Please see the attached Hidden Opportunities Update on Garrett Motion Inc. (NASDAQ: GTX).

GTX will redeem the remainder of HON’s Series B Preferred shares with cash on June 28^th providing clear line of sight to a simplified capital structure

• Last night, after the market close, GTX announced it would redeem, in cash, the remaining $212 million of Series B preferred stock (held by its former parent, Honeywell) on June 28, 2022. To that end, there will subsequently no longer be any Series B stock outstanding. (For context, GTX initially redeemed $211 million of Series B Preferred stock in 4Q 2021 and additional $197 million in 1Q 2022.)
• The company ended 1Q 2022 with a net leverage ratio, including Series B Preferred stock, of 1.88x (versus 1.95x at the end of 2021, 2.55x at the end of 3Q 2021 and 2.73x at the end of 2Q 2021).  Accounting for this early redemption, we expect GTX’s leverage ratio will be ~1.70x-1.75x at the end of 2022E.
• In that context, GTX continues to make solid progress toward the de-leveraging and simplification of its balance sheet and capital structure (i.e., into just debt and equity), which is a process that we expect will be completed, at the latest, by April 2023.  (Notably, the company filed an S-1 registration statement regarding its Series A Preferred stock in early-June 2022).
• In terms of guidance, recall that GTX lowered its full-year 2022E outlook following March-quarter results citing the on-going impact of chip shortages/supply chain disruptions as well as increased currency fluctuation headwinds. To that end, GTX projected full-year 2022E net sales of $3.5-$3.7 billion (previously $3.7-$4.0 billion) with adjusted EBITDA of $530-$590 million (previously $590-$650 million) and GAAP net income of $250-$295 million (previously $295-$340 million). Adjusted free cash flow is expected to be $330-$430 million (previously $$400-$500 million; see Exhibit #1 on page 2).  Notably, GTX’s revised guidance assumes global light vehicle production is roughly flat at ~77 million units (versus its prior forecast of 7% growth to ~80.1 million units).
• Our fair value estimate remains $11 per share, which reflects an 8.0x multiple on our 2023E adjusted net income forecast of $428 million and a diluted share count of ~321.5 million.  For context, on an EV/EBITDA basis, our valuation implies a ~6.0x multiple (see Exhibit #2 on page 2).

Drop Coverage of The ODP Corp. Effective Immediately

• On June 21, 2022, before the market open, The ODP Corp. (NASDAQ: ODP) announced that the company has decided to not divest its consumer business at this time.
• Previously the company had proposed spinning off the consumer business, a plan that was subsequently paused given outside interest in acquiring the consumer piece of the business.
• Given that ODP will maintain its consumer business, we DROP coverage of The ODP Corp. effective immediately.
• Our prior estimates and fair value for ODP should no longer be relied on.

ALERT: Kellogg to Spin-Off North American Cereal, and Plant Based Businesses

On June 21, 2022, before the market open, Kellogg Co. (NYSE: K) announced that the company’ Board of Directors has approved a plan to separate the company into three standalone, publicly traded companies. The separation, which is posited to be completed via tax-free spin-offs, will result in shareholders of record owning interest in: “Global Snacking Co.”, “North America Cereal Co.”, and “Pant Co.”.

In terms of timing, management is currently targeting both spin-offs to be completed by year-end 2023, with the North America Cereal Co. separation to precede the spin-off of Plant Co. The company has stated that it expects Global Snacking Co. to maintain an investment grade credit rating.

Kellogg is a global manufacturer and marketer of snacks and convenience foods, with well known snacks marketed under the Kellogg’s, Cheez-It, Pringles, and RXBAR, amongst others. Cereal and cereal bars are generally branded under the Kellogg’s name, as well as Kashi and Bear Naked brands. Additionally, the company has frozen food brands Eggo and Morningstar Farms. In its current corporate structure, in 2021 K generated $14.2 billion in revenue and $2.5 billion in adjusted EBITDA. The company has struggled with overall growth as stagnant or declining sales at the Cereal category has obfuscated growth opportunities available to the Snacks and Other categories, primarily plant based products.

Following the separation:

Global Snacking Co. generated pro forma 2021 sales and EBITDA of $11.4 billion and $2.0 billion, respectively. The company will control well-known brands including Pringles, Cheez-It, Pop-Tarts, Kellogg’s Rice Krispies Treats, Nutri-Grain, and RXBAR, amongst others, which represent approximately 60% of the company’s sales. Global Snacking will also retain the international cereal business, which will represent less than 25% of sales and provides scale and growth opportunities moving forward. North America will represent just under 50% of the new company’s revenue. Management expects the Snaking business to generate high single digit revenue growth with margin expansion opportunities.

North America Cereal Co. will be a leader in cereal in the U.S., Canada, and Caribbean markets, with 2021 sales of $2.4 billion and EBITDA of approximately $250 million. Key brands include Kellogg’s, Frosted Flakes, Froot Loops, Special K, Rice Krispies, and Kashi, amongst others. Looking forward, the company will initially be focused on recovering from current struggles with supply chain issues by restoring its inventory, margins, and share position following 2021. Management expects the company to largely generate “stable net sales over time”, with opportunities to widen profit margins and generate higher cash flow.

Plant Co., the smallest of the post-separation companies by revenue, is anchored by the Morningstar Farms brand of plant based burgers, “Chik’n”, sausage, and other products. On a pro-forma basis the company generated 2021 sales and EBITDA of $340 million and $50 million, respectively. The company will initially be focused on growth opportunities within the U.S., Canada, and Caribbean markets, with further international expansion opportunities in the future.

PRELIMINARY VALUATION

In terms of rationale, the separation accomplishes two main objectives. First, as standalone companies each will have greater access to growth capital investment opportunities given the reduction in competition for dollar spend from the other categories. Secondly, the growth attributes of the Snacks and Plant companies will be more apparent ex the more stable growth of Cereal. Additionally, it could be suggested that as standalone companies each of the post-spin entities may be more attractive acquisition targets given their smaller relative size (as compared to current K) and more focused product offerings.

Following the separation, each company should be re-rated to more accurately reflect the pure-play nature of their respective businesses. For its part, the parent Snacks company will likely be placed into the same category as snack and beverage manufacturers such as Mondelez International Inc. (NASDAQ: MDLZ), J&J Snack Foods Corp. (NASDAQ: JJSF), and Hostess Brands Inc. (NASDAQ: TWNK), amongst others, which currently trade on average at 14.3x 2023 consensus EBITDA estimates. Notably MDLZ, which itself was a spin-off from Kraft, currently trades at the high end of the peer group at 15.7x. Cereal will be comped to General Mills Inc. (NYSE: GIS) and Post Holdings Inc. (NYSE: POST), which trade at 13.6x and 10.0x their respective 2023 EBITDA estimates. Lastly, Plant Co. is likely to be compared to the likes of other plant based and vegan focused public companies, which includes Beyond Meat Inc. (NASDAQ: BYND), Oatly Group AB (NASDAQ: OTLY), and Tattooed Chef Inc. (NASDAQ: TTCF). Notably Plant Co.’s peers are unprofitable on both EPS and EBITDA basis, and mostly trade in a range of 1.0x to 2.0x EV to 2023E sales. (BYND currently trades at 3.0x sales, which we attribute to the name brand recognition.)

Based on pro-forma, post-spin 2021 company results, we forecast Snacks, Cereal, and Plant will generate 2023 revenue of $12.8 billion, $2.4 billion, and $419 million, respectively, as Snacks generates mid-to-high single digit growth, Cereal maintains its current sales level, and Plant grows at low double digit. Assuming stable margins, Snacks would generate 2023 EBITDA of almost $2.3 billion, while Cereal would generate $250 million in EBITDA. Applying a slight discounted peer multiple of 14.0x to Snacks implies an enterprise value of $31.5 billion. Cereal likely will trade at the lower end of the peer group given a lack of material growth, as such we apply a 10.0x multiple, inline with POST, resulting in an enterprise value of $2.5 billion. Given the lack of profitability at Plant Co.’s peers, we value shares at 1.5x our 2023 revenue estimate, implying a $628 million enterprise value. Notably our Plant Co. valuation equates to a 10.2x EV/EBITDA multiple assuming stable 14.7% EBITDA margins for the company, which we view as reasonable if not conservative for the growth and profitability profile combined with the view that the MorningStar Farms brand may be an attractive acquisition target.

On a preliminary sum-of-the-parts basis, we estimate that shares of Kellogg Co. are fairly valued at $78 per share based on the above post-spin company valuations and including current net debt of $8.1 billion and 337.9 million shares outstanding.

Drop Coverage of Vector Group Ltd. and Douglass Elliman Inc. Effective Immediately

• On December 29, 2021, after the market close, Vector Group Ltd. (NYSE: VGR) completed the spin off of its real estate brokerage business Douglas Elliman Inc. (NYSE: DOUG).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Vector Group Ltd. and Douglas Elliman Inc. effective immediately.
• Our prior estimates and fair values for VGR, and DOUG should no longer be relied on

NRS remains a standout in 3Q F2022 with better than 100% recurring revenue growth and EBITDA positivity; Net2Phone spin off is on hold until market conditions improve amid a renewed focus on profitability; fair value revised to $55 per share (from $60)

• Last night, after the market close, IDT reported 3Q F2022 results, which demonstrated a 12% decline in consolidated sales to $328 million (vs. $374 million in 3Q F2021) while adjusted EBITDA remained roughly flat at $18.0 million (vs. $17.9 million in the prior period). Adjusted EPS were $0.23 per share (vs. $0.47 in 3Q F2021).
• Notably, at NRS, sales increased 78% to ~$11.4 million, driven by robust growth in both NRS Pay and advertising/data revenue, with recurring revenue increasing ~102% to $10.0 million. (Anecdotally, NRS generated EBITDA of ~$1.9 million in 3Q F2022).
• At Net2Phone, sales increased 37% to $15.6 million with a 42% increase in subscription revenue to $14.2 million. The adj. EBITDA loss improved to $0.9 million (from a loss of $2.9 million a year ago).
• At Traditional Communications, sales declined ~17% to $286 million, including a ~13% decline at Mobile Top-Up along with 24% decline in IDT’s legacy communications businesses, while segment adjusted EBITDA declined ~14% to $19.9 million.
• The company ended 3Q F2021 no debt and $136.0 million in net cash (or roughly $5.20 per share).
• On the topic of the recently delayed spin-off of Net2Phone, IDT’s cloud communications (UCaaS) business, due to “current market conditions”, the company did not commit to a specific timeline but indicated that it will continue to execute on its growth strategy (while striving to make the business “bottom line accretive”) and “monetize the business at an opportune time”. (For our part, we continue to think this was a logical decision in the current environment and that, in any event, the eventual spin-off of NRS is the far bigger catalyst to unlock what we view as significant value.)
• Our base case fair value estimate is revised to $55 per share (from $60 per share), which values IDT’s Traditional Communications segment at 4.5x (previously 5.0x) F2023E EBITDA, applies sales multiples of 2.5x and ~7.5x (previously 8x) to the company’s Net2Phone and Fintech businesses, respectively, and accounts for ~$184.5 million of projected net cash (see Exhibit #1 on page 2).

UHAL posts full-year F2022 EPS growth of ~84% to $57.29 per share; we still see the potential to unlock value from self-storage business in 2022-2023

• UHAL reported 4Q F2022 sales up ~13% to $1.198 billion while operating income and EPS increased ~18% to $155.4 million and $4.42, respectively. By our calculation, EBITDA declined ~3% to $276.9 million (reflecting a more than 20% decline in D&A expense).
• At the core-Moving & Storage segment, 4Q F2022 sales increased 13.5% to $1.1 billion, reflecting a ~12% increase at Moving and a 28% rise at Storage. Operating income increased ~15% to $134.4 million.
• For full-year F2022, consolidated sales increased ~26.5% to $5.74 billion while operating income increased ~71% to $1.64 billion and EPS jumped ~84% to $57.29. By our calculation, EBITDA increased ~35.5% to $2.128 billion
• At core-Moving & Storage, full year sales increased ~27.5% to ~5.4 billion, reflecting a 28% increase at Moving and a 29% expansion at Storage. Operating income improved ~74% to $1.577 billion.
• At year-end, UHAL had net debt of ~$3.3 billion (compared with $3.475 billion at the end of F2021 and ~$4.13 billion at the end of F2020) and a net leverage ratio of ~1.5x , by our calculation.
• In terms of conference call commentary, while no incremental update was provided on the potential to unlock value from the company’s self-storage assets, which we view as undervalued, a long-time investor reiterated the points (without push back) that management should, over the next six months, move to close the perceived valuation gap (relative to self-storage peers) as well as institute a “firm” dividend policy, buy back stock, enact a stock split and change the corporate moniker to U-Haul.
• Our fair value estimate remains $765 per share, reflecting a blended multiple of ~8.5x on F2023E Moving & Storage EBITDA of $2.06 billion, the insurance assets at 0.5x book value and net debt of ~$3.07 billion (see Exhibit #1 on page 2).

MATW posts 4Q F2018 results slightly ahead of consensus; management sees mid to high single digit growth in adj. EBITDA and EPS for F2019; withdraw coverage of MATW, as of today’s close

• Last night, after the market close, MATW reported 4Q F2018 consolidated sales growth of ~3% to $407.4 million (compared with consensus of $406.8 million) with adjusted EBITDA growth of ~20% to $77 million (versus consensus of $74.1 million) and adj. EPS growth of 16% to $1.23 (compared with consensus of $1.21).
• For full-year F2019, consolidated sales rose almost 6% to $1.6 billion with ~7% growth in adj. EBITDA to $255 million and 10% adj. EPS growth of $3.96.
• The company ended F2018 with net debt of ~$919 million, including $960.6 million of debt and $41.6 million of cash, and a leverage ratio of 3.6x.
• For F2019, management guided to adj. EBITDA growth in the “mid-to-high single digit” range with adjusted EPS growth in the “mid-single digit” range.
• Decent F2018 results and F2019 outlook notwithstanding we will withdraw coverage/recommendation of MATW, as of today’s close, to concentrate on ideas where we see more compelling valuations and higher likelihoods that potential transactional catalysts will emerge (e.g., BEL and RDI).
• For context, shares of MATW have declined ~17% since our re-recommendation in December 2017 (compared with a 2.3% gain in the S&P 500 and a 0.5% decline in the Russell 2000). [Note: we had previously recommended MATW between March-November 2016 during which time the shares appreciated ~40% (versus a ~7% gain in the S&P and a ~19% rise in the Russell).

PAR tops consensus in 1Q 2022, inches closer to profitability; we think a sale of the Government business is in the offing and would provide significant incremental capital for growth in Restaurants (and/or share repurchases)

• Last night, after the market close, PAR reported 1Q 2022 consolidated sales up 47.4% to $80.3 million (vs. consensus of $74.6 million) with adj. EBITDA and EPS losses of $2.9 million and $0.26, respectively (vs. consensus loss expectations of $4.3 million and $0.43 and prior year losses of $4.855 million and $0.34).
• By segment, revenue at the Restaurants/Retail segment rose ~60% to $58.85 million while Government segment sales rose ~47% to $80.285 million, driven, in part, by the recently secured contract with the U.S. Air Force.
• At the end of 1Q 2022, PAR’s run-rate of annual recurring revenue (ARR) was up 172% at $94.4 million. (As well, management notes that over the last two years the gross margin on ARR has risen to ~72% from the low-40%s).
• The company does not provide any explicit financial guidance but anecdotally maintained its expectation that ARR would grow 30%-40% annually over the next several years.
• As well, while management eschewed any specific commentary on the potential monetization of the non-core Government segment it did acknowledge, at least anecdotally, that it seems more likely that PAR would be able to receive the valuation multiple and price internally deemed fair as growth ramps from the aforementioned U.S. Air Force contract. On the conference call, an investor suggested the business could be worth $200 million (essentially double what is factored into our valuation framework) and would provide incremental growth capital to the core business (limiting the risk for potential dilution) as well as increased firepower for share repurchases.
• Our fair value estimate on PAR is revised to $55 (from $68 per share), reflecting value of $59 per share for the Restaurants/Retail segment, based on a blended sales multiple of 4.8 (previously 5.8x) and $3 per share for the Government business, based on an 12x EV/EBITDA multiple (previously 11x), and accounting for ~$225 million of projected net debt.

XPO top consensus in 1Q 2022 and increases full-year adj. EBITDA and EPS guidance; leverage ratio falls to 2.0x (from 2.7x); spin-off of North American Truck Brokerage still on track for 4Q 2022 and we continue to expect a sale or listing of the European operations

• XPO Logistics posted consolidated sales growth of ~16% to $3.47 billion (compared with consensus of $3.214 billion) with adjusted EBITDA growth of 15% to $321 million (compared with consensus of $286 million) and adj. EPS growth of ~58% to $1.25 (versus consensus of $0.93).
• Free cash flow improved almost 70% to $66 million and following the sale of its intermodal business for ~$710 million in March 2022 the company ended 1Q 2022 with a net leverage ratio of 2.0x (compared with 2.7x at the end of 2021). We expect the company will continue to pursue the sale or listing of its European operations, which should help bring the company toward the lower end of its targeted leverage range of 1.0x-2.0x.
• In terms of guidance, XPO increased its full-year 2022 financial targets, which now reflect the intermodal divestiture and call for consolidated adjusted EBITDA of $1.35-$1.39 billion (previously management’s guide of $1.36-$1.4 billion included the intermodal business’ contribution) and adj. EBITDA of $5.20-$5.60 (previously $5.00-$5.45). Free cash flow is still expected to be $425 million (or ~$3.65 per share; see Exhibit #1 on page 2). Anecdotally, XPO still expects its core LTL business to generate adj. EBITDA of “at least $1 billion” in 2022.
• On the spin-off front, XPO named Drew Wilkerson to lead the standalone North American Truck Brokerage business, which is still expected to be spun-off in 4Q 2022.
• Our fair value estimate is revised to $86 per share (from $92 per share) based on a blended multiple of ~9.0x (previously 9.5x), reflecting 8.5x for LTL (previously 9.5x), 10.5x for Truck Brokerage/Last Mile and 8x for Europe, on 2023E adj. EBITDA of $1.405 billion (along with projected net debt of ~$2.2 billion (see Exhibit #1 on page 2).