Douglas Elliman Reports First Quarter as a Standalone Entity; Maintain BUY Rating, Adjust FVE to $14 per share

• On March 1, 2022, after the market close, Douglas Elliman Inc. (NYSE: DOUG) reported 4Q 2021 and full year 2021 results, which is the first report as a standalone entity following being spun off from Vector Group Ltd. (NYSE: VGR) in December 2021.
• DOUG full year results included consolidated revenue of $1.35 billion and adjusted EBITDA of $110.7 million, representing respective increases of 75% and 402% versus 2020 results.
• DOUG’s financial performance benefited from broad secular trends including increased home ownership percentage, new and existing home sales, and median home price increases through the year. Management comments suggests a positive view on these trends continuing.
• We remain attracted to DOUG’s business characteristics including exposure to luxury markets, including New York City, and expanding geographic exposure to include other high value markets.
• We adjust our fair value estimate to $14 per share, from $15 per share, as we moderate our valuation multiple to 7.0x (from 8.0x) while fine-tuning our 2023 EBITDA estimate of $123 million and maintaining our BUY rating.
• In support of our valuation, we look to peers RE/MAX Holdings Inc. (NYSE: RMAX) and Realogy Holdings Corp. (NYSE: RLGY), which currently trade at 5.4x and 9.2x their respective 2023 consensus EBITDA estimate. It is our opinion that DOUG shares are undervalued at the current price. At yesterday’s closing price shares were trading at less than 3x our 2023 EBITDA estimate.
• For more details, please refer to The Spin Off Report dated November 29, 2021, and UPDATES dated December 17, 2021, and December 30, 2021.

Drop Coverage of Tenet Healthcare Corp. Effective Immediately

• On March 1, 2022, before the market open, Tenet Healthcare Corp. (NYSE: THC) announced that the company would no longer pursue a spin-off of its Conifer Health Solutions subsidiary.
• Management cited ongoing improved business fundamental and value creation opportunities arising from keeping ownership of Conifer as the primary rationale for cancelling the planned spin-off.
• Given the cancellation, we DROP coverage of Tenet Healthcare Corp. effective immediately.
• Our prior estimates and fair value for THC should no longer be relied on.

Drop Coverage of Dell Technologies Inc. and VMware Inc. Effective Immediately

• On November 1, 2021, after the market close, Dell Technologies Inc. (NYSE: DELL). completed the spin-off of its 80.6% ownership stake in VMware Inc. (NYSE: VMW).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Dell Technologies Inc. and VMware Inc. effective immediately.
• Our prior estimates and fair values for DELL and VMW should no longer be relied on.

Drop Coverage of CommScope Holding Co. Inc Effective Immediately

• On February 17, 2022, before the market open, CommScope Holding Co. Inc. (NASDAQ: COMM) announced that it has deferred its planned spin-off of its Home Network business.
• COMM cites supply chain disruptions for the segments poor results, which included a 18% decline in 4Q 2021 segment revenue, as the primary reason that markets are currently not conducive to a separation of the Home Networks business at this time.
• Management indicates that the company is still committed to separating Home Networks into a standalone company, however the timing of a spin-off cannot currently be estimated.
• Given the lack of clarity on when a spin-off will occur, we DROP coverage of CommScope effective immediately. We would resume coverage if the company were to begin moving forward with a separation.
• Our prior estimates and fair values for COMM should no longer be relied on.

Please see the attached Hidden Opportunities Update on GXO Logistics, Inc. (NYSE: GXO)/XPO Logistics, Inc. (NYSE: XPO).

GXO tops consensus in 4Q 2021 and modestly raises 2022E adj. EBITDA (and adj. EBITDAR) guidance; intends to issue long-term financial targets later this year; fair value remains $89 per share

• Last night, after the market close, GXO, the contract logistics business spun off from XPO Logistics (NYSE: XPO) in August 2021, reported a 28% increase in 4Q 2021 sales, of which ~19% was organic, to $2.26 billion (vs. consensus of $2.05 billion) with a ~14.5% rise in adjusted EBITDA to $167 million (vs. consensus of $158 million). Adjusted EPS doubled to $0.48 (compared with consensus of $0.53 and $0.24 in the prior year period).
• For full-year 2021, GXO sales increased ~27.5% to $7.94 billion with a 38.5% rise in adjusted EBITDA to $633 million. Adjusted EPS were $2.09 (compared with $0.55 in 2020).
• The company generated $216 million in free cash flow in 2021 and ended the year with net debt of $628 million as well as a net leverage ratio of ~1.0x (compared with 1.3x at the end of 3Q 2021).
• For 2022E, GXO maintained its previously articulated top-line guidance calling for organic top-line growth of 8%-12% while modestly increasing its adjusted EBITDA guidance to $707-$742 million (up from $705-$740 million) as well as its adjusted EBITDAR forecast to $1.5-$1.6 billion (up from $1.5 billion). Free cash flow is expected to be ~30% of adjusted EBITDA. For context, this guidance compares with current sales and adj. EBITDA consensus of $8.5 billion, implying a ~7% year over year increase, and $728.7 million, respectively.
• As well, GXO indicated that they intend to outline more specific long-term financial targets later this year; previous anecdotal indications have suggested GXO could sustain “double-digit” sales and adj. EBITDA growth as the company sees “secular tailwinds” from E-Commerce, Automation and Outsourcing underpinning the opportunity in a large (i.e., TAM of ~$430 billion) and fragmented (i.e., top 5 players control less than 25%) market.
• Our fair value remains ~$89 per share by applying a 15x multiple, roughly in-line with its IFRS adjusted peers as well as management’s “mid-teens” commentary, to 2022E adj. EBITDA of $735 million (see Exhibit #1 on page 2).
• That said, with GXO trading near fair value and a lack of incremental catalysts (as GXO is a pure play) we will withdraw coverage, as of today’s close. For context, shares of XPO/GXO have collectively advanced ~25.3% since our initial pre-spin recommendation (vs. a ~10% gain in the S&P and an ~11% rise in the Russell).

GTX posts full-year 2021 results in-line with guidance as well as a net leverage ratio below 2x (with further improvement expected in 1Q 2022); 2022E guidance, at the mid-point, calls for sales, adj. EBITDA and FCF growth of ~4%, ~2% and ~22.5%, respectively

• GTX posted full-year 2021 net sales growth of 15% to $3.63 billion, compared with global light vehicle production of ~2.5%, with a ~38% increase in adjusted EBITDA to $607 million, which reflects a 220-basis point improvement in the margin to 16.7% (and an incremental margin of ~28%). Free cash flow (FCF) improved significantly to $367 million (from $128 million in 2020). Results compare with management’s most recent full-year guidance calling for sales of $3.6-$3.7 billion with adj. EBITDA of $590-$630 million and adj. FCF of $280-$340 million (see Exhibit #1 on page 2).
• The company ended 2021 with a net leverage ratio, including Series B Preferred stock, of 1.95x (versus 2.55x at the end of 3Q 2021 and 2.73x at the end of 2Q 2021), reflecting solid FCF conversion and the prepayment of $211 million in the Series B stock (with an additional payment of $197 million expected in 1Q 2022). In our view, these steps mark solid progress toward the de-leveraging and simplification of GTX’s 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. In terms of additional capital allocation measures, the company also bought back $19 million of equity, comprised of ~510K common shares and 1.8 million Preferred A shares, on the $100 million buyback program that was authorized in November 2021.
• Given current market conditions, which continue to be impacted by the on-going chip shortage/supply chain disruptions, management issued initial 2022E guidance calling for net sales growth of 4%-13% to $3.7-$4.0 billion with adjusted EBITDA of $590-$650 million (compared with GTX’s initial lender projections of $3.83 billion $596 million, respectively). Adjusted free cash flow is expected to be $$400-$500 million (see Exhibit #1 on page 2).
• Our fair value estimate remains ~$12 per share, which reflects a constant 8.5x multiple on our 2023E adjusted net income forecast of $470 million (previously $475 million) and a diluted share count of ~325 million (previously ~333 million). For context, on an EV/EBITDA basis, our valuation implies a ~6.5x multiple (see Exhibit #2 on page 2).

Please see the attached Hidden Opportunities Update on Encompass Health Corp. (NYSE: EHC).

EHC posts 4Q 2021 results and 2022E guidance that modestly lagged consensus; tax-free spin-off its Home Health & Hospice business still expected to be completed in 1H 2022; fair value revised to $81.50 (from $83.50), announces a tax-free to spin-off its Home Health & Hospice business with planned completion in 1H 2022

• Last night, EHC reported 4Q 2021 sales up 8.6% to ~$1.319 (compared with consensus of $1.31 billion) with a 5.3% increase in adjusted EBITDA to $252.7 million (versus consensus of $256.6 million) and adjusted EPS of $0.97 (compared with consensus of $1.05).
• By segment, Inpatient Rehabilitation sales increased ~12% to $1.04 billion with an ~8% rise in adjusted EBITDA to $236.3 million while Home Health & Hospice revenue was down 1.8% at ~$276 million with a ~5% decline in adj. EBITDA to $52.6 million.
• The company ended 2021 with net debt of ~$3.23 billion, including cash of $55 million and debt of $3.286 billion, and a leverage ratio, by our calculation, of 3.1x (compared with 3.1x in 3Q 2021, 3.6x at year end 2020 and its covenant of 5.5x, which steps down to 4.25x in 2022).
• In terms of guidance, management introduced initial full year 2022E forecasts (see Exhibit #1 on page 2), which called for consolidated sales $5.38-$5.5 billion (compared with current consensus of $5.498 billion), adjusted EBITDA of $1.015-$1.065 billion (versus consensus of $1.075 billion) and adj. EPS of $3.83-$4.19 (compared with the consensus estimate of $4.36).
• That said, the company maintained its long-term growth targets (i.e.,2022-2026versus prior 2020-2025) for both IR and HH&H, which call for discharge and admissions growth of 6%-18% and 10%-15%, respectively (see Exhibit #2 on page 2).
• The company continues to expect that the previously announced spin-off of its Home Health & Hospice business, which will be rebranded Enhabit Home Health & Hospice, will be completed in 1H 2022. The company expects post spin Enhabit to be levered at 3.0x-3.25x (with post-spin EHC at 2.5x-3.5x). In terms of incremental costs, Enhabit will likely see $26-$28 million of annualized G&A costs (offset by a reduction of $5-$10 million at EHC).
• Our fair value is revised to $81.50 per share (from $83.50), reflecting an unchanged blended multiple of 9.7x on 2023E adjusted EBITDA of ~$1.2 billion along with projected net debt, including minority interest, of ~$3.425 billion (previously $3.23 billion; see Exhibit #3 on page 2).

Exelon Corp Completes Spin-Off of Constellation Energy; Rate Constellation at NEUTRAL with a $49 Fair Value Estimate, and Post-Spin Exelon at NEUTRAL with a $43 Fair Value Estimate

• On February 1, 2022, after the market close, Exelon Corp (NASDAQ: EXC) completed the spin-off of its competitive energy generation business, which has adopted the corporate moniker Constellation Energy Group. Shares of Constellation Energy Group began trading this morning on the NASDAQ under the ticker “CEG”. Exelon shareholders of record received one share of CEG for every three shares of EXC owned.
• Constellation as a standalone company will be a leading clean energy company supplying homes, businesses, public sector entities, community aggregations, and a range of wholesale customers across the continental U.S. The company primarily serves commercial and industrial (C&I) customers, with consistent load capabilities that allow for high customer retention and a growing retail base.
• CEG believes that it is well positioned to benefit from increased clean electricity demand as electrification is set to result in sustained increases in demand in the future. The company has ownership interest in 13 nuclear generating stations, which account for 62% of its supply source.
• Post-spin Exelon will position itself as “the premier transmission and distribution (T&D) utility”. The company will be the largest T&D utility in the U.S., serving approximately 10 million customers and operating across seven different jurisdictions. As a pure-play T&D company, post-spin EXC also points to its ESG profile, having no owned generation.
• In relation to rationale for the separation, investors tend to value the consistent earnings streams provided by pure-play utility companies more highly than the more volatile results of unregulated power concerns (as well as those of hybrid/more integrated models), particularly in the wake of historical transactions at the time that were aimed at improving corporate focus on regulated assets.
• On a post-spin basis, we fairly value shares of CEG at $49 per share and EXC at $43 per share. Given shares of both post-spin companies traded in the when-issued market at roughly our fair value estimates, we rate both CEG and post-spin EXC at NEUTRAL.
• For more details, please refer to The Spin Off Report dated January 24, 2022.

Drop Coverage of Ziff Davis Inc. and Consensus Cloud Solutions Inc. Effective Immediately

• On October 7, 2021, after the market close, J2 Global Inc. (formerly trading on the NYSE under the ticker “JCOM”) completed the spin-off of its digital fax business into a standalone publicly traded company, which adopted the corporate moniker Consensus Cloud Solutions Inc. (“Consensus”)
• Following the separation, J2 Global changed its corporate name to Ziff Davis Inc., and now trades on the NASDAQ under the symbol “ZD”.
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Ziff Davis Inc. and Consensus Cloud Solutions Inc. effective immediately.
• Our prior estimates and fair values for ZD, and CCSI should no longer be relied on.

EHC announces a tax-free to spin-off its Home Health & Hospice business with planned completion in 1H 2022

• Last night, after the market close, EHC announced the spin-off of its Home Health & Hospice business, which marks the culmination of a strategic review that began in December 2020. (For context, the review was, at least in part, prompted by pressure from activist investor Jana Partners, currently a 2% holder, who has most recently advocated for a strategic merger at HH&H prior to its separation.)
• The spin-off entity will be rebranded as Enhabit Home Health & Hospice, a play of its Encompass roots and the word “inhabit”, and the transaction is expected to be completed in 1H 2022 (subject to customary conditions, including the effectiveness of a Form 10, regulatory approval and the receipt of a favorable private letter ruling from the IRS).
• The company expects to report 4Q 2021 results on February 1, 2021, after the market close, and hold a conference call at 10 a.m. (ET) the following morning.
• For the full-year, management has most recently guided to sales, adjusted EBITDA and EPS 0f $5.08-$5.13 billion, $1.025-$1.045 billion and $4.23-$4.38, respectively (see Exhibit #1 on page 2).
• Our fair value is revised to $83.50 per share (from $95), reflecting a blended multiple of 9.7x (previously 10.3x) on 2023E adjusted EBITDA of ~$1.2 billion along with projected net debt, including minority interest, of ~$3.23 billion (see Exhibit #2 on page 2).
• Notably, in-depth coverage of this impending tax-free transaction will also be provided by our colleagues at The Spin-Off Report.