Attached, please see The Spin-Off Report Update on GXO Logistics, Inc. (NYSE: GXO).

GXO tops consensus in first quarter as a standalone public company; modestly increases 2021E sales and adj. EBITDA guidance and maintains 2022E outlook; maintain NEUTRAL rating with a $89 per share Fair Value

• XPO Logistics (NYSE: XPO) completed the spin-off of GXO Logistics (NYSE: GXO), its contract logistics business, on August 2, 2021.
• Today, in its first reported quarter as a standalone public company, GXO posted top-line growth of 24.6% to $1.974 billion (versus consensus of ~$1.9025 billion), driven by solid growth in e-commerce, omnichannel retail, and reverse logistics, with a ~15% increase in adjusted EBITDA to $163 million (compared with consensus of $158 million). Adjusted EPS was $0.56 (compared with consensus of $0.51 and $0.23 in the prior year period).
• The company generated $50 million of free cash flow in 3Q 2021 and ended the quarter with net debt of $757 million, including cash of $275 million, and a net leverage ratio of 1.3x.
• In terms of guidance, the company modestly increased its 2021E outlook, which now calls for sales of $7.6-$7.8 billion (up from$7.5-$7.7 billion) with adjusted EBITDA of $607-$637 million (previously $605-$635 million). The company lowered its tax rate and capital spending expectations to 25%-27% (from 26%-28%) and $225-$250 million (previously $240-$250 million), respectively.
• For 2022E, GXO maintained its previously articulated guidance calling for organic top-line growth of 8%-12% with adjusted EBITDA of $705-$740 million (and adj. EBITDAR of ~$1.5 billion). Longer-term, management has anecdotally suggested that GXO can sustain “double-digit” sales and adj. EBITDA growth as, at least thematically, the company sees “secular tailwinds” from E-Commerce, Automation and Outsourcing underpinning the opportunity within a large (i.e., TAM of ~$430 billion) and fragmented (i.e., top 5 players control less than 25%) market.
• Applying a 15x multiple to 2022E EBITDA of $735 million, which is roughly in-line with IFRS 16 adjusted peers, such as Clipper Logistics (CLG LN), ID Logistics (IDL FP), and Kuehne + Nagel (KNIN SW), as well as management’s “mid-teens” commentary, implies a fair value of $89 per share. Given the implied upside to our fair value estimate we maintain GXO shares at NEUTRAL.
• For more details, please refer to The Spin Off Report dated April 7, 2021.

Regal Rexnord Reports 3Q 2021 Results, Including YoY Revenue Increase of 18% and 140 Basis Points of Margin Expansion; Maintain BUY Rating and $173 FVE

• On November 2, 2021, before the market open, Regal Rexnord Corp. (NYSE: RRX) reported 3Q 2021 results, which included year-over-year revenue increase of 17.7% to $892.7 million and adjusted operating margin of 14.2% versus 12.8% in the prior year period.
• The company also announced the acquisition of Arrowhead Systems, a provider of industrial process automation solutions, for $297 million, and increased its share repurchase authorization to $500 million (previously $250 million).
• Regal Rexnord adjusted its 2022 guidance to account for the previously completed RMT with Rexnord’s P&MC business, and now includes revenue of $5.1 billion, adjusted EBITDA of $1.1 billion (representing an approximate 21% margin), and adjusted diluted EPS of $9.95 to $10.35. Notably the company has changed its adjusted EPS calculation to add back after-tax amortization and stock-based compensation as of 4Q 2021.
• In terms of RRX’s underlying businesses, revenue growth was driven across the board with year-over-year increases of 23.0% at Commercial Systems, 6.6% at Industrial Systems, 14.7% at Climate Solutions, and 24.4% at Power Transmission Solutions; Growth was primarily organic in nature.
• We now fairly value shares of Regal Rexnord at $176 per share (previously $173 per share) which is based an average of a 12.0x multiple on our 2022 EBITDA estimate of $1.1 billion and a 19.0x multiple on our revised 2022 EPS estimate of $9.35 (revised from $8.99 on a slightly lower tax rate estimate). We note our fair value estimate incorporates an estimated $1.1 billion in net debt, which is based off dated pro-forma disclosures from the company’s RMT filings. Balance sheet disclosures in this morning’s earnings release do not appear to incorporate the full impact of the previously conducted transactions, as such we view it as prudent and conservative to use the pro forma estimates in our fair value calculation.
• With the RRX fair value representing approximately 17% upside from the current share price, we expect the trading price of RRX to increase from current levels due to multiple expansion, to more closely approximate peers. We believe that multiple expansion is warranted based on the improved margin profile of RRX when incorporating the earnings contribution of P&MC, combined with the expectation of expanding end-markets driving sustainable mid- to- high single-digit revenue growth in the coming years. RRX should see increased demand, which combined with an improved cost structure is expected to result in sustainable margin improvement. Factoring in cost synergies to be realized from the merger with P&MC, RRX’s earnings outlook should be viewed in a positive light. We acknowledge that cost pressures for raw materials and transportation may temper some of the margin expansion, but we expect the benefits of the merger to mostly offset inflationary pressures. As such, we rate shares of RRX at BUY.
• For more details, please refer to The Spin Off Report dated September 21, 2021, and UPDATEs dated September 28, 2021, and October 5, 2021.

DELL Completes Spin-Off of VMW Shares; Rate DELL at BUY with $65 FVE; Rate VMW at NEUTRAL with $137 FVE

• 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). DELL shareholders of record received approximately 0.44 shares of VMW for each share of DELL owned.
• Prior to the spin-off, VMW issued a $11.5 billion special dividend to VMware shareholders, including DELL, which equates to $25.46 per share. DELL received proceeds of $9.3 billion. Additionally, in conjunction with the share distribution, VMW has collapsed its dual share class structure into a single class structure.
• We maintain our post-spin DELL fair value estimate of $65 per share and BUY rating. Our BUY rating is predicated on our view that DELL shares are undervalued versus peers, and the spin-off of its VMW ownership position presents a clearer investment case to shareholders. We expect that the valuation discount will narrow in the near term. Our fair value estimate is based on 7.0x multiple on our F2023 EBITDA estimate of $10.2 billion.
• Based on DELL’s closing price last night in the when-issued market, shares are trading at 6.4x our 2023 EBITDA estimate.
• We maintain our post-dividend fair value estimate on VMW of $140 per share and rate shares at NEUTRAL as we do not necessarily see the distribution of shares from DELL as a catalyst to price appreciation. That said, we do note that the separation from DELL has several benefits to VMW, including increased float, a simplified capital structure due to the collapsing of the dual-class equity structure, and potential inclusion in major indexes, of which it is currently not a member. If included in the S&P 500, for example, for which its market capitalization certainly would qualify it, the shares could see buying pressure in the near term that could provide upside potential to our fair value estimate.
• Our VMW fair value estimate is based on a 15.0x multiple on our F2023 EBITDA estimate of $4.5 billion.
• For more details, please refer to The Spin Off Report dated October 26, 2021.

Attached, please see The Spin-Off Report Update on Bath & Body Works (NYSE: BBWI) and Victoria’s Secret & Co. (NYSE: VSCO). 

Drop Coverage of Bath & Body Works, Inc., and Victoria’s Secret & Co. Effective Immediately  

• On August 2, 2021, L Brands (formerly NYSE: LB) completed the separation of Bath & Body Works (NYSE: BBWI) and Victoria’s Secret & Co. (NYSE: VSCO).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Bath & Body Works and Victoria’s Secret effective immediately.
• Our prior estimates and fair values for BBWI, and VSCO should no longer be relied on.

Adjusting Pre- and Post-Spin FVEs Based on Current Business Trends, Lower Earnings Estimates and Valuation Multiples; Maintain NEUTRAL Rating on Pre-Spin IBM

• International Business Machines Corp. (NYSE: IBM) and Kyndryl Holdings Inc. have begun trading in the when-issued market ahead of the company’s spin-off, which is expected to be completed on November 3, 2021. Kyndryl is currently trading under the ticker “KD-W”, and will begin trading regular-way on the NYSE under the symbol “KD” on November 4, 2021.
• In early trading, albeit with relatively light overall volume, Kyndryl is trading well below our initial pre-spin fair value estimate. KD-W is currently trading at $32 per share.
• We are adjusting our post-spin earnings estimates to account for the company’s recent 3Q 2021 earnings release and management commentary, which more accurately reflects the current operating environment for both post-spin entities.
• 3Q 2021 consolidated revenue declined by 6% with adjusted EBITDA margins contracting 270 basis points versus 3Q 2020. Notably, management stated that IBM, ex-KD, revenue increased 2% in 3Q 2021, versus 1% growth in 2Q 2021 and a decline of 1% in 1Q 2021.
• We adjust our revenue and earnings estimates for both post-spin entities and now forecast KD revenue and EBITDA of $18.3 billion and $2.6 billion, respectively, and $59.3 billion and $14.8 billion in revenue and EBITDA, respectively, for post-spin IBM.
• We now fairly value shares of Kyndryl at $46 per share, which is derived by applying a 4.5x multiple to our 2022 EBITDA estimate. Our prior KD valuation admittedly gave too lofty a multiple for what is a legacy managed infrastructure business with challenges to revenue growth that increasingly competes with hybrid cloud service providers.
• Our revised multiple is a half turn premium to the current DXC Technology Co.’s (NYSE: DXC) multiple, which is the low end of the peer group, and a slight discount to DXC’s historic average forward EV/EBITDA multiple, which we view as appropriate given current business trends and revised comparable group. At the current when-issued price KD-W is trading roughly in line with DXC.
• Notably, KD would have generated $800 million in free cash flow in 2020 on a pro-forma basis. Assuming $700 million in free cash flow generation on a go forward basis, shares at the current when-issued price would yield ~9.5% and ~7% at our revised fair value estimate.
• We now fairly value shares of post-spin IBM at $128 per share, which is derived by applying an 11x multiple to our 2022 EBITDA estimate and incorporates approximately $2 per share in value for the retained ownership in KD. On a pre-spin basis we assign a $138 per share fair value estimate to IBM and maintain our NUETRAL rating.
• Despite the change in post-spin value assignments, our overall conservative view on the post-spin business’ prospects remains intact. For the parent company revenue growth from RedHat and consulting are likely at least partially offset by the declines in the larger portions of the remaining businesses, which will result in minimal growth in the near term.
• The largest issue going forward for KD is the company’s ability to drive sustainable revenue growth and margin expansion to operate profitably on a both a net earnings and cash flow basis. Revenue declines, from both discrete portfolio actions (i.e., prioritizing higher-margin businesses) and COVID-related effects, appear to be easing, as indicated by revenue trends through 1H 2021. However, margin expansion has yet to materialize, and sustained revenue growth may be difficult to achieve.
• As such we would be reluctant to recommend either post spin company absent a significant mispricing that would provide a margin of safety well beyond that which the current when-issued pricing provides.
• We reserve placing post-spin recommendations on IBM and KD given the light trading volume in the when-issued market prevents any reasonable position being established.
• For more details, please refer to The Spin Off Report dated October 18, 2021.

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

GTX posts top- and bottom-line growth in 3Q 2021 as its volume outpaces global auto production by 1900 bps; given current supply chain trends GTX reduced the high-end of its 2021 adj. EBITDA guidance by ~3% to $620 million

• GTX posted 3Q 2021 net sales growth of 2.2%% to $839 million, despite a 1% decline in volume to 3.1 million units, with a ~12% increase in adjusted EBITDA to $134 million, which reflects a 110-basis point improvement in the margin to 16.0% (and an incremental margin of ~40%).  Results compare with the sales and adj. EBITDA “guidance” provided in a February 2021 presentation to lenders of $845 million, which was based on production volume of 3.25 million units, and $124 million, respectively. [Note: there are currently no consensus estimates.]
• The company ended 3Q 2021 with a leverage ratio of 1.23x, including $456 million of unrestricted cash (up from $401 in 2Q 2021). Including $585 million of Series B Preferred stock, the leverage ratio is 2.55x. (For context, current leverage figures compare with 1.37x and 2.73x, respectively, at the end of 2Q 2021.) 
• Importantly, GTX expects to partially call ~$213 million of its Series B Preferred stock in 1Q 2022, which, in our view, is a solid step 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 estimate will be completed, at the latest, by April 2023.
• Given current market conditions, which continue to be impacted by the on-going chip shortage/supply chain disruptions, management modestly lowered its full-year 2021 guidance calling for 14%-17% sales growth (previously 18%-23%) to $3.6-$3.7 billion (compared with previous guide of $3.7-$3.9 billion and its initial lender “guidance of $3.485 billion) with adjusted EBITDA of $590-$620 million (compared with the previous guide of $590-$640 million and GTX’s initial lender projection of $520 million). Adjusted free cash flow is expected to be $280-$340 million in 2021 (see Exhibit #1 on page 2). (Anecdotally, GTX indicated that it expects supply chain disruptions to persist through 1H 2022 but with a strong rebound in 2H 2022.)
• Our fair value estimate remains $12 per share, which reflects a constant 8.5x multiple on our 2023E net income forecast of $475 million and a diluted share count of ~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 3Q 2021 miss and lowers full-year sales, adj. EBITDA and EPS guidance by a modest 1.5%-2.5% due to “transient” challenges; strategic review persists but EHC expects a transaction in 1H 2022 and to provide more precise info on timing and form in connection with 4Q 2021 results; fair value revised to $95 per share (from $101)

• EHC reported 3Q 2021 sales up ~9.5% to $1.285 billion (compared with consensus of $1.31 billion) with a ~7% increase in adjusted EBITDA to $245.6 million (versus consensus of $260.5 million) and adj. EPS of $1.03 (compared with consensus of $1.06 and $0.78 in the year-ago period). Adjusted free cash flow was flat for the quarter at $124 million (but up 19% to $437 million year-to date).
• By segment, Inpatient Rehabilitation sales increased ~12.5% to $1.01 billion with an ~11% rise in adjusted EBITDA to $231.6 million while Home Health & Hospice revenue was down 0.2% at ~$274 million with an 11% decline in adj. EBITDA to $46.4 million.
• The company ended 3Q 2021 with net debt of ~$3.1 billion, including cash of $95 million and debt of $3.2 billion, and a leverage ratio, by our calculation, of 3.1x (compared with 3.1x in 2Q 2021, 3.6x at year end 2020 and its covenant of 5.5x, which steps down to 4.25x in 2022).
• As well, management lowered full year sales, adjusted EBITDA and EPS guidance to $5.08-$5.13 billion (from $5.1-$5.25 billion), $1.025-$1.045 billion (from $1.05-$1.07 billion) and $4.23-$4.38 (from $4.32-$4.47), respectively (see Exhibit #1 on page 2) due to what it describes as “transient” challenges. For context, guidance compares with our 2021 sales, adj. EBITDA and EPS forecasts of $5.03 billion, $1.021 billion and $4.26, respectively, and current consensus estimates of $5.18 billion, $1.06 billion, and $4.41, respectively.
• Importantly, EHC indicated that while its exploration of strategic alternatives, which could include a carve-out, IPO, spin-off or split-off of its HH&H business, remains on-going the company is targeting a transaction in 1H 2022 and expects to provide more precision, in terms of timing and form, in connection with its 4Q 2021 earnings release.
• Our fair value is revised to $95 per share (from $101), reflecting a blended multiple of 10.3x (previously 11x) on 2023E adjusted EBITDA of ~$1.2 billion along with projected net debt, including minority interest, of ~$2.945 billion (see Exhibit #2 on page 2). That said, we may make further adjustments following this morning’s conference call at 10 a.m. (ET); call-in at (800) 347-7407 with passcode EHCQ321.

Drop Coverage of Merck & Co. Inc. and Organon & Co. Effective Immediately

• On June 2, 2021, Merck & Co. Inc. (NYSE: MRK) completed the spin-off of Organon & Co. (NYSE: OGN).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Merck & Co. Inc. and Organon & Co. effective immediately.
• Our prior estimates and fair values for MRK, and OGN should no longer be relied on.

Drop Coverage of SolarWinds Corp. and N-able Inc. Effective Immediately

• On July 19, 2021, SolarWinds Corp. (NYSE: SWI) completed the spin-off of N-able Inc. (NYSE: NABL).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of SolarWinds Corp. and N-able Inc. effective immediately.
• Our prior estimates and fair values for SWI, and NABL should no longer be relied on.

Drop Coverage of DTE Energy Co. and DT Midstream Inc. Effective Immediately

• On July 1, 2021, before the market open, DTE Energy Co. (NYSE: DTE) completed the spin-off of DT Midstream Inc. (NYSE: DTM).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of DTE Energy Co. and DT Midstream Inc. effective immediately.
• Our prior estimates and fair values for DTE, and DTM should no longer be relied on.