Drop Coverage of GXO Logistics Inc. Effective Immediately

On August 2, 2022, before the market close, XPO Logistics Inc. (NYSE: XPO) completed the spinoff of GXO Logistics Inc. (NYSE: GXO).
Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of GXO Logistics Inc. effective immediately.
Our prior estimates and fair values for GXO should no longer be relied on.

Drop Coverage of Becton, Dickinson and Co. and Embecta Corp. Effective Immediately

On April 1, 2022, before the market close, Becton, Dickinson and Co. (NYSE: BDX) completed the spinoff of Embecta Corp. (NASDAQ: EMBC).
Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Becton, Dickinson and Co. and Embecta Corp. effective immediately.
Our prior estimates and fair values for BDX, and EMBC should no longer be relied on.

ALERT: NCR to Separate Digital Commerce and ATM Businesses

On September 15, 2022, after the market close, NCR Corp. (NYSE: NCR) announced that the company plans to separate its digital commerce business and its ATM business into two separate, publicly traded companies. The separation is expected to be completed near the end of 2023 and is subject to customary closing conditions such as final Board approval, an effectiveness declaration of the company’s Form 10 filing by the SEC, and an opinion on the tax-free status of the separation.

The separation announcement follows the undertaking of a “comprehensive strategic review process” to evaluate a “full range” of strategic alternatives, which include the disposition of a material business or asset”, a spin-off, an/or a merger or sale of the company in an attempt to unlock value for shareholders.

In conjunction with the spin announcement, management stated that throughout the review process the company received “material interest in a whole company sale”, as well as interest in various individual segments. In fact, in late-April 2022, it was reported by Dealreporter thatNCR received interest from six parties, including Apollo Global Management (NYSE: APO), for all or part of the business. However, given the current stat of the financing markets, the ability to deliver a while company transaction that “reflects an appropriate and acceptable value to our NCR shareholders” was not feasible.

Currently, the company reports four segments: (1) Banking (52% of consolidated sales and 62% of adjusted EBITDA in 2021); (2) Retail (32% of sales and 26% of adjusted EBITDA); (3) Hospitality (12% of sales and 9% of adjusted EBITDA); and (4) Telecommunications & Technology (or T&T), which comprised 4% of consolidated sales and 3% of adjusted EBITDA in 2021. In 2021, the company posted consolidated top-line growth of 15% to $7.16 billion, as strong growth at Banking (up 20%), Retail (up 10%), and Hospitality (up 24%) offset a 14% decline at T&T, with a 39% increase in total adjusted EBITDA to $1.244 billion. For 2022, the company expects consolidated revenue growth of 12%-15% to $8.0-8.2 billion, with adjusted EBITDA growth of 21%-27% to $1.500-$1.575 billion and non-GAAP diluted EPS up 27%-39% to $3.25-$3.55. Free cash flow is expected to be $500-$600 million. Longer term, in late 2021 NCR articulated aspirational five-year goals (for 2026), which included annual recurring revenue comprising ~80% of its total revenue mix, annual non-GAAP diluted EPS growth of 15%, and annual free cash flow of $1 billion.

PRELIMINARY VALUATION

Following the separation, CommerceCo, which will control the Retail, Hospitality, Merchant Services, and Digital Banking operations, will have trailing revenue and EBITDA of approximately $4.0 billion and $600 million, respectively, representing ~55% recuring revenue and a 16% adjusted EBITDA margin. ATMCo will control the Self-Service Banking and ATM Network operations and has trailing revenue and EBITDA of approximately $3.8 billion and $700 million (67% recurring revenue and ~18% adjusted EBITDA margin).

Based on management guidance, current trends and consensus forecasts, it can be reasonably projected that NCR could generate consolidated 2023E sales and adjusted EBITDA of $8.56 billion and $1.45 billion, respectively. In terms of post-spin companies, we forecast 3%-5% revenue growth at ATMCo. and 5%-6% revenue growth for CommerceCo, and stable EBITDA margins from the current operating environment.

NCR currently trades at ~6.0x 2023E EV/EBITDA (which is below its 10-year average forward multiple of ~7.0x). Post-separation ATMCo could be compared to the likes of Fidelity National (NYSE: FNF), Fiserv (NASDAQ: FISV), Q2 Holdings (NYSE: QTWO), Temenos AG (TEMN SW), Infosys (NYSE: INFY), Alkami Technology (NASDAQ: ALKT), and ACI Worldwide (NASDAQ: ACIW), which trade at ~12x (in a range of 8.0x-16.5x). Applying a 6.0x multiple to 2023E ATMCo segment EBITDA of $726 million implies segment value of ~$4.4 billion. As a point of reference, management has indicated that ATMCo has historically generated approximately $500 million in annual free cash flow, which would imply a yield of ~11% on this valuation.

Applying a 7.0x multiple to our CommerceCo EBITDA estimate of $724 million, a discount to competitors such as Oracle (NYSE: ORCL), GK Software (GKS GY), Par Technology (NYSE: PAR), Olo (NYSE: OLO), Lightspeed (NYSE: LSPD), Diebold Nixdorf (NYSE: DBD), SAP (NYSE: SAP), and HP (NYSE: HPQ), which trade at ~8.5x (in a wide range of 5.5x-12.5x), implies value of ~$5.1 billion.

Accounting for current net debt net debt of $5.5 billion, and current shares outstanding of 136.9 million, yields a preliminary, pre-spin, sum-of-the-parts value of ~$3.9 billion, or $29 per share.

ALERT: Danaher to Spin-Off Environmental & Applied Solutions Business

On September 14, 2022, after the market close, Danaher Corp. (NYSE: DHR) announced that the company plans to separate its Environmental & Applied Solutions segment into a standalone, publicly traded company via a tax-free spin-off. The separation is expected to be completed in 4Q 2023 and is subject to customary closing conditions such as final Board approval, an effectiveness declaration of the company’s Form 10 filing by the SEC, and an opinion on the tax-free status of the separation.

DHR, as it currently stands, is a global science and technology conglomerate consisting of Life Sciences, Diagnostics, and Environmental & Applied Sciences, with annual revenue of approximately $30 billion. The company’s revenue mix consists of Life Sciences (50.8% of 2021 revenue); Diagnostics (33.4%), and Environmental & Applied Solutions (15.8%).

The Life Sciences segment offers instruments and consumables used in the study of genes, proteins, metabolites and cells that are used in the manufacturing of new therapies, testing and new drug and vaccines. Life Sciences includes bioprocess (drug, therapy, and vaccine development), filtration (filtration, separation, and purification), mass spectrometry, microscopy, gene and cell therapy businesses. The segment generated $14.96 billion in revenue in 2021 and $4.4 billion in operating income.

DHR’s Diagnostics segment includes clinical instruments, reagents, consumables, software for hospitals and physicians, used in the diagnosis and treatment of diseases. The Diagnostic’s segment businesses include core lab clinical (testing instruments and consumables), molecular diagnostics (DNA based testing for clinical and non-clinical markets), acute care diagnostics (instruments and software for both laboratory and point-of-care settings), and pathology diagnostics. Diagnostics generated $9.8 billion in revenue and $2.3 billion in operating income in 2021.

Environmental & Applied Solutions (“EAS”) offers “products and services that help protect precious resources and keep global food and water supplies safe”. EAS consists of a water quality business that provides instrumentation and software used in analyzing, treating and managing water sources, as well as a product identification business, which is a leading provider of printers, instrumentation, software, and consumables used in various consumer, pharmaceutical, and industrial packaging applications. EAS generated $4.65 billion in revenue and $1.1 billion in operating income in 2021.

The decision to separate the EAS business is consistent with DHR’s history of spin-offs, including the 2015 spin-off of its communications business, which was acquired by NetScout Systems Inc. (NASDAQ: NTCT) in a Reverse-Morris Trust transaction, the 2016 separation of the company’s former Test & Measurement business into Fortive Corp. (NYSE: FTV), and the split-off of its dental business into Envista Holdings Corp. (NYSE: NVST).

PRELIMINARY VALUATION

DHR currently trades at almost 20.5x 2023E consensus EBITDA estimate, which is roughly inline with life sciences and diagnostics peers, which trade on average at 21.3x their respective 2023E EBITDA forecasts. Following the separation, EAS will be more aptly compared to water measurement and testing peers such as Xylem Inc. (NYSE: XYL), which currently trades at ~18.0x its 2023 consensus EBITDA estimate.

On a pro forma basis, EAS generated $4.7 billion in revenue in 2021, and management has indicated that long-term targets include core revenue growth in the mid-single digits, with approximately 55% of revenue being classified as recuring, and 25% EBITDA margins. Following the separation, the parent company will exhibit wider margins (EAS’s EBITDA margins of approximately 25% are well below the 35% of Diagnostics, and 39.5% of Life Sciences), and better top line growth versus the spin company. It could be expected that following the spin-off, the parent company would benefit from a degree of multiple expansion to reflect the improved revenue and margin profile, while the EAS business would see multiple contraction to approximate peers.

Based on 1H 2022 revenue and margin trends and forecasting normalized sales growth of 3% for EAS and 5% for the post-spin parent company, we forecast revenue of $5.0 billion for EAS and $28.6 billion for DHR. Incorporating standalone corporate costs and dis-synergies, EAS could operate with a 24% EBITDA margin resulting in $1.2 billion in 2023E EBITDA, while the parent company would operate at 36% margin. Applying peer multiples to the standalone companies, we estimate that EAS would have an enterprise value of approximately $21.7 billion and DHR would be valued at $226.9 billion on an enterprise basis.  Incorporating current net debt of $17.8 billion, and 727.4 million shares outstanding, yields a preliminary sum-of-the-parts valuation for pre-spin DHR of $317 per share.

Melrose to Spin-Off Automotive and Powder Metallurgy Businesses

On September 8, 2022, Melrose Industries PLC (MRO LN) announced the intention to spin-off the GKN Automotive and GKN Powder Metallurgy businesses into a standalone, publicly traded company. DemergerCo, as the new company is currently being referenced, will be headquartered in London, and is expected to trade on the London Stock Exchange. The proposed transaction is targeted to be completed mid-2023 with a formal launch of the independent company in 1Q 2023 and shareholder approval in 2Q 2023. DemergerCo will be a automotive platform initially focused on supplying driveline technologies and the production of metal powder and precision metal parts for the automotive and industrial sectors. DemergerCo will focus on “profitable organic growth as well as targeted M&A in the automotive sector, where we see opportunities as a consolidator either via an all cash acquisition or share based transaction.” If the separation is completed, MRO will retain ownership of the GKN Aerospace business and maintain its current “Buy, Improve, Sell” business strategy moving forward.

As the company currently stands, MRO operates as an investment company focused in the manufacturing sector and reports under three businesses: Aerospace (36.9% of revenue and 26.3% of adjusted operating income in 2021), Automotive (46% of revenue and 40.4% of adjusted operating income in 2021), and Powder Metallurgy (13.8% of revenue and 21.4% of adjusted operating income in 2021). (The company also reports an “Other Industrial” segment, contributing 3.4% of 2021 revenue, which comprises the GKN Hydrogen business in its investment phase).

Aerospace manufacturers airframe, engine structures, and electrical interconnection systems for the aerospace industry for both civil and defense platforms. The segment generated GBP 2.5 billion in revenue and GBP 112 million in adjusted operating profit, representing a 4.4% margin. The segment is currently in the process of significant restructuring to right size its cost base and operations. Management is targeting a 12% adjusted operating margin, which would be realized upon a full market recovery to pre-COVID 19 revenue (GBP 3.8 billion in 2019).

Automotive is a manufacturer and supplier of drive systems for both conventional and electric vehicles and generated GBP 3.7 billion in revenue and GBP 172 million in adjusted operating profit in 2021. The segment has been impacted by supply and demand imbalances due to COVID-19’s impact on market dynamics, and has seen revenue decline by almost 24% since 2019 and margins decline by 340 basis points over the same timeframe. While supply chain constraints remain, management expects pressures to ease throughout the remainder of 2022, which combined with current restructuring initiatives despite persistent raw material inflationary pressures, should allow for margin expansion to achieve the segments 10%+ operating margin target.

Powder Metallurgy is a leader in manufacturing both precision metal parts for the automotive and industrial sectors, as well as the production of metal powder. The segment generated GBP 975 million in revenue and GBP 91 million in adjusted operating profit in 2021, representing a 7% sales increase and 510 basis points of operating margin expansion. The segment is experiencing many of the same industry dynamics as the Automotive segment, including chip shortages for automotive manufacturers impacting demand for metallurgy’s products, which management expects to ease moving forward. Management is targeting a 14% operating margin for the segment.

Following the separation, management is targeting a 16%+ EBITDA margin for DemergerCo (from the current approximate of 12.2%) and 18%+ for the parent company (currently expected to approximate 11.8%). Based on the 1H 2022 revenue and margin trends, combined with moderate margin expansion into 2023 on better industry trends and benefits of restructuring efforts, we forecast that DemergerCo would generate GBP 5.1 billion in revenue and GBP 665 million in EBITDA. The parent company is forecast to generate GBP 2.6 billion in revenue and GBP 330 million in EBITDA in 2023.

For its part, MRO currently trades at 6.2x the consensus 2023 EBITDA estimate, while Aerospace peers trade at approximately 12x and auto parts peers trade at closer to 5.0x their consensus 2023 EBITDA estimate. Applying peer multiples to the post spin entities, and capitalizing GBP 50 million in corporate costs at the weighted average multiple of 7.3x, we assign a preliminary sum-of-the-parts fair value estimate of GBp 138.50 to shares of Melrose.

ECN to sell Kessler Group to Stone Point Capital for $210 million; maintains 2023E guidance on strong tuck-in acquisition pipeline in the marine & RV financing space

• Last night, after the market close, ECN announced an agreement to sell Kessler Group, its credit card advisory & management business, to private-equity firm, Stone Point Capital, for $210 million.
• The transaction, which is expected to close in late 3Q 2022 or early 4Q 2022, implies a valuation of 1.2x book value, 8.0x 2022E adj. after-tax operating income and, by our calculation, ~4.2x 2022E adj. EBITDA (implying an about 11% IRR since ECN acquired it in May 2018).
• Proceeds from the transaction are expected to be initially used to repay debt but ultimately redeployed into its higher growth/higher return businesses (i.e., Triad and Source One/IFG).
• In terms of guidance, ECN revised its 2022E forecast to $0.25-$0.28 (from the previous $0.29-$0.31 and its initial $0.25-$0.30 outlooks, which both included KG) but maintained its 2023E forecast of $0.36-$0.42, reflecting continued growth in its underlying businesses as well as already identified tuck-in acquisition targets. On the latter point, ECN indicates that it currently has four deals under letters of intent (LOI) as well as a large pipeline of potential opportunities to further consolidate the $25 billion-plus boat & RV financing industry.
• All in all, while we find the strategic rationale of the transaction to be solid, in that KG never really seemed to fit with ECN’s other business, was arguably the least attractive business in the portfolio and the capital can be more accretively deployed elsewhere, we are modestly underwhelmed by the sale price (particularly relative to the premium multiple the company was able to monetize Service Finance at in December 2021.)
• Nevertheless, albeit with some modest tweaks, we maintain our ~C$9.00 per share fair value, reflecting a ~13.75x multiple (up from ~12.0x, reflecting the exclusion of the lower valued KG business) on 2023E EBITDA of $147.5 million (down from $192.5 million, which included KG) and net debt of ~$290 million (down from ~$500 million reflecting the proceeds from the KG sale); see Exhibit 1 on page 2). [Note: Per share figures have been converted from USD at an exchange rate of ~1.25x.]

Drop Coverage of AT&T Inc. and Warner Bros. Discovery Inc. Effective Immediately

• On April 8, 2022, after the market close, AT&T Inc. (NYSE: T) completed the spinoff of its WarnerMedia business, which immediately merged with Discovery Inc. in a Reverse Morris Trust (“RMT”) transaction.
• Following the merger, Discovery changed its corporate moniker to Warner Brothers Discovery Inc. and began trading on the NASDAQ under the ticker “WBD” on April 10, 2022.
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of AT&T Inc. and Warner Bros. Discovery Inc. effective immediately.
• Our prior estimates and fair values for T, and WBD should no longer be relied on.

ALERT: POWW to Spin-Off Ammunition and Munition Component Manufacturing Business

On August 15, 2022, before the market open, AMMO Inc. (NASDAQ: POWW) announced that the company plans to separate its ammunition and munition component manufacturing business from its online marketing businesses into two independent publicly traded companies. The separation is expected to be accomplished via a spin-off of the ammunition and munition component manufacturing business, which will adopt the corporate moniker Action Outdoor Sports Inc. (“AOS”). The parent company, which will be rebranded as Outdoor Online Inc., will retain the company’s online marketplace properties, which includes GunBroker.com. The separation, as it is currently posited, is expected to be completed in calendar year 2023, and is subject to customary closing conditions, including approval of a Form-10 filing by the SEC, and final Board approval.

AMMO, as it stands today, is a “designer, producer, and marketer of performance-driven, high-quality ammunition and ammunition component products”. Products are sold to sport and recreational shooters, hunters, manufacturers, and law enforcement members, amongst others. Additionally, the company owns the online auction site GunBroker.com, which enables the lawful sale of firearms, ammunition, and hunting/shooting accessories. Ammunition is sold under various brand names including STREAK Visual Ammunition, Stealth Subsonic Ammunition, and Jesse James Ammunition, amongst others. The GunBroker business was acquired on April 30, 2021, when AMMO merged with SpeedLight Group I LLC, which operated 9 subsidiaries, all of which were related to GunBroker.com.

The company generated $240 million in revenue in F2022 (March year-end), which increased significantly from the prior year’s sales of $62.5 million due to the GunBroker acquisition and increased “Standard Ammunition” manufacturing capacity, and adjusted EBITDA of $75.5 million, versus $8.1 million in F2021. Notably, “Marketplace Revenue”, which represents GunBroker, contributed $64.6 million in F2022 revenue.

PRELIMINARY VALUATION

In conjunction with the spin announcement, the company issued guidance for the post-spin entities to include AOS F2023 revenue of $230-$240 million and adjusted EBITDA of $57 – $60 million. For Outdoor Online, management expects the business to generate $70 million in revenue and $51 million in adjusted EBITDA in F2023.

Following the separation, the AOS business will not have a pure play competitor, but will likely be compared to more diversified ammunition makers such Olin Corp. (NYSE: OLN) and Vista Outdoors Inc. (NYSE: VSTO), which currently trade 4.6x and 3.8x their respective forward EBITDA estimates, and firearm manufacturers Sturm, Ruger & Co. Inc. (NYSE: RGR) and Smith & Wesson Brands Inc. (NASDAQ: SWBI), which trade at 6.3x and 3.2x their respective forward EBITDA estimates. In relation to Outdoor Online, we use eBay Inc. (NASDAQ: EBAY) as our initial point of reference for where we think shares may trade, while acknowledging the likelihood of a discount awarded given the products sold on GunBroker.com. EBAY currently trades at 9.1x the current 2023 consensus EBITDA estimate. For its part, POWW trades at 7.3x the forward EBITDA estimate.

Based on management guidance, the peer average for AOS, and a one-turn discount multiple of Outdoor Online, our preliminary sum-of-the-parts valuation assigns a fair value estimate of approximately $5.60 per share to POWW, which is roughly in line with the current trading

ECN posts 2Q 2022 results at high-end of guidance & maintains full year 2022E EPS guidance; will update 2023E guidance at the end of 3Q 2022 to reflect the IFG acquisition (along with potentially 4 other tuck-in deals currently under LOIs); increase fair value to ~$9.00 per share (from $8.50)

• Last night, after the market close, ECN posted adj. EPS growth of ~80% to $0.09 (versus $0.05 in the prior year period, guidance of $0.08-$0.09 and consensus of $0.09), reflecting strong results at Triad and Source One and slower CCIM activity at KG. Adj. EBITDA increased ~66% to ~$38.9 million (versus consensus of $36.5 million).
• The company affirmed 2022E EPS guidance of $0.29-$0.31, reflecting increased expectations at Triad & Source One and the assumption that new CCIM transaction activity at KG is deferred until 2023 (see Exhibit 1).
• ECN also maintained its initial 2023E EPS guidance of $0.36-$0.42 but indicated that it would update it following 3Q 2022 (ostensibly higher) to reflect the acquisition of Intercoastal Financial Group (IFG), which it indicates could offer incremental originations and EPS accretion of ~$1 billion and ~$0.06, respectively, in 2023E (along with four other potential transactions that are currently under letters of intent as well as several other deals in earlier stages of negotiations).
• More specifically on the IFG transaction, ECN paid $75 million, including $55 million in cash at closing and $20 million over time, for the marine and recreational vehicle (RV) financing platform. (In terms of mix, 87% of originations are marine and the remaining 13% are for RVs.) The deal complements the purchase of Source One in March 2022 giving the combined platform a nationwide footprint and significant scale in attractive markets, such as CA, FL, NY as well as TX and NC. The average FICO score is 787, with nearly 50% of borrowers exceeding 800, and the average down payment slightly more than 25%.
• IFG’s originations were $547 million in 2021 (and ~$302 million in 1H 2022) and have grown at a compound annual rate of ~16% over the last five years. Management estimates IFG will add adj. operating income of $12-$14 million, with a “low-risk execution path to $30-$40 million” over the next few years, and ~$0.06 of adj. EPS in 2023E.
• To that end, we increase of fair value estimate for ECN to C$9.00 per share (from C$8.50), reflecting a ~12x multiple (previously ~12.5x) on 2023E EBITDA of $192.5 million (up from $170.1 million) and net debt of ~$500 million (previuosly $425 million; see Exhibit 2). [Note: Per share figures have been converted from USD at an exchange rate of ~1.25x.]

LNDC intends to sell the remaining CF assets in the “near-term” and re-brand as Lifecore Biomedical; announces new CEO and Board changes; guides to F2023 sales and EBITDA of 12%-15% and 7%-12%, respectively, at Lifecore

• Last night, after the market close, Landec announced that it intends to sell the remaining assets of Curation Foods (CF) during F2023 and re-brand under the Lifecore Biomedical corporate moniker (while concurrently changing its ticker to LFCR).
• In connection with these moves, the company has appointed Mr. James Hall, Lifecore’s current president, as chief executive succeeding Dr. Albert Bolles who will transition to the president of CF and oversee the disposition of its remaining assets, namely Yucatan Foods and O Olive Oil & Vinegar, which will be re-classified as discontinued operations. (Mr. John Morberg will remain as the company’s chief financial officer.)
• Additionally, four of LNDC’s eleven directors, including Mr. Powell and Mses. Carosella, Pankopf and Sohn, will step down/not seek re-election at this year’s annual meeting (scheduled for October).
• For context, while management could not provide any specific commentary on the potential valuation or timing of asset sales, we note that the company acquired O Olive Oil in March 2017 for $2.5 million (with a potential earn out of $7.5 million) and Yucatan Foods for $80 million, comprised of $60 million of cash & $20 million of stock, in December 2018. At the time of their respective purchases, O and Yucatan generated ~$3.5 million and ~$57.5 million of sales (compared with sales of $9.3 million and $65.3 million in F2022).
• In terms of F2022 results from continuing operations, Lifecore posted top-line growth of 11.5% to $109.5 million with gross profit and adj. EBITDA growth of 14% and 18%, respectively (implying margins of ~40.0% and 26.5%). For additional context, since 2015, Lifecore has generated compound annual top-line and EBITDA growth of ~15% and ~25%, respectively.
• LNDC ended F2022 with net debt of $136.4 million (compared with $192.7 million at the end of F2021), including cash of $1.6 million and debt of $138 million, and a leverage ratio of ~5.9x, by our calculation.
• In terms of F2023E guidance, Lifecore sales are expected to rise 12%-15% to $122-$126 million with adj. EBITDA growth of 7%-12% to $31-$32.5 million. Corporate expense is expected to be ($7.0)-($7.5) million in F2023. Capital expenditures, including plans to expand operational capacity to 22 million units (from 10 million) by F2025, are expected to be $34-$38 million.