RICK tops consensus in 4Q F2022; expects growth in F2023 even if a recession ensues, in part due to recent acquisitions, including yesterday’s purchase of 5 clubs in TX for ~4.5x EBITDA; increase fair value to $93.50 per share. 

• Last night, after the market close, RICK reported 4Q F2022 consolidated sales up ~30% to $71.4 million (versus consensus of $69.9 million) with adjusted EBITDA up ~38% to $24.2 million (compared with consensus of $22.4 million).  Adj. EPS were $1.45 (versus consensus of $1.35 and $1.58 in the prior year) while free cash flow (FCF) rose ~72% $14.5 million.

On December 6, 2022, before the market open, 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, which is expected to qualify as tax-free to U.S. investors, is expected to be completed in late 2023 and 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.

As the company stands today, it describes itself as a “global leader in delivering innovative and sustainable mobility solutions for the vehicle market.” BWA currently operates under four operating segments:

• Air Management products include turbochargers, emission systems, timing systems, powertrain sensors, amongst others, and contributes ~48% or revenue.
• e-Propulsion & Drivetrain (EP&D) segment manufactures and sells rotating electrical components, control modules, and software for automatic transmissions and torque-management. The segment contributed ~35% of revenue in 2021.
• Fuel Injection develops and manufactures gasoline and diesel fuel injection components and systems. Fuel Injection contributed ~11% of sales in 2021.
• Aftermarket sells a wide range of products for fuel injection, electronics and engine management, and vehicle diagnostics categories to independent aftermarket customers and original equipment service customers. Segment sales represented ~6% of 2021 revenue.

FBHS to Complete MasterBrand Spin-Off on December 14, 2022; Maintain Pre-Spin BUY Recommendation, Pre-Spin FVE of $76 per Share

• On November 22, 2022, before the market open, Fortune Brands Home & Security Inc. (NYSE: FBHS) announced that the company plans to complete the spin-off of its cabinets business into a standalone, publicly traded company on December 14, 2022. The spin company will adopt the corporate moniker MasterBrand Inc. and will trade on the NYSE under the ticker “MBC”.
• FBHS shareholders of record as of December 2, 2022, will receive one share of MBC for each share of FBHS owned. “When-issued” trading is expected to begin on or about December 9, 2022.
• As previously announced, following the separation, the parent company will change its name to Fortune Brands Innovations Inc., and will trade under the symbol “FBIN” on the NYSE.
• Notably, FBHS and MBC management are hosting an investor day on December 6, 2022.
• Regarding the rationale for the separation, it appears that FBHS is looking to shed the slower-growth and lower-margin Cabinets business to allow for a better growth and margin profile at the remaining parent company. The Cabinets segment has experienced several hundred basis points lower growth in sales, albeit partially from acquisitions in other segments, than Water Innovations and Outdoors & Security, and it operates with margins approximating 10%, while Outdoors & Security and Water Innovations operate with margins of approximately 15% and 23%, respectively.

GFF reports full-year 2022 results and 2023 guidance in-line/modestly above our expectations; indicates its strategic review process “is active and discussions with potential counterparties are ongoing”; maintain fair value of $46.50 per share

• This morning, before the market open GFF reported full-year 2022 sales up 25% to $2.8 billion (roughly in-line with our estimate) with adj. EBITDA, which excludes ~$54 million of unallocated corporate costs, up 73% of $512 million (compared with our $472 million forecast).
• Looking into 2023E, the company expects full-year sales and adj. EBITDA, which, again, excludes ~$56 million of unallocated corporate costs of “at least $500 million” (compared with our ~$2.9 billion and ~$483 million forecasts, respectively). The company also expects 2023E free cash flow (FCF), including ~$50 million of capital expenditures, to exceed net income. Depreciation & amortization (D&A) expense is projected to be ~$72 million, of which $22 million is amortization, and net interest expense is expected to be ~$92 million.
• The company expects that it will further improve its current 2.9x leverage ratio in 2023.

Liberty Media plans to split off The Braves Group into a separate, publicly traded asset-backed equity; transaction is expected to be completed in 1H 2023

• This morning, in conjunction with its annual Investor Meeting, Liberty Media announced plans to split off The Braves Group, 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).
• The transaction, which is expected to be completed in 1H 2023, will be accomplished 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).
• While less relevant for our purposes, Liberty Media will maintain the existing tracking stock structure for its SiriusXM and Formula One businesses and, in fact, create a third tracking stock dedicated to its Live Nation business.

Lack of new contracts at ADG and cost pressures at AEP offset solid results at ARS in 3Q 2022; leverage ratio is a growing concern but management suggests increased biding activity at ADG could result in “more than half” of its $1.5 billion pipeline being awarded “before the end of the year” and that it is in “advanced negotiations” with auto clients at AEP to improve profitability; revise fair value to C$17 per share (from C$25 per share)

• Last night, after the market close, BOS posted 3Q 2022 sales down ~6.5% to $104.7 million with adj. EBITDA $1.27 million (both well-below initial consensus but toward the high-end of its pre-announced ranges of $102-$105 million and $1.0-$1.4 million, respectively). Adjusted EPS were ($0.44) compared with its pre-announced range of ($0.44)-($0.47) per share.

• Broadly, by segment, performance remained solid at ARS but the lack of significant new business awards (and a tough comparison) at ADG and cost pressures at AEP clearly continued to weigh on results.

Drop Coverage of AMMO Inc. Effective Immediately

• On November 7, 2022, AMMO Inc. (NASDAQ: POWW) announced that the company is suspending the previously announced plans to spin-off its ammunition and marketplace business.
• Given the suspension of separation plans, we DROP coverage of AMMO Inc. effective immediately.
• Our prior estimates and fair values for POWW should no longer be relied on.

Alert: LAC to Spin-Off North American Mining Operations

• On November 3, 2022, before the market open, Lithium Americas Corp. (NYSE: LAC) announced that it intends to spin-off its North American mining operations into a separate, stand-alone publicly traded company. The separation, if completed, will be accomplished by a pro-rata distribution of shares in Lithium Americas (NewCo) to shareholders of LAC, while the parent company will be referred to as Lithium International. The spin-off will be subject to customary closing conditions, is expected to be “tax-deferred” to U.S. shareholders and is currently targeted for completion by year end 2023.

• Lithium Americas Corp., a pre-production (but relatively late stage) lithium miner that develops (and will eventually operate) lithium projects in two main geographic regions, namely Argentina and the U.S., had previously disclosed that it was exploring the separation of its operations based on their distinct geographical footprints/jurisdictions. To that end, management, which owns roughly 9% of the outstanding shares, has indicated its belief, at least preliminarily, that more value may potentially be created through two separate entities with dedicated local executives, and that such a structure could facilitate potential development partnerships/investments for its domestic operations (where possible partners may not want the South American exposure inherent in the company’s current conglomerate structure).

• In Argentina, the company is developing Cauchari-Olaroz, a lithium brine joint venture project with Ganfeng Lithium (002460 CH), in Jujuy Province, as well as Pastos Grandes, also a lithium brine project, albeit ~100 kilometers away in Salta Province, which was acquired in January 2022 via the purchase of privately held Millennial Lithium Corp. for $400 million. (Also, in July 2021, the company made a strategic investment in Arena Minerals [TSX: AN], which it increased to 17.4% in November 2021.) Cauchari-Olaroz, which has estimated reserves of ~1.95 million tonnes of lithium carbonite equivalent (LCE) with an average concentration of 607 mg/L, is expected to produce ~60,000 tons of battery-quality lithium carbonite per year over the course of a ~40-year life. Operating costs are expected to be less than $3,600 per tonne. (Currently, the project is ~85% complete, with Phase 1 commissioning targeted to commence in 2H 2022 and Phase 2 construction, which is expected to expand production by ~20 million tonnes per year in ~2025, expected to begin in late 2022.) Pastos Grandes, which has an estimated 943 million LCE with an average concentration of 439 mg/L, is expected, per a feasibility study completed in 2019 (under the previous owner), to produce ~24,000 tonnes of battery-quality lithium carbonite per year over the course of a ~40-year life span.

• In the U.S., LAC is developing Thacker Pass, which is the largest known domestic lithium resource, in northern Nevada. The project, which has reserves of 179.4 million tonnes of lithium ore with an average grade of 3,283 parts per million (ppm) containing ~3.135 million tonnes of LCE, is expected to produce ~40 million tonnes per year as part of its Phase 1 plan and ultimately expand to ~80,000 tonnes per year following Phase 2 construction, over an expected life span of ~46-years. Operating costs are expected to be ~$4,100 per tonne. (Early-work construction is expected to begin in 2022, with the results of a feasibility study expected in 2H 2022 and Phase 1 production likely commencing in 2025.)

• Assuming long-term lithium carbonate prices in the $13,000-14,000 per tonne range as well as a 9% discount rate and net cash of ~$155 million per share, a net present value (NPV) of ~$4.05 billion or ~$31 per share can be calculated (based on a diluted share count of ~135 million). For context, assuming 2024E EBITDA of ~$335 million, this valuation framework implies a multiple of ~12x, which is roughly in line with lithium comparables such as Albemarle Corp. (NYSE: ALB), IGO Ltd. (IGO AU), and Livent Corp. (NYSE: LTHM).

Breach Inlet Capital publicly urges the immediate spin-off of BATRK from Liberty Media; contends it is “materially undervalued as a monopoly with secular tailwinds” and worth ~$50 per share

• Yesterday, during mid-day trading hours, Breach Inlet Capital, a top-25 shareholder holding ~0.4 million shares that focuses “on underfollowed and misunderstood small cap equities”, issued a public letter to Liberty Media’s Board urging the immediate spin-off of BATRK
• The investor, which notes it has been a “patient and supportive shareholder” for six years, indicates that its views have been previously expressed to the Board privately in July 2022 but are now being made public due to the apparent lack of any significant “responsive action”.
• Breach Inlet contends BATRK is a “mini-monopoly” (i.e., no new teams have been created in the last 25 years and none exist within a 400-mile radius) that benefits from “multiple secular tailwinds”, including the increasing value of TV contracts for sports content along with the ongoing creation of new billionaires (and the relatively new ability for institutional investors/investment funds to take minority stakes).
• All told, the investor contends BATRK is worth ~$50 per share, based on a 6.0x sales multiple for the Atlanta Braves MLB team, which, for context, is in-line with the multiple ascribed to the woefully performing Miami Marlins but a discount to the almost 7x and better than 8.5x multiples garnered by the New York Mets and the Los Angeles Dodgers, respectively, and the equity contributed to The Battery, at cost.
• To that end, the investor asserts Liberty’s current tracking stock structure is “confusing and convoluted” and impedes the maximization of value of all shareholders. As such, the conversion of BATRK into a standalone, asset-backed equity would help alleviate the current discount (by eliminating complexity and facilitating the eventual, tax-efficient monetization of the asset).
  For our part, our base case fair value estimate for BATRK remains ~$42 per share, reflecting a $42 per share valuation for the Atlanta Braves, based on a 5.5x multiple of 2022E sales, a $9 per share valuation for the company’s real estate/development assets (i.e., The Atlanta Battery), reflecting a 6% capitalization rate on our stabilized net operating income estimate, and net debt of ~$ 9 per share (see Exhibit #1 on page 2).

Per Bloomberg, GTX is working with advisers to explore strategic options, including a sale

• This morning, Bloomberg reported that Garrett is working with advisors to explore its strategic options, which could include a sale of the company. (In our view, if true, GTX could attract interest from both strategic and financial buyers.)
• Notably, the report has not been confirmed by the company and the article says that “people familiar with the matter” but who are “not authorized to speak publicly” indicate that “nothing was imminent.
• Recall, GTX recently posted GTX posted 3Q 2022 net sales growth of 13% (or ~25% on a constant currency basis), reflecting a 15% increase in unit volume to 3.6 million. (Anecdotally, the company expects unit volumes to remain roughly flat, sequentially, at ~3.6 million in 4Q 2022).
• Adjusted EBITDA increased 9% to $146 million, reflecting a 60-basis point deterioration in margin to 15.4%. (Notably, management estimates that FX and inflation impacted margins by ~190 bps during the quarter implying margins actually improved year over year on an apples-to-apples basis.)
• Adjusted free cash flow (FCF) was $120 million versus ($63) million in the prior year and $23 million in 2Q 2022. (Anecdotally, the company expects FCF of ~$160 million in 4Q 2022, which implies a sequential improvement from 3Q 2022.)
• The company ended 3Q 2022 with a net leverage ratio of 1.75x (compared with 2.33x at the end of 2021 and 1.87x in 2Q 2022). Notably, ~80% of GTX’s long-term debt is fixed (at a rate of less than 3.2%) over the next three years with no significant maturities until 2028.
• In terms of the outlook, GTX narrowed its previous guidance ranges (see Exhibit #1 on page 2) with its adj. EBITDA forecast being maintained at the mid-point (on slightly higher sales but with slightly lower FCF). Specifically, the company expects full-year sales of $3.57-$3.67 billion (vs. the prior guide of $3.5-$3.7 billion), implying constant currency sales growth of 7%-9% (vs. 5%-10% prior), with adj. EBITDA and FCF of $545-$575 million and $310-$370 million, respectively (vs. prior guides of $290-$335 million and $530-$590 million. GAAP net income is expected to be $325-$345 million (vs. the prior forecast of $290-$335 million).
• Our base case fair value estimate for GTX is ~$11 per share, reflecting an 8.0x multiple on our 2023E adjusted net income forecast of $422 million (previously $428 million) and a fully diluted share count of ~321.5 million (see Exhibit #2 on page 2).