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

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.

UPDATE: Aramark (NYSE: ARMK)
August 16, 2023

ARMK Files Form 10 for Uniform Services Business; Maintain BUY, and Adjust FVE to $46

• On August 15, 2023, after the market close, Aramark (NYSE: ARMK) announced that it had filed a Form 10 with the SEC in relation to its planned spin-off of its Aramark Uniform Services business (“AUS”). The filing was made under the temporary name of “EPIC NewCo”.
• The AUS separation is expected to be completed by ARMK’s FYE September 30, 2023.
• Details in the Form 10 include pro-forma capital structure and margins for the standalone AUS business.
• It is currently posited that the company will carry cash and equivalents of $30 million and $1.5 billion in long-term debt. AUS’ net debt of ~$1.4 billion implies post-spin net debt for the Food Services company (FSS) to total $5.8 billion based on the most recently reported quarter. We previously estimated AUS and FSS post-spin net debt levels of $1.6 billion and $4.8 billion.
• According to managements pro-forma disclosures, standalone AUS would have operated F2022 with an EBITDA margin of 13.9% and 13.4% through 3Q F2023. We previously modeled F2024 EBITDA margins of 15.5%.
• We adjust our post-spin fair value estimates for both FSS and AUS to incorporate updated post-spin capital structure, margin expectations, and current peer trading multiples. We now value shares of AUS at $18 per share, and the parent food service company at $28 per share. As a result, we slightly lower our pre-spin fair value estimate to $46 per share (previously $47 per share) and maintain our BUY rating.
• Aramark Uniform Services will host an analyst day on September 13, 2023.
• For more details, please refer to The Spin-Off Report dated May 23, 2023, and UPDATE dated August 8, 2023.

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 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: Lithium Americas Corp. (NYSE: LAC)
August 8, 2023

• On November 3, 2022, before the market open, Lithium Americas Corp. (NYSE: LAC) announced that it intends to spin off its North American mining operations into a separate, stand-alone publicly traded company. The separation, if completed, will be accomplished by a pro-rata distribution of shares in Lithium Americas (NewCo) to shareholders of LAC, while the parent company will be referred to as Lithium Argentina. Lithium Argentina will control the Cauchari-Olaroz project, as well as the Pastos Grandes basin development operations. NewCo will consist of the 100% ownership of the Thacker Pass project. The spin-off will be subject to customary closing conditions, is expected to be “tax-deferred” to U.S. shareholders and is currently targeted for completion by October 15, 2023, but in any event, no later than December 31, 2023.
• Lithium Americas Corp. (NYSE: LAC), is a pre-production lithium miner that develops (and will eventually operate) lithium projects in two main geographic regions, namely Argentina and the U.S. Founded in 2007 by Raymond Edward Flood Jr., and currently headquartered in Vancouver, British Columbia, Canada. LAC conducted an initial public offering in 2010, raising $5 million. The company is currently pre-revenue and is in various stages of permitting, construction, and ramp up of production on its major projects, which include Cauchari-Olaroz in Argentina, and Thacker Pass, located in Humboldt County, Nevada. Notably, the company acquired its U.S.-based assets (i.e., Thacker Pass) in 2016 through a merger with Western Lithium. LAC also controls the Pastos Grandes Project mine operations, which are also located in Argentina, which were acquired in 2022, as well as the 2023 acquisition of the Sal de la Puna Project.
• We base our fair value estimates on management’s disclosed DCF and NAV values. Given the large reserve values, projected supply demand imbalance, and current pricing of lithium, it is difficult to argue that future cash flows will not exceed the current market capitalization/enterprise value. However, given the long-time frame in which the mines will produce lithium, currently modeled at 40 years, and the differences in initial production of battery-grade lithium from the two disparate sites, investors must consider the time-value of money in considering an investment. In that context, LAC’s spin transaction in and of itself is likely not a significant value-creating event, in contrast to most spin-offs that fall into our coverage universe. Instead, the separation highlights the near-term production ramp up in the Argentinian assets versus the long road ahead for the American asset. In that respect, investors looking to capitalize on the increasing demand for lithium and the structural supply and demand imbalance, would likely favor investment in Lithium Argentina, while investors with a longer investment time horizon may take a closer look at post-spin Lithium Americas.
• In the short-term, we would expect the share price of LAC to be highly speculative, particularly in relation to post-spin Lithium Americas (NewCo), with shares reacting to news and litigation flow prior to the eventual production of battery-grade lithium. For Lithium Argentina, we would expect much less speculation in shares given the near-term production ramp up, and therefore expect shares to trade more dependently on production and pricing of lithium.
• Given the above noted differing characteristics of the two post-spin companies, most starkly illustrated by the significantly longer time frame until production ramps up at the U.S.-based asset, we view it as appropriate to value shares using a higher discount rate versus the Argentinian assets. Thus, we value shares of Lithium Americas (NewCo) at 12% and Lithium Argentina at 10%. Based on management’s post-spin capitalizations, we assign a post-spin fair value estimate of $19 per share to New Lithium Americas Corp, and $4 per share to Lithium Argentina (see Exhibit 13). On a pre-spin, sum-of-the-parts basis, we fairly value shares of LAC at $23 per share. While presenting ~20% upside to our fair value, we rate shares at NEUTRAL, based on the above noted factors related to the time horizon to capture the upside potential in shares and our opinion that the spin transaction is not necessarily the catalyst to immediately realizing that value. In that context, investors with a longer investment time horizon may wish to consider ownings shares of LAC.

UPDATE: Aramark (NYSE: ARMK)
August 8, 2023

ARMK Reports 3Q F2023 Including Revenue and Profit Growth Across All Businesses; Debt Reduction Ahead of 4Q F2023 Spin-Off is Encouraging; Maintain BUY, Increase FVE to $47 (from $45)

• On August 8, 2023, before the market open, Aramark (NYSE: ARMK) reported 3Q F2023 (September FYE) results, which included 15% year-over-year revenue growth to $4.7 billion (14% organic growth) and a 34% increase in adjusted operating Income to $240 million versus 3Q F2022.
• ARMK’s revenue increased across all three business segments, with particular strength in FSS US, 44% year-over-year, while International FSS increased 14%, and Uniform Services increased by 10%. Profitability improvements were a result of maturation of new business, improvements in supply chain and fixed cost leverage, and cost management initiatives.
• ARMK management continued to prudently manage cash flow to reduce net debt ahead of the planned USS business spin-off, which management continues to target a completion by year-end F2023.
• Net debt/covenant adjusted EBITDA now stands at 4.7x versus 6.4x as of July 1, 2022. Leverage is expected to approximate 4.0x at the time of the spin-off.
• Aramark Uniform Services will host an analyst day on September 13, 2023.
• Management slightly increased its F2023 guidance to include organic revenue growth of ~15% (previously >13%), consisting of Global FSS growth of ~17% (from ~15%), and adjusted operating income growth of ~33% (from ~32%). FCF is expected to total $475 million ($300 million after deferred taxes and spin-off costs), and leverage of less than >4.0x.
• On a pre-spin, sum-of-the-parts basis, we increase our fair value estimate to $47 per share (previously $45 per share) on updated net debt as of 3Q F2023. In our view, ARMK is in the process of returning its segment margin profiles to closer approximate that of pre-pandemic levels, having already achieved that goal on a revenue basis. Through new client wins across FSS and Uniform, as well as successfully passing pricing through to counteract the inflationary environment, it appears the company is poised for above-historical earnings growth over the next several years. Absent a resurgence in inflation or a severe recession, we believe that shares of ARMK appear attractive heading into the separation of the Uniforms business. As such, we maintain our BUY rating on shares of ARMK.
• For more details, please refer to The Spin Off Report dated May 23, 2023.

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 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: NCR Corp. (NYSE: NCR) 
August 3, 2023

NCR Reports 2Q 2023 EPS; Margin Expansion is Encouraging; 4Q 2023 Spin-Off on Track; Maintain BUY, $32 FVE

• On August 2, 2023, after the market close, NCR Corp. (NYSE: NCR) reported 2Q 2023 results, which included a 1% year-over-year decline in revenue to $1.986 billion and a 15% increase in adjusted EBITDA to $389 million versus 2Q 2022.
• Notably, the revenue decline was largely expected as the company transfers to a subscription-based model versus an up-front perpetual license model. Margin expansion resulted from increased levels of recurring revenue (4% increase year-over-year) and cost productivity actions.
• On a year-over-year segment level, Digital Banking increased sales by 7%, Retail by 2%, while Payments & Networks was flat, and Hospitality and Self-Service Banking declined by 1% and 3% respectively.
• On a post-spin segment basis, NCR Voyix (the parent company containing Retail, Hospitality, and Digital Banking segments) increased revenue by 2% and widened EBITDA margins by 270 basis points to 24.8%. The spin company’s, which will adopt the corporate moniker NCR Atelos, revenue declined by 2% to $981 million with adjusted EBITDA increasing by 14% to $259 million (330 basis points of margin expansion).
• NCR continues to lower its leverage ahead of the planned separation, which is on track to be completed in 4Q 2023. The company generated $154 million in FCF in 2Q 2023 and has exceeded its goal of $500 million in FCF generated in 15 months prior to the separation, with approximately 4 months remaining. The company is now levered at 3.4x net-debt-to-EBITDA versus 4.0x at the end of 2Q 2022.
• On a pre-spin basis, we fairly value shares of NCR at $32 per share, consisting of approximately $11 per share in value from ATMCo. and $21 per share from the parent company. At this level, we are valuing shares at 7.6x our consolidated EBITDA estimate, which on the whole appears attractive when compared to SaaS companies, as well as considering the healthy cash flow from ATMCo., and opportunities for revenue acceleration at both post-spin companies if management can successfully implement customer shifts to the ATMaaS and SaaS platforms.
• Given the favorable business trends, combined with the implied upside to our fair value estimate, we maintain our pre-spin BUY recommendation on NCR. Post-spin, despite managements conjecture that investors appear interested in the ATMCo.’s cash flow characteristics, we would posit that NCR shareholders may rotate out of ATMCo. given the view that the ATM business is a legacy business that lacks growth, in favor of the parent company, which may initially pressure the new company’s share price.

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 – July 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) 
July 31, 2023

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.

UPDATE: Tiptree Inc. (NASDAQ: TIPT) 
August 3, 2023

Tiptree posts top- and bottom-line growth of 19% and 20%, respectively, driven by growth of 31% and 59% in sales and net income at Fortegra; maintain our base case fair value estimate of $24.50 per share 

• Last night, after the market close, TIPT reported consolidated 2Q 2023 top-line growth of 19% to $404.5 million with 20% growth in net income to $23.8 million.  Consolidated return on equity (ROE) rose 520 basis points to 17.5%.
• At Fortegra, the company’s primary operating business, sales increased ~31% to $384.7 million with a nearly 44% jump in gross written premiums and equivalents (GWPE) while net income advanced ~59% to $30.1 million. The combined ratio improved 40 bps to 90.5% and Fortegra’s return on equity improved 790 bps to 32.4%, largely driven by continued growth in the company’s capital-light warranty business.
• The book yield on Fortegra’s $1.24 billion investment portfolio rose to 3.1% in 2Q 2023 (from 1.2% 2Q 2022) while the overall rating of its holdings improved to AA+ (from AA).  The average duration is 1.9 years (compared with 2.1 years I the previous quarter).
• Sales at Tiptree Capital fell ~57% to $19.8 million, primarily driven by the sale of the company’s shipping assets in 2022, while net income was 10K (compared with $3.9 million in 2Q 2022).  Net income at the mortgage business, Reliance, was essentially breakeven in 2Q 2023 (vs. a ~$1.2 million loss in 2Q 2022 and a ~$4.0 million profit in 2Q 2021).
• Corporate expenses fell to $9.5 million in 2Q 2023 (from $13.3 million in the prior year quarter) and the company continued to maintain no corporate level debt at quarter-end.
• The company does not provide any explicit financial guidance although management anecdotally indicated on this morning’s conference call that, based on current market trends, Fortegra’s growth will likely persist at least at historical rates (i.e., 20%-plus organic top-line growth and 25%-plus net income growth) in 2H 2023 and 2024.
• Our base case fair value for TIPT remains $24.50 per share based on a 12.5x multiple of projected 2024E net income at Fortegra (pro-rated for TIPT’s ultimate 68.6% ownership as well as a ~$41 million deferred tax liability) and a 0.5x multiple of book value, ex-NCI, at Tiptree Capital.

UPDATE: SNC-Lavalin (TSE: SNC) 
August 3, 2023

• This morning, before the market open, SNC reported 2Q 2023 consolidated sales up 13.9% to $2.13 billion (vs. consensus of $1.88 billion), including ~22% growth to $2.0 billion in the core SNCL Services business.  Total adjusted EBITDA increased ~39.5% to $183.9 million (vs. consensus of ~$152 million) with professional services & project management (PS&PM, which includes SNCL Services) posting ~30.5% growth to ~$167 million (compared with ~$128 million in 2Q 2022).
• Importantly, the backlog on its legacy LSTK Projects business declined ~$96 million sequentially (i.e., versus 1Q 2023) to ~$422 million and was down ~49% when compared with 2Q 2022.  The segment adjusted EBIT loss improved to $13 million in 2Q 2023 (as compared with a $37 million loss in the prior year period).  The company still expects to “hand over” 2 of the remaining 3 projects to the clients in 2023 (with the final project being completed in 2024); to that end, the company expects to generate positive free cash flow in 2H 2023.
• The company ended 2Q 2023 with net recourse & limited recourse debt of ~$1.68 billion, including $553 million in cash and $2.22 billion of debt, and a net leverage ratio of 3.1x (compared with 2.9x at the end of 1Q 2023 and 2022).  That said, as calculated by SNC’s credit agreement, the leverage ratio stood at 3.0x (compared with the company’s 3.75x covenant).
• In terms of 2023 guidance, the company increased its full-year outlook for organic revenue growth at SNCL Services to 12%-15% (from 5%-7%) while maintaining the remainder of its outlook, which calls for an adj. EBIT margin at SNCL Services of 8%-10% with adj. EBITDA margins at the Engineering Services subsegment (~60% of consolidated sales) of 14%-16%.  Corporate SG&A and amortization expense continue to be projected at ~$130 million and ~$90 million, respectively.  Based on an unchanged capital spending budget of $80-$100 million, SNC still expects to be cash flow positive in 2H 2023.
• Additionally, the company maintained its longer-term (20222-2024E) guidance .
• Our fair value for SNC is increased to $43 per share (from $38.50), which assigns value of $50 per share to SNCL Services, based on a blended multiple of ~9.5x, and $10 per share for the Capital segment, wholly comprised of the estimated value of its stake in Highway 407, while accounting for future LSTK losses, corporate overhead and net debt.

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