YELL provides Teamsters with legal notice that it is “ceasing” operations and filing for bankruptcy; our quick reaction to the potential impact on XPO moves fair value to $80 per share

While as yet unconfirmed by the company, this morning, Yellow Corp. (NASDAQ: YELL) provided legal notice to its unionized workforce, represented by the International Brotherhood of Teamsters, that it is “ceasing” operations and will file for bankruptcy.

Seemingly, this marks the inauspicious end to the long-troubled carrier which narrowly avoided a formal bankruptcy in 2009 and 2011, via debt for equity swaps that essentially wiped out the prior equity, and obtained a $700 million emergency loan from the U.S. government (in exchange for a nearly ~30% stake) to continue operations in 2020.

That said, for all its financial and operational problems YELL is/was still a top-5 player in the LTL space with ~$4.7 billion of U.S. LTL revenue in 2022 (or ~8.5%-9.5% share of the ~$50-$55 billion LTL market) that will need to find a home among the remaining players, including XPO, Inc. (NYSE: XPO), Old Dominion (NASDAQ: ODFL), Saia (NASDAQ: SAIA), ArcBest (NASDAQ: ARCB), Fed Ex Freight (NYSE: FDX), TFI International (NASDAQ: TFII) as well as a handful of private players.

In that context, as outlined in our note published June 20^th,  we think it can be reasonably assumed that the near-term impact of YELL’s demise will be that any excess truck/terminal capacity in the industry is pretty quickly erased.  (Clearly, personnel will present a near-term “pinch-point”, but we think the increased availability of labor from YELL’s 25,000-plus workforce will be a mitigating factor in coming months.)

As it relates specifically to XPO, which in mid-2022 implemented plans to expand its overall door capacity by ~6% in key constrained markets, such as Dallas, Atlanta and Salt Lake City (as well as increase its driver recruitment/training efforts) by the early 2024, we estimate that its excess capacity could conservatively be assumed to be ~5%-15%.

Given the situation, we think it reasonable to assume that new freight easily comes into the system with incremental margins of ~30% (although we note this could be considerably higher depending on what we see in the pricing environment over the next couple of months).

To that end, assuming 10% excess capacity and 30% incremental margins we have attempted to factor this unfolding development into our forecasts.  That said, we acknowledge the situation is still very fluid and we will continue to refine our forecasts as things develop in the coming weeks.

All told, our base case fair value for XPO moves to $80 per share, based on a 10x multiple (compared with the 9.0x multiple previously employed and LTL peers SAIA and ODFL at ~12x and 16x, respectively) applied to 2024E adj. EBITDA of $1.16 billion (previously $1.025 billion) and projected net debt of $2.175 billion.

MATW reports 3Q F2023 results modestly ahead of consensus and sees full-year F2023 adj. EBITDA of “at least $220 million” (within its prior guidance of $215-$235 million); fair value increased to $51 per share (from $50)

• Last night, after the market close, MATW reported 3Q F2023 consolidated sales up 11.9% (or ~12.3% on a constant currency basis) to $471.9 million (vs. consensus of $465.5 million) with a ~22% increase in adjusted EBITDA to ~$56.2 million (vs. consensus of $55.5 million). Adj. EPS were $0.74 (up ~27.5% versus $0.58 in the prior year period and consensus of $0.65).
• By segment, sales at the Memorialization segment rose 2.7% to ~$209 million with a 24.5% increase in adj. EBITDA to ~$40 million while sales at Industrial Technologies increased 66.5%, most notably driven by the energy storage business (including the Olbrich and R+S acquisitions), to $130.5 million with an ~27.5% increase in adj. EBITDA to ~$15.0 million.  At SGK, sales fell ~5.5% to ~$132.5 million while adj. EBITDA increased 12.5% to ~$16.5 million (as adverse conditions in Europe as well as currency headwinds were offset by recent cost reductions and pricing pass-throughs).
• The company ended 3Q F2023 with net debt of $735.7 million, including $39.3 million in cash and $775 million of debt, and a net leverage ratio of 3.3x (versus 3.5x in 2Q F2023, 3.85x in 1Q F2023 and 3.5x at the end of F2022). The company’s long-term target remains “at or below 3.0x”.
• In terms of guidance, the company maintained its full-year F2023 adjusted EBITDA guidance of $215-$235 million (compared with $210.4 million in F2022) while noting that it expects adj. EBITDA will be “at least $220 million”; anecdotally, Industrial Technologies should post ~$500 million of sales in F2023, primarily driven by the energy storage business, while Memorialization continues to perform better than pre-pandemic levels even as death rates continue to normalize. At SGK, market conditions are expected to remain challenged, given its significant European exposure, but pricing conditions are improving, and the cost reduction efforts taken earlier in the year (with more to come over the next six months) should drive further margin improvement in the remainder of F2023 and F2024.
• Anecdotally, management indicated on this morning’s conference call that its outlook continues to reflect a “cautious” stance on the timing of revenue recognition of existing orders in the energy storage business as well as the timing of future orders, of which management suggests it is in multiple later-stage negotiations (e.g., “all” of the battery manufacturers in the Asia Pacific region).
• Our base case fair value estimate for MATW is increased to $51 per share (from ~$50 per share), reflecting a blended multiple 9.5x multiple (unchanged) on our F2024E adjusted EBITDA of $~$247 million (previously ~$245 million) and net debt of ~$672.5 million (previously ~$704.5 million; see Exhibit #1 on page 2).

GTX reports 2Q 2023 results; raises full-year guidance for the 2^nd consecutive quarter with the bottom end of its FCF guide implying a ~17% yield; repurchases were modest during in 2Q 2023 but have ramped into July and the company plans $200 million of early debt repayment in 3Q 2023

• This morning, before the market open, GTX reported 2Q 2023 sales up 18% (or 19% on a constant currency basis) to $1.01 billion, driven by both new product ramps and OEM restocking, with 23% growth in adj. EBITDA to $170 million (vs. $138 million in 2Q 2022).  Net income and adj. free cash flow (FCF) were $71 million and $140 million, respectively, compared with $85 million and $23 million in the prior year period.
• For 1H 2023, GTX posted sales growth of 12.5% to $1.98 billion with 19% growth in adj. EBITDA to $338 million.  Net income and adj. FCF were $152 million and $228 million, respectively, compared with $173 million and $61 million in the prior year period.
• The company ended 2Q 2023 with a net leverage ratio of 2.15x (compared with 1.64x at the end of 2022 and 1.87x at the end of 2Q 2022).  GTX repurchased $17 million worth of stock during 2Q 2023 (under its $250 million authorization) but indicates that that figure has ramped to $80 million as of July 25^th.  As well, the company plans $200 million of early debt repayment in 3Q 2023 in pursuit of its 2024 net leverage target of ~2.0x (that said, we would note that 80% of GTX’s long-term debt is fixed at less than 3.2% over the next three years with no significant debt maturities until 2028).
• In terms of guidance, management increased its full-year outlook for the second straight quarter (see Exhibit 1 on page 2); net sales are now projected to be $3.84-$4.03 billion (versus prior guidance of $3.79-$3.98 billion), implying constant currency growth of 6%-11% (previously 5%-10%) with adjusted EBITDA and FCF of $620-$670 million and $340-$440 million, respectively (versus prior guides of $585-$635 million and $315-$415 million).  GAAP net income is projected to be $255-$290 million (up from the previous range of $231-$268 million).
• Management’s current projections assume light vehicle production of ~84 million units (up from the previous 1% growth assumption) along with a Euro/Dollar exchange rate of 1.11 (previously 1.07).  Research & Development (R&D) costs and capital expenditures are expected to be ~4.3% (previously 4.4%) and 2.3% (unchanged) of net sales, respectively, of which 50% and 20% (both unchanged), respectively, will be devoted to electrical technology innovation.
• On the latter electric vehicle (EV) or zero-emission vehicle (ZEV) front, GTX continues to garner pre-development projects for its E-Powertrain, E-Cooling Compressor and H2 Fuel Cell solutions/systems and it continues to target ~$1 billion of EV/ZEV sales (at or above the company’s existing margin profile) by 2030.
• Our base case fair value estimate for GTX remains ~$11 per share, reflecting an 8.0x multiple on our 2024E adjusted net income forecast of ~$349 million and a fully diluted share count of ~266 million.

Drop Coverage of MSG Sphere Co. and Madison Square Garden Entertainment Corp. Effective Immediately

• On April 21, 2023, Madison Square Garden Entertainment Corp. completed the spin-off of its traditional live entertainment business. New Madison Square Garden Entertainment Corp. now trades on the NYSE under the ticker “MSGE”.
• Following the separation, the parent company adopted the corporate moniker MSG Sphere Co. and now trades on the NYSE under the ticker “SPHR”.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of MSG Sphere Co. and Madison Square Garden Entertainment Corp. effective immediately.
• Our prior estimates and fair values for SPHR and MSGE should no longer be relied on.

Last night, after the market close, Liberty Media completed the 1-for-1 split-off of Atlanta Braves Holdings, Inc. (formerly Liberty Braves Group); new shares will begin trading this morning; our base case fair value estimate remains $50 per share

• Last night, after the market close, Liberty Media completed the previously announced split-off of Atlanta Braves Holdings, Inc., including ownership of The Atlanta Braves Major League Baseball (MLB) team, its stadium, Truist Park, as well as the adjacent mixed-use development, The Battery Atlanta, into a separate, publicly traded, asset-backed equity (as opposed to its previous multi-class tracking stock structure).
• To that end, the company redeemed all of the previously outstanding Series A, B, & C shares of the Liberty Braves Group for one share in the corresponding common stock of the new Atlanta Braves Holdings (with all intergroup interests being settled & extinguished).
• There was no record date for the transaction; as such, all holders of Liberty Braves Group’s common stock at the split-offs’ 5 p.m. effective time last night, July 18^th, automatically received their allotted shares.
• In terms of the new listings, Atlanta Braves Holdings’ Series A and C common stock will begin trading on the NASDAQ under the tickers BATRA and BATRK this morning, July 19^th, while the Series B common stock will trade in the OTC market under the ticker BATRB.
• It remains our view, this transaction would reduce complexity, widen the potential shareholder base and help further narrow the so-called tracking stock discount as well as facilitate the eventual, tax-efficient monetization of the Atlanta Braves Holdings’ assets.
• Our base case fair value estimate remains $50 per share, reflecting a ~$47 per share valuation for the Atlanta Braves MLB team, based on a 5.5x multiple of 2023E regular season ballpark sales, a $9 per share valuation for the company’s real estate/development assets (i.e., The Battery Atlanta), reflecting a 6.5% capitalization rate on our stabilized net operating income estimate, and net debt of ~$ 5 per share.
• For reference, Liberty Braves Holdings expects to report 2Q 2023 results on August 4, 2023, before the market open and hold a conference call that morning at 10 a.m. (ET); call-in at (877) 704-2829.

Alert:  Lions Gate Files Form 10 to Spin-Off Studio Business

On July 12, 2023, after the market close, Lions Gate Entertainment (NYSE: LGF.A, LGF.B) issued a press release announcing that the company has filed a public Form 10 registration statement with the SEC to conduct a tax-free spin-off of its Motion Picture and Television Production business segments, collectively referred to as LGF’s Studio Business. The transaction, which is targeted to be completed by the end of September 2023, is subject to customary closing conditions including an effectiveness declaration of a Form 10 filing with the SEC and final approval from the company’s Board of Directors, amongst others. Following the separation, the parent company will control the company’s Straz cable television station operations.

Currently, LGF reports three operating segments: (1) Motion Picture (29% of consolidated sales and 54% of segment profit in March-ending F2023); (2) Television Production (38% of F2023 sales and 26% of segment profit); and (3) Media Networks (33% of F2023 sales and 21% of segment profit).

Motion Picture controls the company’s theatrical release of motion pictures, sale and rental of film productions, licensed films, and television programs, via packaged media and through digital media platforms, and licensing of film productions for linear and video-on-demand services international licensing. Television Production licenses scripted and unscripted series, made for TV movies, mini-series, and documentary programing, as well as the sale and rental of television series and movies through packaged media and digital media platforms. Media Networks primarily consists of the company’s STARZ branded premium subscription video services, which are distributed via traditional cable operators, over-the-top streaming platforms, and direct-to-consumer through the Straz app. Notably, LGF acquired Starz in 2016 for $4.4 billion in cash and stock.

On a consolidated basis, the company generated F2023 adjusted operating income before depreciation & amortization (OIBDA) of $358 billion (compared with $402 million in F2022). The company does not offer specific financial guidance (and its results can be lumpy based on the strength/appeal of its film slate in any given year), but current consensus estimates call for F2024 and F2025 sales of $4.3 billion and $4.5 billion, respectively, along with adjusted OIBDA of $425 million and $494 million for F2024 and F2025, respectively.

Based on current trends, consensus forecasts, and management commentary, it can reasonably be projected that LGF’s Media Networks segment could generate adjusted OIBDA of ~$145 million in F2025E. Assuming the standalone business were valued at ~5.0x, a modest discount to peers such as AMC Networks (NASDAQ: AMCX) and Discovery Inc. (NASDAQ: DISCA), value of $724 million could be derived. (Notably, this value could be conservative, considering that LGF purchased STARZ for $4.4 billion in 2016.)

Applying a 12x multiple to the remaining TV and Motion Picture businesses, which include a content library that generates annual sales approaching $800 million (with cash margins exceeding 50%), suggests a remaining value of ~$4.7 billion. (Again, considering recent M&A activity, including the MGM/AMZN transaction as well as Comcast’s [NASDAQ: CMSCA] ~$4.1 billion purchase of DreamWorks in August 2016, which represented an estimated EV/EBITDA multiple of ~24.5x, this valuation could be conservative in the event of a sale.) Accounting for capitalized corporate costs of $100 million at about 10x, and current net debt, including minority interest, of $1.8 billion suggests a sum-of-the-parts fair value of ~$2.6 billion, or ~$11.50 per share (based on a share count of 229.5 million).

The Sell-Off in PHINA Presents An Increasingly Attractive Risk Reward Scenario, In Our View; Upgrade PHIN to BUY (from NEUTRAL), Maintain $33 FVE

• On July 3, 2023, after the market close, BorgWarner Inc. (NYSE: BWA) completed the spin-off of its fuel systems and aftermarket business into a standalone, publicly traded company called PHINIA Inc. (NYSE: PHIN).
• Shares of PHINA have declined 45% since the close of trading on July 5, 2023, on total volume of 30.0 million shares. (For context, PHIN has 46.9 million shares outstanding.)
• Following this precipitous sell-off, which we think has been perpetuated by BWA investors clearly favoring owning the parent company as well as index selling related to PHIN’s exclusion from the S&P 500, our view has become increasingly positive in regards to the margin of safety that the shares currently present. As such, we UPGRADE shares of PHINA Inc. and maintain our $33 fair value estimate.
• While shares may still see some modest incremental downward pressure, we view the fact that 63% of shares outstanding have turned over, combined with today representing the fifth day of regular-way trading, which we have historically found is a precursor to more normalized trading volumes and less volatility emerging, as relevant leading indicators. (To that end, our research over the years has suggested selling pressure typically abates five to seven trading days post distribution.)
• For reference, our fair value estimate is based on a 4.0x multiple of 2024E EBITDA of $519 million. Management has guided for 2023 EBITDA of $485 – $505 million, and 2025 targets of ~$3.7 billion in revenue and 14% – 15% EBITDA margins, which at the low end equates to approximately $518 million.
• At today’s price, shares of PHIN are currently trading at 3.35x our 2024 EBITDA estimate, and 3.6x the low end of management’s guidance for this year.
• For PHINIA, we do see significant cash flow generation from its product portfolio over the coming years. However, we acknowledge that the company likely does not receive a valuation multiple above low single digits given its end market exposure.

Ahead of a conference appearance later today, APG indicates 2Q 2023 adj. EBITDA will “at or above the midpoint” of its initial guidance and that leverage will be within its targeted range by year-end despite a return to bolt-on M&A; fair value increased to $31 per share (from $30 per share) 

• This morning, ahead of an appearance at an industry conference at 1:40 p.m. this afternoon, APG indicated that 2Q 2023 adjusted EBITDA would come in “at or above the midpoint” of its initial $195-$205 million with organic net revenue growth in the high-single digits.
• Along with the implied EBITDA margin expansion, APG noted that free cash flow conversion continues to improve and will allow the company to reduce its net leverage ratio to within its 2.0x-2.5x target, albeit toward the higher end, by the end of 2023 despite a recent return to M&A in the Safety Services business.
• On the latter M&A point, the company indicated that it had completed a $35 million acquisition within the core Safety Service segment at the end of 2Q 2023 and that it expects to complete at least two more bolt-on transactions, again within the Safety Services segment, during 3Q 2023.  The combined annual net revenue contribution from these three acquisitions is projected to be ~$35 million (as well as immediately accretive to the company’s EBITDA margin.)
• The company will report actual 2Q 2023 results on August 3^rd, before the market open, with a conference call at 8:30 a.m. (ET).
• For context, APG ended 1Q 2023 with net debt of $2.311 billion, including $363 million in cash and $2.594 billion of debt, and a net leverage ratio of 3.1x (versus 3.2x at the end of F2022).
• In terms of earnings guidance, recall APG increased its full-year 2023 sales and adjusted EBITDA outlook to $6.875-$7.025 billion (up from $6.8-$6.95 billion) and $740-$780 million (up from $735-$775 million), respectively following 1Q 2023.
• The company’s initial 2Q 2023 guidance called for net sales of $1.75-$1.78 billion along with adjusted EBITDA of $195-$205 million.
• Anecdotally, the company has maintained its long-term (i.e., 2025) financial goals, which target generating ~60% of its sales from inspections, services & monitoring as well as a consolidated adjusted EBITDA margin of 13%. Free cash flow conversion is targeted to be 80% (relative to adj. EBITDA and up from ~65% in 2023) and its leverage target remains 2.0x-2.5x (which, again, the company expects to achieve, at least at the high end, by year-end 2023).
• Our base case fair value estimate for Api Group (APG) increases to $31 per share (from $30 per share), reflecting a blended multiple of ~11.5x on F2024 adjusted EBITDA of ~$875.5 (previously $831 million) along with projected net debt of ~$1.30 billion.

Drop Coverage of Fidelity National Information Services Inc. Effective Immediately

• On January 6, 2023, Fidelity National Information Services Inc. (NYSE: FIS) announced that the company has agreed to sell a 55% stake in Worldpay Merchant Solutions to private equity funds managed by GTCR at an enterprise valuation of $18.5 billion (including $1 billion in contingent consideration).
• Net proceeds to FIS are expected to approximate $11.7 billion, and the transaction is targeted to be completed in 1Q 2024.
• Given the majority stake sale, FIS will not be spinning off the Worldpay business to shareholders. As such, we DROP coverage of Fidelity National Information Services Inc. effective immediately.
• Our prior estimates and fair values for FIS should no longer be relied on.

Drop Coverage of Crane NXT Co. and Crane Co. Effective Immediately

• On April 3, 2023, after the market close, Crane Holding Co. (formerly NYSE: CR) competed the spin-off of Crane Co. The spin company now trades on the NYSE under the ticker “CR”.
• Following the separation, the parent company adopted the corporate moniker Crane NXT Co. and trades on the NYSE under the symbol “CXT”.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Crane NXT Co. and Crane Co. effective immediately.
• Our prior estimates and fair values for CXT and CR should no longer be relied on.