, 2023, received one share of WS for every share of WOR held.
In terms of rationale for the separation, following the Tempel acquisition, management believes that the Steel company has sufficient scale to operate as a standalone entity. Additionally, given the volatility that is inherent in the price of steel, a standalone Worthington Enterprises should see a lower degree of volatility arising from steel price swings and the resultant impact from Steel’s unconsolidated JVs. Following the separation, both companies will be respective leaders in their dominant businesses, and investors likely will favor the reduced complexities in reporting, which may attract new investors and/or more sell-side coverage, both of which we would view as a positive.
Despite near term economic uncertainty as exhibited by 1Q F2024 results (May FYE), the post-spin companies remain a dominant player in most of its core businesses (steel processing and building products [WAVE]), have strong balance sheets, and will be positioned to weather the current macro environment and have ample liquidity to capitalize on attractive acquisitions.
Worthington Steel looks to capitalize on the decarbonization of transportation and the energy transformation through its electrical steel business, while Worthington Enterprises will participate in demand from government stimulus, environmental investment, population shifts and on- and near-shoring (moving production back to the U.S. or closer in proximity).
In terms of favorability, we believe that investors will prefer the parent company’s exposure to multiple industries and the removal of volatility from the steel market, which may result in a sell-off of WS shares. With market leadership positions in the building products segment, which derives the majority of the post-spin parent company’s earnings, we favorably view the company’s positioning to capitalize on increases in residential and non-residential new construction and remodels.
We maintain our post-spin fair value estimates of $44 per share of WOR and $28 per share for WS. Given limited upside to our fair value estimates we rate both companies at NEUTRAL. We would revisit our post-spin ratings on any sell-off of post-spin shares or changes in company or industry fundamentals.
For more details, please refer to our comprehensive note dated November 24, 2023.
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 Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Masimo Corp. (MASI), Matthews International Corp. (MATW), Newpark Resources (NR), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)
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.
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