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.

Approaching Spin-Off Completion Dates (2023):

Aramark (ARMK) / Vestis Corp (VSTS): 9/30/2023
Danaher Corp (DHR) / Veralto Corp. (VLTO): 9/30/2023
Kellogg Co (K)  WK Kellogg Co. (KLG): 10/2/2023
Lithium Americas Corp (LAC) / Lithium International: 4Q 2023
NCR Corp (NCR) / NCR Atleos LLC (NATL):  4Q 2023
Vista Outdoor Inc (VSTO) / Outdoor Products Business: Late 2023
Lions Gate Entertainment Corp (LGF/B) / Studio Business:  Late 2023

Newest Publications & Updates

UPDATE:  Kellogg Co. (K)
September 11, 2023

On September 11, 2023, before the market open, Kellogg Co. (NYSE: K) announced that it’s Board of Directors has approved the spin-off of its North American Cereal business. The spin company will adopt the corporate moniker WK Kellogg Co. and is expected to trade on the NYSE under the ticker “KLG”.

The separation is expected to become effective on October 2, 2023, with shareholders of record as of September 21, 2023, receiving one share of KLG for every two shares of K held. Shares of KLG will begin trading on October 2, 2023.  Following the separation, the parent company will change its name to Kellanova and will continue to trade on the NYSE under the ticker “K”.

When-issued trading for WK Kellogg will begin on or about September 27, 2023, under the symbols “KLG WI”.

We adjust our post-spin fair value estimate for WK Kellogg to $14 per share (previously $3.50 per share) to account for the one-for four share distribution ratio.  We maintain our pre-spin K fair value estimate of $73 per share and NEUTRAL rating.

While we do not see a pre-spin opportunity, we do anticipate the potential for post-separation investment opportunities, depending on the ultimate initial trading range of Kellanova and WK Kellogg.  Of primary interest would be if WK Kellogg experiences an initial sell-off of shares due to investors exiting the spin company ownership position in favor of maintaining a position in the more growth oriented, geographically diversified snacks company, which should pressure shares of WK Kellogg in initial trading.

COMPREHENSIVE REPORT: Danaher Corp. (DHR)
September 6, 2023

On September 14, 2022, Danaher Corp. (NYSE: DHR) announced plans to separate its Environmental & Applied Solutions segment into a standalone, publicly traded company via a tax-free spin-off.   The spin company will adopt the corporate moniker Veralto Corp. and trade under the ticker “VLTO”.

The separation will be accomplished via a one-for-three share distribution of Veralto shares to DHR shareholders of record as of September 13, 2023, and is expected to be completed on Saturday September 30, 2023. Shares of Veralto are scheduled to begin trading on the NYSE on October 2, 2023. “When-issued” trading for Veralto and Danaher is expected to begin on or about September 27, 2023, under respective symbols “VLTO WI” and “DHR WI.”

Certain areas of the business are dealing with several headwinds. Most notably, the company continues to work through lapping COVID sales that are still declining. Second, management continues to deal with customers’ overstocked inventories and restricted access to capital. Management has highlighted China customers as working through inventories, resulting in decreased or canceled orders coupled with decreased funding availability to biotech customers. Management expects these two factors to be mostly worked through during 2H 2023. Notably, the EAS business is somewhat insulated from the headwinds that will remain with post-spin DHR.

Post-spin we would expect that VLTO would see a valuation multiple contraction to approximate more closely that of its peers;, however, it could be argued that, given Veralto’s forecasted margin profile is roughly 300 basis points higher than peers, the company would be awarded a slight premium. Absent the lower margin Veralto business, DHR will also exhibit margins above its peers, which could also warrant a slight premium and an increase in its trading multiple versus the current level.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of Danaher Corp. at $268 per share, consisting of $242 per share in value from post-spin DHR and $26 per share in value from Veralto. Given that the current share price approximates our fair value estimate, and the limited timeframe until the completion of the separation (September 30, 2023), we rate pre-spin shares of DHR at NEUTRAL.

Following the spin-off, we expect shareholder rotation out of Veralto due to the relative size difference of the post-spin entities and the differing industry end markets. Post-spin, we would favor VLTO shares at a discount to our fair value estimate given the lack of current industry headwinds facing the parent company and the current trading multiple of the pre-spin company (which implies minimal multiple expansion opportunities given peer trading).

We would revisit post-spin DHR upon a contraction in the trading multiple as we favorably view the longer term prospects of the company, given management’s historical ability to grow revenue, earnings, and shareholder value in normal operating environments.

Radar Screen – September 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Spin-Off Report Calendar – September 2023

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 2023

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

European Spin-Off Compendium – April 2023

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

Bits & Pieces – September 2023

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 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.

Approaching Spin-Off Completion Dates (2023):

Aramark (ARMK) / Vestis Corp (VSTS): 9/30/2023
Danaher Corp (DHR) / Veralto Corp. (VLTO): 9/30/2023
Kellogg Co (K)  WK Kellogg Co. (KLG): 10/2/2023
Lithium Americas Corp (LAC) / Lithium International: 4Q 2023
NCR Corp (NCR) / NCR Atleos LLC (NATL):  4Q 2023
Vista Outdoor Inc (VSTO) / Outdoor Products Business: Late 2023
Lions Gate Entertainment Corp (LGF/B) / Studio Business:  Late 2023

Newest Publications & Updates

UPDATE:  Kellogg Co. (K)
September 11, 2023

On September 11, 2023, before the market open, Kellogg Co. (NYSE: K) announced that it’s Board of Directors has approved the spin-off of its North American Cereal business. The spin company will adopt the corporate moniker WK Kellogg Co. and is expected to trade on the NYSE under the ticker “KLG”.

The separation is expected to become effective on October 2, 2023, with shareholders of record as of September 21, 2023, receiving one share of KLG for every two shares of K held. Shares of KLG will begin trading on October 2, 2023.  Following the separation, the parent company will change its name to Kellanova and will continue to trade on the NYSE under the ticker “K”.

When-issued trading for WK Kellogg will begin on or about September 27, 2023, under the symbols “KLG WI”.

We adjust our post-spin fair value estimate for WK Kellogg to $14 per share (previously $3.50 per share) to account for the one-for four share distribution ratio.  We maintain our pre-spin K fair value estimate of $73 per share and NEUTRAL rating.

While we do not see a pre-spin opportunity, we do anticipate the potential for post-separation investment opportunities, depending on the ultimate initial trading range of Kellanova and WK Kellogg.  Of primary interest would be if WK Kellogg experiences an initial sell-off of shares due to investors exiting the spin company ownership position in favor of maintaining a position in the more growth oriented, geographically diversified snacks company, which should pressure shares of WK Kellogg in initial trading.

COMPREHENSIVE REPORT: Danaher Corp. (DHR)
September 6, 2023

On September 14, 2022, Danaher Corp. (NYSE: DHR) announced plans to separate its Environmental & Applied Solutions segment into a standalone, publicly traded company via a tax-free spin-off.   The spin company will adopt the corporate moniker Veralto Corp. and trade under the ticker “VLTO”.

The separation will be accomplished via a one-for-three share distribution of Veralto shares to DHR shareholders of record as of September 13, 2023, and is expected to be completed on Saturday September 30, 2023. Shares of Veralto are scheduled to begin trading on the NYSE on October 2, 2023. “When-issued” trading for Veralto and Danaher is expected to begin on or about September 27, 2023, under respective symbols “VLTO WI” and “DHR WI.”

Certain areas of the business are dealing with several headwinds. Most notably, the company continues to work through lapping COVID sales that are still declining. Second, management continues to deal with customers’ overstocked inventories and restricted access to capital. Management has highlighted China customers as working through inventories, resulting in decreased or canceled orders coupled with decreased funding availability to biotech customers. Management expects these two factors to be mostly worked through during 2H 2023. Notably, the EAS business is somewhat insulated from the headwinds that will remain with post-spin DHR.

Post-spin we would expect that VLTO would see a valuation multiple contraction to approximate more closely that of its peers;, however, it could be argued that, given Veralto’s forecasted margin profile is roughly 300 basis points higher than peers, the company would be awarded a slight premium. Absent the lower margin Veralto business, DHR will also exhibit margins above its peers, which could also warrant a slight premium and an increase in its trading multiple versus the current level.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of Danaher Corp. at $268 per share, consisting of $242 per share in value from post-spin DHR and $26 per share in value from Veralto. Given that the current share price approximates our fair value estimate, and the limited timeframe until the completion of the separation (September 30, 2023), we rate pre-spin shares of DHR at NEUTRAL.

Following the spin-off, we expect shareholder rotation out of Veralto due to the relative size difference of the post-spin entities and the differing industry end markets. Post-spin, we would favor VLTO shares at a discount to our fair value estimate given the lack of current industry headwinds facing the parent company and the current trading multiple of the pre-spin company (which implies minimal multiple expansion opportunities given peer trading).

We would revisit post-spin DHR upon a contraction in the trading multiple as we favorably view the longer term prospects of the company, given management’s historical ability to grow revenue, earnings, and shareholder value in normal operating environments.

Radar Screen – September 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Spin-Off Report Calendar – September 2023

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 2023

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

European Spin-Off Compendium – April 2023

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

Bits & Pieces – August 2023

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 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. 

Newest Publications & Updates

COMPREHENSIVE REPORT: Masimo Corporation (NASDAQ: MASI)
August 31, 2023

Masimo Corporation (NASDAQ: MASI) operates two business segments: (1) Healthcare (~62% of consolidated 2023E sales), which develops, manufactures & sells non-invasive patient monitoring devices/technologies, most notably its pulse oximeter, for professional (e.g., hospitals) and, to a lesser degree, consumer customers; and (2) Non-Healthcare (38% of 2023E sales), which develops, manufacturers & sells high-end, home audio equipment/platforms to consumers. 

Since the announcement of the ~$1.06 billion acquisition of Sound United in February 2022, MASI’s share price has shed 50% of its value, representing a more than $6.5 billion erosion in the company’s market capitalization.  In that context, we estimate that MASI’s core Healthcare business is trading at a significant discount to peers and its own 3-, 5- and 10-year trading averages while assigning a fraction of the value paid for the Non-Healthcare/consumer audio business.

The broad investor criticism and share price decline in the wake of the Sound United transaction set the stage for activist investor, Politan Capital, to build a ~9% stake by August 2022 and gain 2 (of 5) Board seats (with ~70% of the non-insider vote) in June 2023.  Following its resounding (albeit hard fought) victory, the activist continues to push for improvements in MASI’s corporate governance and will hold management accountable on its commitment to a three-year time horizon before considering a divestiture of the Non-Healthcare business (assuming the strategic rationale for the deal fails to materialize). Additional catalysts could stem from new product launches, as well as a favorable outcome in MASI’s patent infringement litigation in front of the ITC against the Apple Watch, which is set for trial in October 2023.  

MASI’s Healthcare and Non-Healthcare businesses could be valued at ~$140 per share, and ~$12 per share, respectively. Accounting for projected net debt of ~$6.50 per share yields a base case sum-of-the-parts fair value of $146 per share.  Potential catalysts include the separation/monetization of assets, corporate governance improvements, favorable litigation awards, leverage reductions and/or better than expected growth & margins from new product launches.

Radar Screen – September 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Product Specialist

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

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. 

Please Note: This message is being resent because the link to the Masimo report below was not working on the previous email.

Newest Publications & Updates

COMPREHENSIVE REPORT: Masimo Corporation (NASDAQ: MASI)
August 31, 2023

Masimo Corporation (NASDAQ: MASI) operates two business segments: (1) Healthcare (~62% of consolidated 2023E sales), which develops, manufactures & sells non-invasive patient monitoring devices/technologies, most notably its pulse oximeter, for professional (e.g., hospitals) and, to a lesser degree, consumer customers; and (2) Non-Healthcare (38% of 2023E sales), which develops, manufacturers & sells high-end, home audio equipment/platforms to consumers. 

Since the announcement of the ~$1.06 billion acquisition of Sound United, which became the foundation of the company’s Non-Healthcare segment, in February 2022, MASI’s share price has shed 50% (versus a 2.8% decline in the Russell 2000 and a 1.2% gain in the S&P 500), representing a more than $6.5 billion erosion in the company’s market capitalization.  In that context, we estimate at the current valuation MASI’s core Healthcare business is trading at a significant discount to peers and its own 3-, 5- and 10-year trading averages while also assigning a fraction of the value paid for the Non-Healthcare/consumer audio business. Moreover, it is evident that the broad investor criticism & precipitous market decline in the wake of the Sound United transaction set the stage for activist investor, Politan Capital, to build a ~9% stake in the company by August 2022 and gain 2 (of 5) Board seats (with ~70% of the non-insider vote) in June 2023.  Following its resounding (albeit hard fought) victory, the activist continues to push for further improvements in MASI’s corporate governance paradigm and will undoubtedly hold management accountable on (or accelerate) its commitment to a three-year time horizon before considering a divestiture of the Non-Healthcare business (assuming the strategic rationale for the deal fails to materialize). Additional catalysts could stem from new product launches, including Stork and PerL, as well as a favorable outcome in MASI’s patent infringement litigation in front of the ITC against the Apple Watch, which is set for trial in October 2023.  

Based on management guidance and commentary as well as peer and M&A valuations, MASI’s Healthcare and Non-Healthcare businesses could be valued at ~$140 per share, and ~$12 per share, respectively. Accounting for projected net debt of ~$6.50 per share yields a base case sum-of-the-parts fair value of $146 per share (with bull and bear cases of ~$159 and ~$132 per share, respectively).  Potential catalysts include the separation/monetization of assets, corporate governance improvements, favorable litigation awards, leverage reductions and/or better than expected growth & margins from new product launches. Risks include execution, competition, technological disruption, commodity & currency fluctuations, regulation, cyber threats, pandemics and/or a recession.

Radar Screen – September 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Product Specialist

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

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.

Newest Publications & Updates

COMPREHENSIVE REPORT: Danaher Corp. (DHR)
September 6, 2023

• On September 14, 2022, Danaher Corp. (NYSE: DHR) announced plans to separate its Environmental & Applied Solutions segment into a standalone, publicly traded company via a tax-free spin-off.   The spin company will adopt the corporate moniker Veralto Corp. and trade under the ticker “VLTO”.
• The separation will be accomplished via a one-for-three share distribution of Veralto shares to DHR shareholders of record as of September 13, 2023, and is expected to be completed on Saturday September 30, 2023. Shares of Veralto are scheduled to begin trading on the NYSE on October 2, 2023. “When-issued” trading for Veralto and Danaher is expected to begin on or about September 27, 2023, under respective symbols “VLTO WI” and “DHR WI.”
• The decision to separate the EAS business is consistent with DHR’s history of spin-offs, including the 2015 spin-off of its communications business, which was acquired by NetScout Systems Inc. (NTCT) in a Reverse-Morris Trust transaction, the 2016 separation of the company’s former Test & Measurement business into Fortive Corp. (FTV), and the split-off of its dental business into Envista Holdings Corp. (NVST). The Veralto spin completes DHR’s transformation into a pure-play life sciences tools and diagnostics company.
• Certain pieces of the business are currently dealing with several headwinds. Most notably, the company continues to work through lapping COVID sales that are still declining. Secondly, management continues to deal with customers’ overstocked inventories and restricted access to capital. Management has highlighted China customers as working through inventories, resulting in decreased or canceled orders coupled with decreased funding availability to biotech customers. Management expects these two factors to be mostly worked through during 2H 2023. Notably, the EAS business is somewhat insulated from the headwinds that will remain with post-spin DHR.
• Post-spin we would expect that VLTO would see a valuation multiple contraction to approximate more closely that of its peers;, however, it could be argued that, given Veralto’s forecasted margin profile is roughly 300 basis points higher than peers, the company would be awarded a slight premium. Absent the lower margin Veralto business, DHR will also exhibit margins above its peers, which could also warrant a slight premium and an increase in its trading multiple versus the current level.
• On a pre-spin, sum-of-the-parts basis, we fairly value shares of Danaher Corp. at $268 per share, consisting of $242 per share in value from post-spin DHR and $26 per share in value from Veralto. Given that the current share price approximates our fair value estimate, and the limited timeframe until the completion of the separation (September 30, 2023), we rate pre-spin shares of DHR at NEUTRAL.
• Following the spin-off, we expect shareholder rotation out of Veralto due to the relative size difference of the post-spin entities and the differing industry end markets. Post-spin, we would favor VLTO shares at a discount to our fair value estimate given the lack of current industry headwinds facing the parent company and the current trading multiple of the pre-spin company (which implies minimal multiple expansion opportunities given peer trading).
• We would revisit post-spin DHR upon a contraction in the trading multiple as we favorably view the longer term prospects of the company, given management’s historical ability to grow revenue, earnings, and shareholder value in normal operating environments.

UPDATE:  Aramark (ARMK)
September 6, 2023

ARMK To Complete Uniform Services Spin-Off on September 30, 2023; Maintain BUY Rating, and $46 FVE

• On September 6, 2023, before the market open, Aramark (NYSE: ARMK) announced it’s Board of Directors has approved the spin-off of its Uniform Services business. The spin company will adopt the corporate moniker Vestis and is expected to trade on the NYSE under the ticker “VSTS”.
• The separation is expected to be completed on September 30, 2023, with shareholders of record as of September 20, 2023, receiving one share of VSTS for every two shares of ARMK held.
• Shares of VSTS will begin trading on October 2, 2023. When-issued trading for Vestis and Aramark will begin on or about September 27, 2023, under the respective symbols “VSTS WI” and ARMK WI”.
• We adjust our post-spin fair value estimate for Vestis to $37 per share (previously $18 per share) to account for the one-for-two share distribution ratio.
• We maintain our pre-spin ARMK fair value estimate of $46 per share and BUY rating.
• Vestis will host an analyst day on September 13, 2023.

Radar Screen – September 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Spin-Off Report Calendar – September 2023

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 2023

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

European Spin-Off Compendium – April 2023

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

Bits & Pieces – August 2023

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 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.

Newest Publications & Updates

COMPREHENSIVE REPORT: Kellogg Co. (NYSE: K)
August 16, 2023

• On June 21, 2022, Kellogg Co. (NYSE: K) announced that its Board of Directors approved a plan to separate the company into three standalone, publicly traded companies. The separation, which was posited to be completed via tax-free spin-offs, would have resulted in shareholders of record owning interests in, as referenced at the time of the announcement, “Global Snacking Co.,” “North America Cereal Co.,” and “Plant Co.” In February 2023, in conjunction with the company’s 2022 year-end results, K announced that it now plans to retain its plant-based business while spinning off just its North America cereal business. In terms of timing, management is currently targeting the spin-off to be completed by year-end 2023, subject to customary closing conditions including the final approval from the Board of Directors, an effectiveness declaration of the company’s Form 10 filing by the SEC, and receipt of a private letter ruling from the IRS in respect to the tax-free nature of the transaction, amongst others.
• The spin company will control the North American Cereal business, adopt the corporate moniker WK Kellogg Co. and intends to trade on the NYSE under the symbol “KLG.” The parent company, a global snack-focused business, will change its name to Kellanova following the separation and continue to trade on the NYSE under the ticker “K.”
• Management’s stated rationale for the separation largely hinges on the idea that it believes that Kellanova’s growth and margin profile has been obfuscated withing the current conglomerate structure. Following the separation, Kellanova’s superior revenue growth and margins, relative to WK Kellogg’s, will be more apparent to investors, while WK Kellogg’s dedicated sales force and management, combined with its independent balance sheet, will allow management to make investments in its supply chain to expand margins.
• In theory, upon the separation, the snacks-focused growth company with higher margins should be re-rated to a higher valuation multiple while the cereal company will likely be re-rated lower. Interestingly, with K currently trading at 11.0x 2024 estimates, it approximates that of WK Kellog peers. However, given the spin company’s margin profile and goal of “stabilized” sales, the shares will trade at a discount to the group.
• On a pre-spin, sum-of-the-parts basis, we fairly value shares of Kellogg Co. at $73 per share, consisting of $3.50 per share in value from WK Kellog and approximately $70 per share in value from Kellanova. With shares trading at 11.0x the current 2024 consensus EBITDA estimate, current negative volume trends across the business, and the impending separation, combined with the implied upside to our fair value estimate, we view it as prudent to rate shares of K at NEUTRAL ahead of the expected 4Q spin-off of WK Kellogg.
• While we do not see a pre-spin opportunity, we do anticipate the potential for post-separation investment opportunities, depending on the ultimate initial trading range of Kellanova and WK Kellogg. Of primary interest would be if WK Kellogg experiences an initial sell-off of shares due to investors exiting the spin company ownership position in favor of maintaining a position in the more growth oriented, geographically diversified snacks company, which should pressure shares of WK Kellogg in initial trading. Additionally, given the relative estimated market capitalizations of the post-spin company’s it should be expected that WK Kellogg will not be included in the S&P 500 (K is currently a constituent and we would expect Kellanova to remain in the index), which would also create indiscriminate/forced selling by indexed investors. If shares of WK Kellogg trade at a significant discount, investors may see an opportunity to invest in a “classic spin-off” where an “unloved” and underinvested entity is able to significantly improve operations and offer significant out sized returns over the longer term. Given a separate management, focused sales force, and an independent balance sheet, if management were to successfully widen margins to approximate that of peers and delever following the investment phase, WK Kellogg could show significant earnings growth potential in the out years.

The European Spin-Off Report – Novartis AG (NOVN SW, NYSE: NVS) – FLASH

August 18, 2023

Novartis to Spin-Off Sandoz on or about October 4, 2023

• On August 18, Novartis AG (NOVN SW, NYSE: NVS) announced the company had filed a shareholder information brochure in relation to a proposed spin-off of its generic drug business, Sandoz. NOVN will hold an Extraordinary General Meeting (EGM) on September 15, 2023, at which time investors will vote to approve the posited spin-off. If completed, the separation would be accomplished via a dividend in kind whereby NOVN shareholders of record would receive one share of Sandoz for every five shares of NOVN. The Sandoz spin-off is planned to occur on or around October 4, 2023, with a primary listing on the SIX Swiss Exchange, and an American Depositary Receipt (ADR) program in the U.S.
• In 2022, NOVN generated $50.5 billion in revenue and $16.7 billion in core operating income, as compared to $51.6 billion and $16.6 billion in the prior year. As the company currently stands, NOVN reports under two segments: Innovative Medicines, which contributed $41.3 billion in revenue in 2022, and Sandoz, which registered sales of $9.2 billion in 2022.
• Innovative Medicines focuses on development and marketing of novel medicines and includes treatments for cardiovascular, immunology, neuroscience, solid tumors, and hematology. Well known products include Cosentyx (marketed for psoriasis) and Entresto (chronic heart failure). Year-over-year Innovative Medicines revenue declined by 2% in 2022 as significant growth from cardiovascular products, in particular 31% growth in revenue from Entresto, was offset by generic competition for the segments more established brands (Afinito/Votubia and Gilenya). Through 1H 2023 segment revenue increased by 5% on key product strength (Entresto, Kesimpta, Pluvicto, and Kisqali), which was partly offset by generic competition. Generic competition lowered revenue grew by 5 percentage points, while pricing added an additional 3 percentage point headwind. Core operating margins widened to 36.9% in 1H 2023 versus 36.2% in 1H 2022.
• Sandoz controls NOVN’s portfolio of generic pharmaceuticals and biosimilars. Sandoz revenue decreased by 4% in 2022 and operating income declined by 8% as higher investments to generate sales and inflationary costs reduced margins to 20.6% versus 21.4% in the prior year. Through 1H 2023 sales increased 4%, largely on strength in Europe on products regionally launched within the prior 12 months, which was partially offset by pricing. Sandoz 1H 2023 core operating profit declined by 2% as margins were 19.6% versus 21.2% in 1H 2022.
• The separations of generics from “Innovative Medicines” follows an industry trend where pharmaceutical manufacturers separate out the lower margin and in general revenue declining generics businesses from the higher margin, higher growth potential, yet involving higher R&D expense, proprietary development businesses. Following the separation, the parent company will optically have an improved growth and margin profile, while the spin company’s dedicated capital structure will allow it to pursue attractive off-patent opportunities and return capital to shareholders.
• In conjunction with NOVN’s 1H 2023 results, management updated its full year 2023 guidance to include Innovative Medicines sales growth of high single digit, and core operating income increase of low single digit to mid-teens (includes corporate expenses and excludes Sandoz contribution). Sandoz sales are expected to increase by mid-single digits, and core operating income to decline in the low double-digit range based on standalone company costs and continued inflationary pressures.
• Notably, in terms of rationale, specialty pharmaceutical companies trade at a premium to generic manufacturers. NOVN currently trades at 11.6x forward EBITDA, which is roughly in line with peers such as Pfizer Inc. (NYSE: PFE) and Merck & Co. Inc. (NYSE: MRK), while generic manufacturers such as Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) trade at closer to 7.0x forward EBITDA. As such following the separation it should be expected that the parent company would not see a large degree of multiple expansion, while the generics company would likely experience multiple contraction top approximate peers.
• Based on 1H 2023 results, and managements guidance, we forecast that as standalone companies, Sandoz and Novartis (ex-Sandoz) will generate $1.9 billion and $17.7 billion in respective EBITDA during 2023. Valuing Sandoz at 7.0x and Novartis at 12.0x, implies post-separation enterprise values of $13.1 billion and $212.7 billion. Incorporating current net debt and diluted shares outstanding, as well as the current USD/CHF exchange rate, we preliminarily assign a pre-spin fair value estimate of CHF 92.00 per share to NOVN SW.

Radar Screen – August 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Spin-Off Report Calendar – August 2023

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 2023

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

European Spin-Off Compendium – April 2023

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

Bits & Pieces – August 2023

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 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. 

Please Note: This message is being resent because the link to the Masimo report below was not working on the previous email.

Newest Publications & Updates

COMPREHENSIVE REPORT: Masimo Corporation (NASDAQ: MASI)
August 31, 2023

Masimo Corporation (NASDAQ: MASI) operates two business segments: (1) Healthcare (~62% of consolidated 2023E sales), which develops, manufactures & sells non-invasive patient monitoring devices/technologies, most notably its pulse oximeter, for professional (e.g., hospitals) and, to a lesser degree, consumer customers; and (2) Non-Healthcare (38% of 2023E sales), which develops, manufacturers & sells high-end, home audio equipment/platforms to consumers. 

Since the announcement of the ~$1.06 billion acquisition of Sound United, which became the foundation of the company’s Non-Healthcare segment, in February 2022, MASI’s share price has shed 50% (versus a 2.8% decline in the Russell 2000 and a 1.2% gain in the S&P 500), representing a more than $6.5 billion erosion in the company’s market capitalization.  In that context, we estimate at the current valuation MASI’s core Healthcare business is trading at a significant discount to peers and its own 3-, 5- and 10-year trading averages while also assigning a fraction of the value paid for the Non-Healthcare/consumer audio business. Moreover, it is evident that the broad investor criticism & precipitous market decline in the wake of the Sound United transaction set the stage for activist investor, Politan Capital, to build a ~9% stake in the company by August 2022 and gain 2 (of 5) Board seats (with ~70% of the non-insider vote) in June 2023.  Following its resounding (albeit hard fought) victory, the activist continues to push for further improvements in MASI’s corporate governance paradigm and will undoubtedly hold management accountable on (or accelerate) its commitment to a three-year time horizon before considering a divestiture of the Non-Healthcare business (assuming the strategic rationale for the deal fails to materialize). Additional catalysts could stem from new product launches, including Stork and PerL, as well as a favorable outcome in MASI’s patent infringement litigation in front of the ITC against the Apple Watch, which is set for trial in October 2023.  

Based on management guidance and commentary as well as peer and M&A valuations, MASI’s Healthcare and Non-Healthcare businesses could be valued at ~$140 per share, and ~$12 per share, respectively. Accounting for projected net debt of ~$6.50 per share yields a base case sum-of-the-parts fair value of $146 per share (with bull and bear cases of ~$159 and ~$132 per share, respectively).  Potential catalysts include the separation/monetization of assets, corporate governance improvements, favorable litigation awards, leverage reductions and/or better than expected growth & margins from new product launches. Risks include execution, competition, technological disruption, commodity & currency fluctuations, regulation, cyber threats, pandemics and/or a recession.

Radar Screen – August 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Product Specialist

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

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.

Newest Publications & Updates

The European Spin-Off Report – Novartis AG (NOVN SW, NYSE: NVS) – FLASH

August 18, 2023

Novartis to Spin-Off Sandoz on or about October 4, 2023

• On August 18, Novartis AG (NOVN SW, NYSE: NVS) announced the company had filed a shareholder information brochure in relation to a proposed spin-off of its generic drug business, Sandoz. NOVN will hold an Extraordinary General Meeting (EGM) on September 15, 2023, at which time investors will vote to approve the posited spin-off. If completed, the separation would be accomplished via a dividend in kind whereby NOVN shareholders of record would receive one share of Sandoz for every five shares of NOVN. The Sandoz spin-off is planned to occur on or around October 4, 2023, with a primary listing on the SIX Swiss Exchange, and an American Depositary Receipt (ADR) program in the U.S.
• In 2022, NOVN generated $50.5 billion in revenue and $16.7 billion in core operating income, as compared to $51.6 billion and $16.6 billion in the prior year. As the company currently stands, NOVN reports under two segments: Innovative Medicines, which contributed $41.3 billion in revenue in 2022, and Sandoz, which registered sales of $9.2 billion in 2022.
• Innovative Medicines focuses on development and marketing of novel medicines and includes treatments for cardiovascular, immunology, neuroscience, solid tumors, and hematology. Well known products include Cosentyx (marketed for psoriasis) and Entresto (chronic heart failure). Year-over-year Innovative Medicines revenue declined by 2% in 2022 as significant growth from cardiovascular products, in particular 31% growth in revenue from Entresto, was offset by generic competition for the segments more established brands (Afinito/Votubia and Gilenya). Through 1H 2023 segment revenue increased by 5% on key product strength (Entresto, Kesimpta, Pluvicto, and Kisqali), which was partly offset by generic competition. Generic competition lowered revenue grew by 5 percentage points, while pricing added an additional 3 percentage point headwind. Core operating margins widened to 36.9% in 1H 2023 versus 36.2% in 1H 2022.
• Sandoz controls NOVN’s portfolio of generic pharmaceuticals and biosimilars. Sandoz revenue decreased by 4% in 2022 and operating income declined by 8% as higher investments to generate sales and inflationary costs reduced margins to 20.6% versus 21.4% in the prior year. Through 1H 2023 sales increased 4%, largely on strength in Europe on products regionally launched within the prior 12 months, which was partially offset by pricing. Sandoz 1H 2023 core operating profit declined by 2% as margins were 19.6% versus 21.2% in 1H 2022.
• The separations of generics from “Innovative Medicines” follows an industry trend where pharmaceutical manufacturers separate out the lower margin and in general revenue declining generics businesses from the higher margin, higher growth potential, yet involving higher R&D expense, proprietary development businesses. Following the separation, the parent company will optically have an improved growth and margin profile, while the spin company’s dedicated capital structure will allow it to pursue attractive off-patent opportunities and return capital to shareholders.
• In conjunction with NOVN’s 1H 2023 results, management updated its full year 2023 guidance to include Innovative Medicines sales growth of high single digit, and core operating income increase of low single digit to mid-teens (includes corporate expenses and excludes Sandoz contribution). Sandoz sales are expected to increase by mid-single digits, and core operating income to decline in the low double-digit range based on standalone company costs and continued inflationary pressures.
• Notably, in terms of rationale, specialty pharmaceutical companies trade at a premium to generic manufacturers. NOVN currently trades at 11.6x forward EBITDA, which is roughly in line with peers such as Pfizer Inc. (NYSE: PFE) and Merck & Co. Inc. (NYSE: MRK), while generic manufacturers such as Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) trade at closer to 7.0x forward EBITDA. As such following the separation it should be expected that the parent company would not see a large degree of multiple expansion, while the generics company would likely experience multiple contraction top approximate peers.
• Based on 1H 2023 results, and managements guidance, we forecast that as standalone companies, Sandoz and Novartis (ex-Sandoz) will generate $1.9 billion and $17.7 billion in respective EBITDA during 2023. Valuing Sandoz at 7.0x and Novartis at 12.0x, implies post-separation enterprise values of $13.1 billion and $212.7 billion. Incorporating current net debt and diluted shares outstanding, as well as the current USD/CHF exchange rate, we preliminarily assign a pre-spin fair value estimate of CHF 92.00 per share to NOVN SW.

Radar Screen – August 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Spin-Off Report Calendar – August 2023

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 2023

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

European Spin-Off Compendium – April 2023

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

Bits & Pieces – August 2023

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 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.

Newest Publications & Updates

UPDATE: XPO Inc. (NYSE: XPO) 
August 7, 2023

YELL formally files for Chapter 11 bankruptcy protection; freight inflows to XPO (and other industry competitors) have already been showing marked acceleration since early-July (as well as into August

• Yellow Corp. (NASDAQ: YELL) formally filed for Chapter 11 bankruptcy protection, marking the end of its nearly 100-year history.
• The announcement comes with little surprise considering YELL provided legal notice to its unionized workforce, represented by the International Brotherhood of Teamsters, as well as its customers that it was “ceasing” operations and would file for bankruptcy, a week ago, on July 31^st.
• To that end, the reverberations around the LTL industry, in terms of incremental freight inflows to competitors, have been occurring for weeks with XPO seeing a 4.2% increase in tonnage and an 8.8% increase in its shipment count during July.  On a sequential basis, (i.e., June to July) tonnage rose 2.6% and the shipment count was up 3.2%; for perspective, normal seasonality would suggest tonnage and shipments would be down 4.1% and 2.8%, respectively, implying an about 6%-7% swing relative to normal seasonal trends.
• On XPO’s most recent conference call last week, management indicated that “excess capacity”, in terms of “doors and service centers”, is in the “mid-teens” but that it is prioritizing providing capacity to existing customers and being “disciplined in what freight we bring into the network” (in other words, they are focusing on pricing/yield, which we note is much more impactful to margins relative to actually moving more freight).  Anecdotally, the company acknowledged that “our customers understand that when you take 10% of capacity out of the market, its going to cost more to move freight…our base line expectation is 3% year over year growth…but this could help us move above that range”.
• All in all, the company was relatively coy on providing specifics, in terms of incremental margins, other than to say that its “would expect to outperform seasonality (of ~230 bps of deterioration) for OR (operating ratio) by at least 100 basis points” in 3Q.  As well, the company declined to give specifics about trends in August other than to say that, similar to July, they expected to outperform normal sequential seasonality (i.e., 2Q vs. 3Q), which could imply a ~4% decline in tonnage.   (Stay tuned for specifics when the company provides its regular monthly disclosure on tonnage in early-September when we will further refine our forecasts.)
• Longer-term, in response to the current market dislocation, management indicated that it was ramping its internal trailer manufacturing from 6,000 to 7,500 and that is likely to be at “the high end…or above” of its 8%-12% (of revenue) long-term cap ex range for the foreseeable future in order to “add more capacity” and capitalize on the ongoing opportunity.
• As well, again without providing specifics, the company anecdotally acknowledged that the current environment not only adds incremental confidence to its long-term target of achieving 600 basis points of margin improvement (into the low-80%’s) by 2027 but likely moves up that timetable.
• Our base case fair value for XPO remains $80 per share, based on a 10x multiple (compared LTL peers SAIA and ODFL at ~12x and 16x, respectively) applied to 2024E adj. EBITDA of $1.16 billion and projected net debt of $2.175 billion.

Radar Screen – August 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Product Specialist

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

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.

Newest Publications & Updates

UPDATE: XPO Inc. (NYSE: XPO) 
August 7, 2023

YELL formally files for Chapter 11 bankruptcy protection; freight inflows to XPO (and other industry competitors) have already been showing marked acceleration since early-July (as well as into August

• Yellow Corp. (NASDAQ: YELL) formally filed for Chapter 11 bankruptcy protection, marking the end of its nearly 100-year history.
• The announcement comes with little surprise considering YELL provided legal notice to its unionized workforce, represented by the International Brotherhood of Teamsters, as well as its customers that it was “ceasing” operations and would file for bankruptcy, a week ago, on July 31^st.
• To that end, the reverberations around the LTL industry, in terms of incremental freight inflows to competitors, have been occurring for weeks with XPO seeing a 4.2% increase in tonnage and an 8.8% increase in its shipment count during July.  On a sequential basis, (i.e., June to July) tonnage rose 2.6% and the shipment count was up 3.2%; for perspective, normal seasonality would suggest tonnage and shipments would be down 4.1% and 2.8%, respectively, implying an about 6%-7% swing relative to normal seasonal trends.
• On XPO’s most recent conference call last week, management indicated that “excess capacity”, in terms of “doors and service centers”, is in the “mid-teens” but that it is prioritizing providing capacity to existing customers and being “disciplined in what freight we bring into the network” (in other words, they are focusing on pricing/yield, which we note is much more impactful to margins relative to actually moving more freight).  Anecdotally, the company acknowledged that “our customers understand that when you take 10% of capacity out of the market, its going to cost more to move freight…our base line expectation is 3% year over year growth…but this could help us move above that range”.
• All in all, the company was relatively coy on providing specifics, in terms of incremental margins, other than to say that its “would expect to outperform seasonality (of ~230 bps of deterioration) for OR (operating ratio) by at least 100 basis points” in 3Q.  As well, the company declined to give specifics about trends in August other than to say that, similar to July, they expected to outperform normal sequential seasonality (i.e., 2Q vs. 3Q), which could imply a ~4% decline in tonnage.   (Stay tuned for specifics when the company provides its regular monthly disclosure on tonnage in early-September when we will further refine our forecasts.)
• Longer-term, in response to the current market dislocation, management indicated that it was ramping its internal trailer manufacturing from 6,000 to 7,500 and that is likely to be at “the high end…or above” of its 8%-12% (of revenue) long-term cap ex range for the foreseeable future in order to “add more capacity” and capitalize on the ongoing opportunity.
• As well, again without providing specifics, the company anecdotally acknowledged that the current environment not only adds incremental confidence to its long-term target of achieving 600 basis points of margin improvement (into the low-80%’s) by 2027 but likely moves up that timetable.
• Our base case fair value for XPO remains $80 per share, based on a 10x multiple (compared LTL peers SAIA and ODFL at ~12x and 16x, respectively) applied to 2024E adj. EBITDA of $1.16 billion and projected net debt of $2.175 billion.

Radar Screen – August 2023

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

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Product Specialist

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