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

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:  MDU Resources Inc. (MDU) / Knife River (KNF)
June 1, 2023

MDU Completes Spin-Off of Knife River; Rate MDU and KNF at NEUTRAL with $24 and $32 Fair Value Estimates, Respectively

MDU Resources Group Inc. (NYSE: MDU) has completed the spinoff of its aggregates-based, vertically integrated construction materials and contracting provider, Knife River Corp., into a standalone, publicly traded company. Knife River now trades on the NYSE under the ticker “KNF”.

Shareholders of record as of May 22, 2023, received one share of KNF for every four shares of MDU owned. MDU retained a 10% ownership stake in KNF. We previously updated our post-spin fair value estimates to incorporate the most recent company filings, reflecting a slight update to the capital structures and shares outstanding, and MDU retaining 10% of Knife River (KNF) post-spin.

We fairly value Knife River at $32 per share and rate shares at NEUTRAL.  Post-spin MDU shares are fairly valued at $24 per share and also rated NEUTRAL.

For more details, please refer to initiation report dated May 5, 2023, and UPDATE dated May 22, 2023.

COMPREHENSIVE REPORT:  Aramark (ARMK) / Uniform Services
May 23, 2023

On May 10, 2022, Aramark (NYSE: ARMK) announced that it plans to divest Aramark Uniform Services (AUS) into a separately traded public company. The separation is expected to be completed via a tax-free spin-off of shares in AUS to ARMK shareholders of record as of a yet-to-be disclosed record date. Management currently expects to complete the transaction by the end of F2023 (September year-end).

As it stands today, ARMK operates as a “leading global provider of food, facilities and uniform services to education, healthcare, business & industry, and sports, leisure & corrections clients.” Aramark’s main operations are in the United States and has exposure in an additional 18 international markets. The company manages several interrelated services, including food service, facilities support, including custodial, grounds keeping and transportation, amongst others, and uniform solutions including uniform laundering, as well as sales of uniforms and related products. In F2022, the company generated $16.3 billion in revenue and $1.3 billion in EBITDA.

Shares of Aramark currently trade at 10.2x the consensus 2024 EBITDA estimate. In theory, shares of the Uniform company, with wider margins than the parent, should experience a degree of multiple expansion as a standalone company. The larger question is what happens to the parent company’s trading multiple. On the surface, when compared to peers in terms of sales growth and margins, we view the FSS business as operating in between CPG LN and SW FP, which trade at 12.6x and 9.2x, respectively. If the company is viewed in that perspective, it should not be expected to see a corresponding level of multiple contraction (relative to the SpinCo). In fact, over time, it appears reasonable that the company would also see multiple expansion as margins continue to improve. Anecdotally, shares of ARMK have traded, on average, at 9.9x and 9.7x forward EBITDA estimates over the past five and ten years, respectively.

On a pre-spin, sum-of-the-parts basis, we value shares of ARMK at $45 per share. 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 (management has guided to 32% operating income growth in F2023). Absent a resurgence in inflation or a severe recession, we believe that shares of ARMK, trading at less than 10x 2024E EBITDA, appear attractive heading into the separation of the Uniforms business. As such, we rate shares of ARMK at BUY.

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 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

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:  MDU Resources Inc. (MDU) / Knife River (KNF)
June 1, 2023

MDU Completes Spin-Off of Knife River; Rate MDU and KNF at NEUTRAL with $24 and $32 Fair Value Estimates, Respectively

MDU Resources Group Inc. (NYSE: MDU) has completed the spinoff of its aggregates-based, vertically integrated construction materials and contracting provider, Knife River Corp., into a standalone, publicly traded company. Knife River now trades on the NYSE under the ticker “KNF”.

Shareholders of record as of May 22, 2023, received one share of KNF for every four shares of MDU owned. MDU retained a 10% ownership stake in KNF. We previously updated our post-spin fair value estimates to incorporate the most recent company filings, reflecting a slight update to the capital structures and shares outstanding, and MDU retaining 10% of Knife River (KNF) post-spin.

We fairly value Knife River at $32 per share and rate shares at NEUTRAL.  Post-spin MDU shares are fairly valued at $24 per share and also rated NEUTRAL.

For more details, please refer to initiation report dated May 5, 2023, and UPDATE dated May 22, 2023.

COMPREHENSIVE REPORT:  Aramark (ARMK) / Uniform Services
May 23, 2023

On May 10, 2022, Aramark (NYSE: ARMK) announced that it plans to divest Aramark Uniform Services (AUS) into a separately traded public company. The separation is expected to be completed via a tax-free spin-off of shares in AUS to ARMK shareholders of record as of a yet-to-be disclosed record date. Management currently expects to complete the transaction by the end of F2023 (September year-end).

As it stands today, ARMK operates as a “leading global provider of food, facilities and uniform services to education, healthcare, business & industry, and sports, leisure & corrections clients.” Aramark’s main operations are in the United States and has exposure in an additional 18 international markets. The company manages several interrelated services, including food service, facilities support, including custodial, grounds keeping and transportation, amongst others, and uniform solutions including uniform laundering, as well as sales of uniforms and related products. In F2022, the company generated $16.3 billion in revenue and $1.3 billion in EBITDA.

Shares of Aramark currently trade at 10.2x the consensus 2024 EBITDA estimate. In theory, shares of the Uniform company, with wider margins than the parent, should experience a degree of multiple expansion as a standalone company. The larger question is what happens to the parent company’s trading multiple. On the surface, when compared to peers in terms of sales growth and margins, we view the FSS business as operating in between CPG LN and SW FP, which trade at 12.6x and 9.2x, respectively. If the company is viewed in that perspective, it should not be expected to see a corresponding level of multiple contraction (relative to the SpinCo). In fact, over time, it appears reasonable that the company would also see multiple expansion as margins continue to improve. Anecdotally, shares of ARMK have traded, on average, at 9.9x and 9.7x forward EBITDA estimates over the past five and ten years, respectively.

On a pre-spin, sum-of-the-parts basis, we value shares of ARMK at $45 per share. 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 (management has guided to 32% operating income growth in F2023). Absent a resurgence in inflation or a severe recession, we believe that shares of ARMK, trading at less than 10x 2024E EBITDA, appear attractive heading into the separation of the Uniforms business. As such, we rate shares of ARMK at BUY.

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 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: PAR Technology (PAR)
May 11, 2023

PAR looks on track to grow recurring revenue in the 20%-30% range (and approach cash flow positivity/profitability) in 2023; conference call commentary suggests multiple potential transactional catalysts could be on the table in the relative near-term

On May 10, after the market close, PAR posted 1Q 2023 consolidated sales up 25.1% to $100.4 million (versus consensus of $90.1 million) with adj. EBITDA and EPS losses of $8.8 million and $0.46 per share, respectively (compared with the consensus loss estimates of $5.5 million and $0.36 per share, respectively, and prior year losses of $2.9 million and $0.26 per share).

Financials aside, we note that on last night’s conference call, management commentary seemingly suggested that several transactional-related catalysts could be on the table in the relative near-term, including a sale of the Government business, accretive M&A within the Restaurant segment (that accelerates PAR’s path to profitability) as well the potential for interest in the company from either strategic and/or private equity suitors (see Exhibit #1 on page 2).

All told, our fair value estimate for PAR is revised to $45 (from $55), reflecting value of $50 per share (previously $59) for the Restaurants/Retail segment, based on a blended 2024E sales multiple of 4.5x (previously 4.8x) and $4 per share (previously $3) for the Government business, based on a 12.5x 2024E EV/EBITDA multiple, and accounting for ~$290.5 million (previously $225 million) of projected net debt (see Exhibit #2 on page 3).

UPDATE: IAC Inc. (IAC)
May 10, 2023

IAC increases 2023E adj. EBITDA guidance; share repurchases ramped during 1Q 2023, reflecting market stabilization as well as management’s view the so-called IAC “stub” is materially undervalued; fair value increased to $72 per share (from $67) 

On May 9, after the market close, IAC reported 1Q 2023 sales down 18% to $1.084 billion, as all business lines experienced softness led by a 23% decline at DotDash Meredith, with adjusted EBITDA growth of ~18% to $9.1 million (compared with $7.1 million in 1Q 2022), led by a return to profitability at Angi.  Excluding certain restructuring, transaction and lease impairment charges at Dotdash Meredith adj. EBITDA increased ~59% to $54 million (versus $34 million in 1Q 2022).

Importantly, we would highlight that despite the recent share price appreciation, the implied value of IAC’s so-called “stub” has actually remained relatively flat over the last several quarters, which, for context, represents the lowest implied valuation we have seen over the last two years and a material discount to our fair value estimate of ~$3.34 billion.

IAC management ramped its share repurchase activity during 1Q 2023 by buying back 3.1 million shares for $158 million or $50.86 per share (with an additional 3.8 million shares under its existing authorization).  The company also invested an additional $104 million in ride-sharing company Turo, bringing its ownership to 31% (from 26.7%) and purchased the land under its NYC headquarters for ~$80 million.

In terms of valuation, among its private holdings, based on IAC’s guidance and commentary, as well as peer and M&A valuations, we value Dotdash Meredith at $26 per share and Emerging & Other at $10 per share, which awards per share values of $7 and $3 to Care.com and Vivian Health, respectively, while assigning zero value to the other businesses (i.e., Mosaic, The Daily Beast, IAC Films and Newco). Search’s profits are assumed to partially offset corporate costs, while Turo is valued at ~$4 per share. For its public holdings, based on discounted prices of ~$2.40 and ~$40 per share, we value ANGI at ~$11.50 per share and MGM at ~$29.50 per share. Accounting for remaining corporate costs as well as net debt yields a total sum-of-the-parts value of ~$72 per share (with bull and bear cases of ~$94 and ~$45 per share, respectively).

Radar Screen – May 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), Natura & Co. Holding (NTCO), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), 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:  Aramark (ARMK) / Uniform Services
May 23, 2023

On May 10, 2022, Aramark (NYSE: ARMK) announced that it plans to divest Aramark Uniform Services (AUS) into a separately traded public company. The separation is expected to be completed via a tax-free spin-off of shares in AUS to ARMK shareholders of record as of a yet-to-be disclosed record date. Management currently expects to complete the transaction by the end of F2023 (September year-end).

As it stands today, ARMK operates as a “leading global provider of food, facilities and uniform services to education, healthcare, business & industry, and sports, leisure & corrections clients.” Aramark’s main operations are in the United States and has exposure in an additional 18 international markets. The company manages several interrelated services, including food service, facilities support, including custodial, grounds keeping and transportation, amongst others, and uniform solutions including uniform laundering, as well as sales of uniforms and related products. In F2022, the company generated $16.3 billion in revenue and $1.3 billion in EBITDA.

Shares of Aramark currently trade at 10.2x the consensus 2024 EBITDA estimate. In theory, shares of the Uniform company, with wider margins than the parent, should experience a degree of multiple expansion as a standalone company. The larger question is what happens to the parent company’s trading multiple. On the surface, when compared to peers in terms of sales growth and margins, we view the FSS business as operating in between CPG LN and SW FP, which trade at 12.6x and 9.2x, respectively. If the company is viewed in that perspective, it should not be expected to see a corresponding level of multiple contraction (relative to the SpinCo). In fact, over time, it appears reasonable that the company would also see multiple expansion as margins continue to improve. Anecdotally, shares of ARMK have traded, on average, at 9.9x and 9.7x forward EBITDA estimates over the past five and ten years, respectively.

On a pre-spin, sum-of-the-parts basis, we value shares of ARMK at $45 per share. 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 (management has guided to 32% operating income growth in F2023). Absent a resurgence in inflation or a severe recession, we believe that shares of ARMK, trading at less than 10x 2024E EBITDA, appear attractive heading into the separation of the Uniforms business. As such, we rate shares of ARMK at BUY.

UPDATE:  MDU Resources Inc. (MDU) / Knife River (KNF)
May 22, 2023

We are updating our MDU Resources Group Inc. (NYSE: MDU) post-spin fair value estimates to incorporate the most recent company filings, reflecting a slight update to the capital structures
and shares outstanding, and MDU retaining 10% of Knife River (KNF) post-spin (our previous estimates indicated up to 19.9% of KNF could be retained by MDU).

The separation will be completed on May 31, 2023, after the market close, with shareholders of record as of May 22, 2023, receiving one share of KNF for every four shares of MDU held.  Shares of KNF and MDU ex-distribution have not begun trading in the when-issued market as of this writing.

Our post-spin fair value estimate for Knife River is revised to $32 per share (previously $28 per share) on lower shares outstanding of 56.1 million (previously 63.6 million) arising from the lower
post-spin ownership of KNF by MDU.  Post-spin MDU shares are now fairly valued at $24 per share (previously $25 per share) on the lower ownership position in post spin Knife River.

Our pre-spin MDU fair value estimate of $32 per share and NEUTRAL recommendation remain unchanged.

For more details, please refer to our comprehensive report published May 5, 2023.

Radar Screen – May 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), Natura & Co. Holding (NTCO), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Tiptree Inc. (TIPT), Western Digital Corp. (WDC)

Spin-Off Report Calendar – May 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