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

ALERT: Lions Gate Files Form 10 to Spin-Off Studio Business
July 13, 2023

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

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

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

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

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

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

UPDATE:  PHINIA Inc. (NYSE: PHIN)
July 12, 2023

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

On July 3, 2023, after the market close, BorgWarner Inc. (NYSE: BWA) completed the spin-off of its fuel systems and aftermarket business into a standalone, publicly traded company called PHINIA Inc. (NYSE: PHIN).

Shares of PHINA have declined 45% since the close of trading on July 5, 2023, on total volume of 30.0 million shares. (For context, PHIN has 46.9 million shares outstanding.)

Following this precipitous sell-off, which we think has been perpetuated by BWA investors clearly favoring owning the parent company as well as index selling related to PHIN’s exclusion from the S&P 500, our view has become increasingly positive in regards to the margin of safety that the shares currently present. As such, we UPGRADE shares of PHINA Inc. and maintain our $33 fair value estimate.

While shares may still see some modest incremental downward pressure, we view the fact that 63% of shares outstanding have turned over, combined with today representing the fifth day of regular-way trading, which we have historically found is a precursor to more normalized trading volumes and less volatility emerging, as relevant leading indicators. (To that end, our research over the years has suggested selling pressure typically abates five to seven trading days post distribution.)

For reference, our fair value estimate is based on a 4.0x multiple of 2024E EBITDA of $519 million. Management has guided for 2023 EBITDA of $485 – $505 million, and 2025 targets of ~$3.7 billion in revenue and 14% – 15% EBITDA margins, which at the low end equates to approximately $518 million.

At today’s price, shares of PHIN are currently trading at 3.35x our 2024 EBITDA estimate, and 3.6x the low end of management’s guidance for this year.

For PHINIA, we do see significant cash flow generation from its product portfolio over the coming years. However, we acknowledge that the company likely does not receive a valuation multiple above low single digits given its end market exposure.

Radar Screen – July 2023

Monthly publication providing ongoing analysis on companies with 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), Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Spin-Off Report Calendar – July 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 – April 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 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

UPDATE:  Lab Corp. (NYSE: LH) 
July 3, 2023

Lab Corp. Completes Spin-Off of Fortrea Holdings; Rate LH at NEUTRAL with a $219 FVE, Rate FTRE at NEUTRAL with a $35 FVE

• On June 30, 2023, after the market close, Laboratory Corporation of America Holdings (“Lab Corp”) (NUSE: LH) completed the spin-off of its clinical development business into a standalone, publicly traded company called Fortrea Holdings Inc. (NASDAQ: FTRE).
• LH shareholders of record received one share of FTRE for every share of LH owned as of June 20, 2023.
• As previously disclosed, Fortrea will be added to the S&P SmallCap 600 effective prior to the opening of trading on July 6, 2023. LH will remain a member of the S&P 500 following the spin-off.
• On Friday, shares of LH and FTRE closed trading in the when-issued market at $207.94 and $34.01, respectively. We maintain our post-spin fair value estimates of $219 and $35 for Lab Corp and Fortrea, respectively. Given limited upside to our post-spin fair value estimates, we rate both shares at NEUTRAL.
• Notably, since our initial LH report, shares have increased by 7.5% versus a 2.6% price increase for the S&P 500.
• If post-spin shares were to pull back from current levels, we would favor owning the parent company (LH) as we view the apparent near ending of COVID-related revenue declines and margin reversion as being priced in, with multiple expansion to that of peers providing more upside potential versus spin company’s business.
• For more details, please refer to The Spin Off Report dated June 13, 2023, and UPDATE dated June 29, 2023

UPDATE:  BorgWarner Inc. (NYSE: BWA)
July 5, 2023

BWA Completes the Spin-Off of PHINIA Inc.; Rate BWA at NEUTRAL with a $44 FVE; Rate PHINIA at NEUTRAL with a $33 FVE

• On July 3, 2023, after the market close, BorgWarner Inc. (NYSE: BWA) completed the spin-off of its fuel systems and aftermarket business into a standalone, publicly traded company called PHINIA Inc. (NYSE: PHIN).
• BWA shareholders of record received one share of PHIN for every five shares of BWA owned as of June 23, 2023.
• As previously disclosed, PHINIA Inc will be added to the S&P SmallCap 600 effective prior to the opening of trading on July 6, 2023. BWA will remain a member of the S&P 500 following the spin-off.
• We maintain our post-spin fair value estimates of $44 per share for post-spin BWA, and $33 for PHIN.
• Given limited upside to our fair value estimate, we rate shares of post-spin BWA and PHIN at NEUTRAL. On a post-spin basis, we would favor the BWA remain co. businesses as the path to electrification provides for a greater growth story versus PHINIA, granted they achieve their profitability goal on the eProducts portfolio and successfully manage their M&A integrations.
• For PHINIA, we would be incrementally positive if shares traded at a significant discount to our fair value estimate, as we do see significant cash flow generation from its product portfolio over the coming years. However, would remain cautious as the company likely does not receive a valuation multiple above low single digits given its end market exposure.
• For more details, please refer to The Spin Off Report dated June 20, 2023, and UPDATE dated June 29, 2023.

Radar Screen – July 2023

Monthly publication providing ongoing analysis on companies with 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), Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC) 

Spin-Off Report Calendar – July 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 – April 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 – May 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: Griffon Corporation (NYSE: GFF)
June 30, 2023  

Close coverage of GFF, as of today’s close; shares appreciated sharply but with the strategic review concluded (for now) with no meaningful portfolio changes we will reallocate our resources elsewhere; that said, we will look to re-recommend if valuation shifts or renewed efforts toward strategic alternatives emerge

• For context, GFF returned 26.4%, including the $2 per share special dividend paid on May 19^th, (compared with an 11.1% increase in the S&P 500 and a 1.1% rise in the Russell 2000) since our most recent recommendation in September 2022. 
• While we continue to see value in GFF on a sum of the parts basis, with the strategic review having concluded (for now) with no meaningful portfolio changes (albeit with improved returns to shareholders) we prefer to remain disciplined and reallocate our resources toward ideas that better fit our “value plus catalyst” approach.
• On the fundamental front, while we continue to expect solid results at the HBP segment we think underlying fundamentals will remain challenged at CPP (and that management’s margin improvement initiatives will take time to gain significant traction).

UPDATE: Liberty Braves Group (NASDAQ: BATRK) 
June 30, 2023

Liberty Media expects to complete the split-off of Atlanta Braves Holdings on July 18^th, after the market close; fair value remains $50 per share

• This morning, before the market open, Liberty Media announced that it expects to complete the previously announced split-off of Atlanta Braves Holdings, Inc., including ownership of The Atlanta Braves MLB team, its stadium, and The Battery mixed-use development into a separate, publicly traded, asset-backed equity (as opposed to its current multi-class tracking stock structure), on July 18, 2023, after the market close.  
• As previously announced, the transaction, which is still subject to shareholder approval at the July 17^th special meeting, is expected to be completed via the redemption of each currently outstanding Series A, B, & C shares for one share in the corresponding common stock of the new Atlanta Braves Group (with all intergroup interests being settled & extinguished).
• Liberty expects Atlanta Braves Holdings Series A and C common stock will begin trading on the NASDAQ tickers BATRA and BATRK on July 19^th while the Series B common stock will trade OTC under the ticker BATRB.
• In remains our view, this transaction will reduce complexity and help alleviate the current so-called tracking stock discount as well as facilitate the eventual, tax-efficient monetization of the Braves Group’s assets.
• Our base case fair value estimate remains $50 per share, reflecting a ~$47 per share valuation for the Atlanta Braves MLB team, based on a 5.5x multiple of 2023E regular season ballpark sales, a $9 per share valuation for the company’s real estate/development assets (i.e., The Atlanta Battery), reflecting a 6.5% capitalization rate on our stabilized net operating income estimate, and net debt of ~$ 5 per share.
• For context, our ~$2.895 billion valuation for the Atlanta Braves baseball team implies an ~11.5% premium to the most recent 2023 Forbes valuation of $2.6 billion, which we note represented a ~24% year over year increase from its 2022 valuation of ~$2.1 billion.

UPDATE: XPO, INC. (NYSE: XPO) 
June 27, 2023

YELL now trading below $1 per share as the company files a breach of contract lawsuit against the Teamsters union and suggests the company could be out of cash by mid-July, which would “likely force the Company into liquidation”

• Per the company’s legal assertions, the union has blocked management’s restructuring efforts, dubbed One Yellow, which are “essential to the Company’s survival” and that “without these crucial reforms, which are standard practice in the industry today, Yellow likely will not survive, 30,000 jobs will be lost, including 22,000 union jobs, and its shareholders, including the federal government, which owns ~30.1% of Yellow stock, will be severely damaged”.  (On the latter point, YELL indicates that it had attempted to reach out directly to the Biden Administration as well as other politicians, such as Sen. Bernie Sanders in hopes of brokering a deal but to “no avail”.)
• Further, management asserted that the completion of its restructuring initiative during 2023 is “critical to Yellow’s ability to survive, particularly given that Yellow faces, among other things, the imminent need to refinance $1.3 billion of debt – a $567.4 million term loan maturing on June 20, 2024 and a $729.4 million U.S. Treasury loan maturing on September 30, 2024.”
• Anecdotally, the company indicated that it could run out of cash as soon as mid-July (a pull-forward of its previous commentary, which suggested a  cash crunch in August, at which time its creditors “will likely force the Company into liquidation”
• Assuming YELL, which generated ~$4.7 billion of U.S. LTL revenue in 2022 (but is chronically unprofitable), were forced into liquidation or even if it manages to survive (but continues to bleed market share) it would result in material market share and pricing gains for the remaining players, including XPO, Inc. (NYSE: XPO), Old Dominion (NASDAQ: ODFL), Saia (NASDAQ: SAIA) and ArcBest (NASDAQ: ARCB) as well as Fed Ex (NYSE: FDX) and TFI International (NASDAQ: TFII).
• To that end, we estimate that XPO, who in mid-2022 implemented plans to expand its overall door capacity by ~6% in key constrained markets (as well as increase its driver recruitment/training efforts) by 1Q 2024, likely has at least 5%-15% in excess truck/terminal capacity (that we assume would quickly be erased in the event of a consolidation event).
• Under these assumptions, even excluding fuel surcharges, we calculate that applying a 9.0x multiple (compared with the peers SAIA and ODFL, which currently trade at ~12x and ~16x, respectively) there could ~$4-$20 per share of potential incremental upside for XPO in the event YELL’s negotiations with both labor and lenders actually devolves into bankruptcy or it manages to limp along as it has in the past.
• Our base case fair value, which assumes the status quo persists in terms of LTL market dynamics, for post-spin XPO is $60 per share, reflecting a 9.0x multiple on 2024E adj. EBITDA of $1.025 billion and projected net debt of $2.175 billion

Radar Screen – July 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), Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), 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: Griffon Corporation (NYSE: GFF)
June 30, 2023  

Close coverage of GFF, as of today’s close; shares appreciated sharply but with the strategic review concluded (for now) with no meaningful portfolio changes we will reallocate our resources elsewhere; that said, we will look to re-recommend if valuation shifts or renewed efforts toward strategic alternatives emerge

• For context, GFF returned 26.4%, including the $2 per share special dividend paid on May 19^th, (compared with an 11.1% increase in the S&P 500 and a 1.1% rise in the Russell 2000) since our most recent recommendation in September 2022. 
• While we continue to see value in GFF on a sum of the parts basis, with the strategic review having concluded (for now) with no meaningful portfolio changes (albeit with improved returns to shareholders) we prefer to remain disciplined and reallocate our resources toward ideas that better fit our “value plus catalyst” approach.
• On the fundamental front, while we continue to expect solid results at the HBP segment we think underlying fundamentals will remain challenged at CPP (and that management’s margin improvement initiatives will take time to gain significant traction).

UPDATE: Liberty Braves Group (NASDAQ: BATRK) 
June 30, 2023

Liberty Media expects to complete the split-off of Atlanta Braves Holdings on July 18^th, after the market close; fair value remains $50 per share

• This morning, before the market open, Liberty Media announced that it expects to complete the previously announced split-off of Atlanta Braves Holdings, Inc., including ownership of The Atlanta Braves MLB team, its stadium, and The Battery mixed-use development into a separate, publicly traded, asset-backed equity (as opposed to its current multi-class tracking stock structure), on July 18, 2023, after the market close.  
• As previously announced, the transaction, which is still subject to shareholder approval at the July 17^th special meeting, is expected to be completed via the redemption of each currently outstanding Series A, B, & C shares for one share in the corresponding common stock of the new Atlanta Braves Group (with all intergroup interests being settled & extinguished).
• Liberty expects Atlanta Braves Holdings Series A and C common stock will begin trading on the NASDAQ tickers BATRA and BATRK on July 19^th while the Series B common stock will trade OTC under the ticker BATRB.
• In remains our view, this transaction will reduce complexity and help alleviate the current so-called tracking stock discount as well as facilitate the eventual, tax-efficient monetization of the Braves Group’s assets.
• Our base case fair value estimate remains $50 per share, reflecting a ~$47 per share valuation for the Atlanta Braves MLB team, based on a 5.5x multiple of 2023E regular season ballpark sales, a $9 per share valuation for the company’s real estate/development assets (i.e., The Atlanta Battery), reflecting a 6.5% capitalization rate on our stabilized net operating income estimate, and net debt of ~$ 5 per share.
• For context, our ~$2.895 billion valuation for the Atlanta Braves baseball team implies an ~11.5% premium to the most recent 2023 Forbes valuation of $2.6 billion, which we note represented a ~24% year over year increase from its 2022 valuation of ~$2.1 billion.

UPDATE: XPO, INC. (NYSE: XPO) 
June 27, 2023

YELL now trading below $1 per share as the company files a breach of contract lawsuit against the Teamsters union and suggests the company could be out of cash by mid-July, which would “likely force the Company into liquidation”

• Per the company’s legal assertions, the union has blocked management’s restructuring efforts, dubbed One Yellow, which are “essential to the Company’s survival” and that “without these crucial reforms, which are standard practice in the industry today, Yellow likely will not survive, 30,000 jobs will be lost, including 22,000 union jobs, and its shareholders, including the federal government, which owns ~30.1% of Yellow stock, will be severely damaged”.  (On the latter point, YELL indicates that it had attempted to reach out directly to the Biden Administration as well as other politicians, such as Sen. Bernie Sanders in hopes of brokering a deal but to “no avail”.)
• Further, management asserted that the completion of its restructuring initiative during 2023 is “critical to Yellow’s ability to survive, particularly given that Yellow faces, among other things, the imminent need to refinance $1.3 billion of debt – a $567.4 million term loan maturing on June 20, 2024 and a $729.4 million U.S. Treasury loan maturing on September 30, 2024.”
• Anecdotally, the company indicated that it could run out of cash as soon as mid-July (a pull-forward of its previous commentary, which suggested a  cash crunch in August, at which time its creditors “will likely force the Company into liquidation”
• Assuming YELL, which generated ~$4.7 billion of U.S. LTL revenue in 2022 (but is chronically unprofitable), were forced into liquidation or even if it manages to survive (but continues to bleed market share) it would result in material market share and pricing gains for the remaining players, including XPO, Inc. (NYSE: XPO), Old Dominion (NASDAQ: ODFL), Saia (NASDAQ: SAIA) and ArcBest (NASDAQ: ARCB) as well as Fed Ex (NYSE: FDX) and TFI International (NASDAQ: TFII).
• To that end, we estimate that XPO, who in mid-2022 implemented plans to expand its overall door capacity by ~6% in key constrained markets (as well as increase its driver recruitment/training efforts) by 1Q 2024, likely has at least 5%-15% in excess truck/terminal capacity (that we assume would quickly be erased in the event of a consolidation event).
• Under these assumptions, even excluding fuel surcharges, we calculate that applying a 9.0x multiple (compared with the peers SAIA and ODFL, which currently trade at ~12x and ~16x, respectively) there could ~$4-$20 per share of potential incremental upside for XPO in the event YELL’s negotiations with both labor and lenders actually devolves into bankruptcy or it manages to limp along as it has in the past.
• Our base case fair value, which assumes the status quo persists in terms of LTL market dynamics, for post-spin XPO is $60 per share, reflecting a 9.0x multiple on 2024E adj. EBITDA of $1.025 billion and projected net debt of $2.175 billion

Radar Screen – June 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), Griffon Corp. (GFF), Hasbro, Inc. (HAS), IAC Inc. (IAC), JELD-WEN (JELD), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), 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

UPDATE:  Lab Corp. (NYSE: LH) 
June 29, 2023

Fortrea to Join S&P SmallCap 600; Spin-Off to be Completed on June 30, 2023, Maintain BUY Rating on Pre-Spin LH

• On June 28, 2023, after the market close, S&P Dow Jones Indices announced that Fortrea Holdings Inc., the clinical development business of Laboratory Corp. of America Holdings Inc. (NYSE: LH), will be added to the S&P SmallCap 600 effective prior to the opening of trading on July 6, 2023. LH will remain a member of the S&P 500 following the spin-off.
• LH is scheduled to complete the spin-off of Fortrea Holdings Inc. on June 30, 2023, after the market close. Fortrea is expected to trade on the NASDAQ under the symbol “FTRE” beginning on July 3, 2023.
• When-issued trading in Fortrea and LH (ex-distribution) closed last night at $34.26 and $204.25, as compared to our post-spin fair value estimates of $35 per share and $219 per share. We fairly value pre-spin shares of LH at $255 per share.
• Given the strength in both post-spin company’s base businesses, the lessening impact of COVID-related revenue on the parent company, and margin improvement opportunities at Fortrea, combined with the implied upside from the current share price to our pre-spin fair value estimate, we continue to rate pre-spin shares of LH at BUY ahead of the spin-off.
• If regular-way shares were to trade at prices approximating the current when-issued pricing, we would favor owning the parent company (LH) as we view the apparent near ending of COVID-related revenue declines and margin reversion as being priced in, with multiple expansion to that of peers providing upside potential versus the implied post-spin LH share price.
• For more details, please refer to The Spin Off Report dated June 13, 2023.

UPDATE:  BorgWarner Inc. (NYSE: BWA)
June 29, 2023

PHINA to Join S&P SmallCap 600; Spin-Off to be Completed on July 3, 2023, Maintain NEUTRAL Rating on Pre-Spin BWA

On June 28, 2023, after the market close, S&P Dow Jones Indices announced that PHINIA Inc., the fuel systems and aftermarket business of BorgWarner Inc. (NYSE: BWA), will be added to the S&P SmallCap 600 effective prior to the opening of trading on July 6, 2023. BWA will remain a member of the S&P 500 following the spin-off.

BWA is scheduled to complete the spin-off of PHINIA Inc. on July 3, 2023, after the market close. PHINIA is expected to trade on the NYSE under the symbol “PHIN” beginning on July 5, 2023.

When-issued trading in PHINIA and BWA (ex-distribution) closed last night at $37.00 and $40.00 (albeit in anemic first day trading volumes), as compared to our post-spin fair value estimates of $33 per share and $44 per share. We fairly value pre-spin shares of BWA at $51 per share.

Given limited upside to our fair value estimate, we rate shares of pre-spin BWA at NEUTRAL. On a post-spin basis, we would favor the BWA remain co. businesses as the path to electrification provides for a greater growth story versus PHINIA, granted they achieve their profitability goal on the eProducts portfolio and successfully manage their M&A integrations.

For PHINIA, we would be incrementally positive if shares traded at a significant discount to our fair value estimate, as we do see significant cash flow generation from its product portfolio over the coming years. However, would remain cautious as the company likely does not receive a valuation multiple above low single digits given its end market exposure.

For more details, please refer to The Spin Off Report dated June 20, 2023

Radar Screen – June 2023

Monthly publication providing ongoing analysis on companies with potential for a value-unlocking event

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APIG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Griffon Corp. (GFF), Hasbro, Inc. (HAS), IAC Inc. (IAC), JELD-WEN (JELD), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker, Inc. (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC)

Spin-Off Report Calendar – June 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 – April 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 – May 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: BorgWarner Inc. (NYSE:BWA) 
June 20, 2023

On December 6, 2022, BorgWarner Inc. (NYSE: BWA) announced its intention to spin off the company’s Fuel Systems and Aftermarket segments into an independent, standalone, publicly traded company. The transaction is to be completed on July 3, 2023, after the market close.

The spin company will adopt the corporate moniker PHINIA and is expected to trade on the NYSE under the ticker “PHIN.” BWA shareholders of record as of June 23, 2023 will receive one share of PHIN for every five shares of BorgWarner owned. When-issued trading is expected to begin on the third trading day prior to the distribution (June 28, 2023) and regular-way trading is expected to begin on the first trading day following the distribution (July 5, 2023).

The spin-off of PHINIA is a key step in attaining BWA’s electric vehicle parts sales goals. The company has said it is on target to achieve the $3.5 billion in all-electric sales, achieved via current booked revenue, targeted M&A, and the separation of PHINIA. Further the company is targeting $10-plus billion in eProducts, with eProducts sales achieving adjusted operating margins of approximately 7%, while maintaining double digit margins on “foundational products.” As of now, eProduct sales are expected to operate at a breakeven level by the end of 2023.

Shares of BWA currently trade at 5.4x the 2024 consensus EBITDA estimate and 8.4x the consensus EPS estimate and have averaged 5.1x EBITDA over the past five years. The company, as it is currently constructed, is largely considered a traditional auto parts supplier while it is still early in its transformation into an EV supplier. The separation of the fuel systems and aftermarket businesses amplifies the current EV focused pieces of the business, and as such should be rewarded with a higher multiple following the spin. Conversely, PHINIA’s business should be re-rated lower to account for its focus on combustion light vehicles and the aftermarkets business.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of BorgWarner Inc. at $51 per share, consisting of approximately $44 per share in value from post-spin BWA and $7 per share in PHINIA. On a post-spin basis, we value shares of BWA at $44 per share and PHINIA at $33 per share to account for the one-for-five share distribution ratio. Given limited upside to our fair value estimate, we rate shares of pre-spin BWA at NEUTRAL. On a post-spin basis, we would favor the BWA remain co. businesses as the path to electrification provides for a greater growth story versus PHINIA, granted they achieve their profitability goal on the eProducts portfolio and successfully manage their M&A integrations. For PHINIA, we would be incrementally positive if shares traded at a significant discount to our fair value estimate, as we do see significant cash flow generation from its product portfolio over the coming years. However, would remain cautious as the company likely does not receive a valuation multiple above low single digits given its end market exposure.

Radar Screen – June 2023

Monthly publication providing ongoing analysis on companies with potential for a value-unlocking event.

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APIG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Griffon Corp. (GFF), Hasbro, Inc. (HAS), IAC Inc. (IAC), JELD-WEN (JELD), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker, Inc. (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC)

Spin-Off Report Calendar – June 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 – April 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 – June 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) 
June 20, 2023

A quick look at the potential impact of significant industry consolidation on XPO(the now stand-alone LTL concern following the spin-offs of GXO and RXO)  

As a purely theoretical exercise, we thought it may be interesting to examine why, besides the recent broader market rally (and the hiring of David Bates as COO), shares of XPO have demonstrated such strength in recent weeks/months even against the backdrop of relatively unfavorable underlying market fundamentals. (On the latter point, while pricing discipline has largely been maintained we would note that we have seen tonnage declines ranging from the low-single digits to the mid-teens across the industry in recent months.)

In that context, we think it reasonable to suggest that some investors could have begun considering the potential impact of significant industry consolidation on the less-than-truckload (LTL) industry broadly and XPO, specifically, in the wake of recent reports regarding the negotiations between long-troubled LTL carrier Yellow Corp. (NASDAQ: YELL) and its unionized labor force, which is represented by the International Brotherhood of Teamsters.

In addition to its labor issues, it seems to us that without a material improvement in the underlying demand environment the company, which sported a ~4.6x adj. leverage ratio at the end of 1Q 2023, could very likely be skirting its minimum trailing 12-month (TTM) EBITDA covenant of $200 million in 2H 2023.  To that end, while, as of 1Q 2023, YELL’s TTM EBITDA was ~$325 million it should be noted that March-quarter results were down ~35% to $34 million and over the last six-months the EBITDA generated by the company totaled only $89 million. This, along with quarter to date tonnage being down more than 16% at YELL so far in 2Q 2023 does not, in our view, suggest a robust near-term rebound in results is likely. 

Further, the company’s credit rating was downgraded from B3 to Caa1 in May 2023 and it has ~$1.3 billion of debt maturing in 2024.

Under a broad range of assumptions, which are discussed in more detail within the report, we estimate there could ~$4-$20 per share of potential upside for XPO in the event YELL’s negotiations with both labor and lenders actually devolves into bankruptcy or it manages to limp along as it has in the past.

Our base case fair value for post-spin XPO is $60 per share, reflecting a 9.0x multiple on 2024E adj. EBITDA of $1.025 billion and projected net debt of $2.175 billion 

UPDATE:

On Wednesday, June 21 (one day after our note above was published), it was reported that YELL is seeking to defer health and welfare as well as pension contribution payments for its employees during July and August (although the contributions would be repaid with interest if/when the company refinances its debt).

Per the company’s chief financial officer, Dan Olivier, the company’s request was “a consequence of the Company’s inability to proceed with One Yellow [the company’s restructuring plan that is being opposed by its unionized labor force], combined with the challenging business conditions confronting the entire LTL industry”, as such “the company has been operating at a loss and rapidly exhausting its liquidity”.

Radar Screen – June 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), Griffon Corp. (GFF), Hasbro, Inc. (HAS), IAC Inc. (IAC), JELD-WEN (JELD), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), 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

Newest Publications & Updates

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: Garrett Motion Inc. (NASDAQ: GTX)
June 13, 2023

GTX completes the conversion of its Series A Preferred stock, simplifying the capital structure into just debt and equity (as well as providing $100 million of incremental annual net cash flow)

• On June 12, after the market close, GTX completed the conversion of all Series A Preferred shares into Common shares on a one-for one basis. Holders of the former Series A Preferred shares will receive accrued & unpaid dividends through June 30^th as well as the dividends that would have accrued through September 30, 2023.  The per share payment, which is expected on or before June 20^th, is comprised of $0.144375 in cash and ~$0.104379 shares of common stock (representing $0.853509 in accrued and unpaid dividends, valued at $8.177 per share).
• The completion of this conversion transaction (along with the early redemption of the Series B Preferred stock in June 2022) finalizes the simplification of GTX’s capital structure into just debt and equity (as well as provides ~$100 million of incremental annual net cash flow via the elimination of the 11% Series A Preferred dividend).
• Post-transaction, investors Centerbridge Partners and Oaktree Capital Management will each own ~15% of GTX’s common stock as well as each have the right to appoint 1 director (compared with ~45% combined ownership and 3 director appointments apiece pre-transaction).  Notably, the two significant investors have agreed to 50% lock-up restrictions over the next six and twelve months (and will forgo their existing Board representation rights if their respective ownership falls below 10%).
• On the fundamental front, recall GTX increased its full-year 2023 financial guidance in mid-April 2023; net sales are projected to be $3.79-$3.98 billion (versus the prior guidance of $3.55-$3.85 billion), implying constant currency growth of ~5%-10% (previously 1%-6%) with adjusted EBITDA and FCF of $585-$635 million and $315-$415 million, respectively (versus prior guides of $555-$615 million and $300-$400 million).  GAAP net income is projected to be $231-$268 million (compared with the previous range of $255-$300 million; see Exhibit 1 on page 2).  The company also increased its share repurchase authorization to $250 million (representing ~12% of the total at current levels).
• Our base case fair value estimate for GTX remains ~$11 per share, reflecting an 8.0x multiple on our 2024E adjusted net income forecast of ~$349 million and a fully diluted share count of ~266 million.

Radar Screen – June 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), Griffon Corp. (GFF), Hasbro, Inc. (HAS), IAC Inc. (IAC), JELD-WEN (JELD), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), 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:  Laboratory Corporation of America Holdings (NYSE: LH)
June 13, 2023

On July 28, 2022, Laboratory Corporation of America Holdings (NYSE: LH) (“Labcorp”) announced that it plans to separate its clinical development business into a standalone, publicly traded company via a tax-free spin-off. The spin company will adopt the corporate moniker Fortrea Holdings Inc. and is expected to trade on the NASDAQ under the symbol “FTRE.” The separation is to be completed on June 30, 2023, to shareholders of record as of 5:00 p.m. EST on June 20, 2023. Labcorp shareholders will receive one share of FTRE for every share of LH held as of the record date. When-issued trading is expected to begin on or around June 16, 2023, and regular-way trading is expected to begin July 3, 2023.

Today, Labcorp is a provider of diagnostic, drug development, and technology-enabled solutions to over 160 million patient encounters per year. Additionally, the company participates in research-based drug development processes via LH’s central laboratory, preclinical, and clinical development businesses. The company currently operates under two reporting segments: Labcorp Diagnostics (“Dx”) (62% of revenue) and Labcorp Drug Development (“DD”) (38% of revenue). Given Labcorp’s significant participation in diagnostics, the company benefited greatly from the COVID-19 pandemic. As the pandemic has shifted to an endemic, COVID-related revenues are expected to sharply decline in 2023, providing a drag on company revenue (in particular Dx revenue.)

In terms of rationale, management has been explicit in its view that the CRO (contract research organization) business was never given a proper valuation in the current consolidated structure and instead has traded either in line with, or at a discount to, comparable lab services peers. For comparison, LH currently trades at 8.9x the current 2024 consensus EBITDA estimate, while the best pure-play diagnostics peer trades at 10.0x and Fortrea peers trade, on average, at 12.4x.
In theory the spin company would experience multiple expansion that is closer to its new peer set. However, with margins lagging peers, and the execution risk of further operational improvement implementations, combined with what appears to be low management expectations on standalone corporate costs (versus historically allocated costs from LH), it is unclear if the new company will be awarded a full peer multiple, at least initially, and in fact may warrant a discount or only a slight premium to the low end of the peer set. Conversely, the parent company appears to be nearing the end of COVID-related revenue declines and margin reversion, and may in fact be trading at an implied discount to where shares ex-FTRE should be trading.

On a pre-spin, sum-of-the-parts basis we fairly value shares of Labcorp at $255 per share, consisting of $219 per share in value from post-spin LH and $35 per share in value from Fortrea. Given the strength in both company’s base businesses, the lessening impact of COVID-related revenue on the parent company, and margin improvement opportunities at Fortrea, combined with the implied upside from the current share price to our fair value estimate, we rate shares of LH at BUY ahead of the spin-off.

Importantly, on a pre-spin basis it should be noted that the true value to be unlocked from this transaction would be related to the re-rating of the parent company, given the relative size of earnings contributions and net debt-to-EBITDA levels between the two post-spin entities. Even if the spin company were to receive multiple expansion to equal that of peers, the pre-spin fair value estimate would increase by approximately $6, versus a one turn increase in the parent company’s multiple, which would increase the pre-spin fair value estimate by approximately $25 per share. On a post-spin basis, we would favor the parent company if it were to trade at a discount to our fair value estimate.

Radar Screen – June 2023

Monthly publication providing ongoing analysis on companies with potential for a value-unlocking event.

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APIG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Griffon Corp. (GFF), Hasbro, Inc. (HAS), IAC Inc. (IAC), JELD-WEN (JELD), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker, Inc. (SWK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC)

Spin-Off Report Calendar – June 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 – April 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 – June 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: RCI Hospitality Holdings, Inc. (NASDAQ: RICK)
May 31, 2023

RCI Hospitality (NASDAQ: RICK) operates two primary business segments: (1) Nightclubs (~77% of consolidated sales and 87% of adj. EBITDA in September ending F2022), which owns and operates 59 gentlemen’s clubs in 13 U.S. states; and (2) Bombshells (~22.5% of total revenue and ~13% of adj. EBITDA), which operates 13 military-themed, casual dining restaurants & bars. The “Other” segment (~0.5% of sales in F2022), is primarily comprised of RICK’s media division along with sales of the energy drink, Robust.

In our view, RICK, which, on a consolidated basis, targets compound annual free cash flow per share (FCF) growth of 10%-15% (at minimum), is, at ~8.0x F2025E EBITDA and a FCF yield of ~11.0%, undervalued relative to the sum value of its parts. On the fundamental front, in pursuit of its FCF goals, RICK intends to further consolidate the Nightclubs business, which enjoys structural barriers to entry and generates high margins with durable cash flows, at 3x-5x EBITDA (and cash-on-cash returns of at least 25%-33%), as well as organically expand its Bombshells sports bar concept, via both company-owned and franchised locations (again, targeting cash-on-cash returns of at least 25%-33%). RICK will also repurchase shares when its FCF yield exceeds 10% (which, per management’s baseline assumptions, is currently estimated to be in the $72-$83 per share range). On the transactional front, we think RICK’s Bombshells concept presents optionality for an eventual spin-off or sale as it gains incremental scale toward ~$50 million of annual EBITDA. (In fact, management has anecdotally indicated that a financial sponsor offered ~14x, or ~$280 million, for Bombshells in mid-2021, but the company concluded the transaction was premature and offered inadequate value.)

Based on management guidance and commentary as well as peer and M&A valuations, RICK’s Nightclub and Bombshells businesses could be valued at ~$118 per share, and $25.50 per share, respectively. Accounting for corporate costs and projected net debt of ~$43.50 per share yields a base case sum-of-the parts fair value of $100 per share (with bull and bear cases of ~$126 and ~$74 per share, respectively).

Potential catalysts include a spin-off or sale, better than expected growth/margins/FCF, stock buybacks, and/or acquisitions. Potential risks include execution, regulatory changes, including on employment classifications, zoning and liquor licenses, cost inflation, changes in consumer behavior, insurance liability, a pandemic, and/or a recession.

Radar Screen – June 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), Griffon Corp. (GFF), Hasbro, Inc. (HAS), IAC Inc. (IAC), JELD-WEN (JELD), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), MDU Resources Group, Inc. (MDU), 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