Drop Coverage of Verint System Inc. and Cognyte Software Ltd. Effective Immediately

• On February 1, 2021, after the market close, Verint Systems Inc. (NASDAQ: VRNT). completed the spin-off of Cognyte Software Ltd. (NASDAQ: CGNT).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Verint Systems Inc. and Cognyte Software Ltd. effective immediately.
• Our prior estimates and fair values for VRNT, and CGNT should no longer be relied on.

Drop Coverage of PROG Holdings Inc. and Viatris Inc. Effective Immediately

• PROG Holdings Inc. (NYSE: PRG) completed the spin-off of the Aaron’s Company Inc. (NYSE AAN) on November 30, 2020.
• On November 16, 2020, Pfizer Inc. (NYSE: PFE) completed the spin-off of its generic drug business, which upon separation merged with Mylan N.V. to form Viatris Inc. (NASDAQ: VTRS) Inc.
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of PROG Holdings, and Viatris Inc. effective immediately.
• Our prior estimates and fair values for PRG, and VTRS should no longer be relied on.

VSCO reports 2Q F2021 results and issues 3Q F2021 guidance well-below consensus; Maintain NEUTRAL rating while increasing fair value estimate to $69 per share

• Last night, after the market close, VSCO reported 2Q F2021 sales growth of ~51% to $1.61 billion (versus consensus of ~$1.7 billion), reflecting same-store comparable growth of ~5%, with operating income $203 million (compared with guidance of “more than $200 million and a $243 million loss in the prior year period) and EPS of $1.71 (versus consensus of $1.59 per share and an adjusted loss of $0.97 in the 2Q F2020).
• For a degree of additional context on current quarter results, when compared with 2Q F2019 (i.e., pre-pandemic) total sales declined ~10%, reflecting the closure of a net ~240 stores, with a ~3% decline comparable same-store sales. (As well, we would note that in mid-July the company had disclosed that in the first nine-weeks of 2Q F2021 net sales were $1.112 billion, which represented gains of 78% and 3%, respectively, when compared with the same periods in F2020 and F2019.)
• Additionally, the company issued 3Q F2021 guidance calling for sales to increase in the “mid-to-high single digits” (compared with 3Q F2021 sales of ~$1.35 billion) along with EPS of $0.60-$0.70.  Notably, the current consensus estimate for 3Q F2021 EPS is $0.94 while the current top-line consensus projection of $1.52 billion implies a ~12.5% year over year increase.
• Due to “continued uncertainty” in the operating environment, the company did not provide any financial guidance for 4Q F2021 although it did indicate that increases in “freight and product” costs could pose a ~$100 million headwind and that macro challenges may inhibit its ability to accelerate sales growth, on a year over year basis, beyond what is forecasted for 3Q F2021.
• In terms of ancillary guidance, management indicated that full-year F2021 capital spending is projected to be ~$170 million and that net store closures are expected to be 30-40. 
• Anecdotally, the company backed the 3–5-year target of a “mid-teens” operating margin that it communicated at the July 19^th Investor Day.
• While we maintain a NEUTRAL rating, our fair value estimate for VSCO, which completed its tax-free separation from L Brands/Bath & Body Works (NYSE; BBWI) on August 3, 2021, is increased to $69 per share, reflecting a 6.0x multiple (previously 4.5x multiple) on 2022E of $1.1965 billion and net debt of $727 million as well as share count of ~93 million (accounting for the 1-for-3 distribution ratio; see Exhibit on page 2). 
• To that end, we continue to prefer shares of the post-spin parent, BBWI, given its long history of consistent growth (i.e., a double-digit 10-year CAGR) and high-end profitability (i.e., 20%-plus margins) as well as its free cash flow generation potential, which we think will support increased capital returns to shareholders (via share repurchases and dividends). Our fair value estimate for post-spin BBWI remains $73 per share, reflecting a 12.0x multiple on 2022E adjusted EBITDA of $2.034 billion and net debt of ~$3.94 billion. 
• That said, exposure to VSCO could offer more risk-tolerant investors upside optionality if the on-going, multi-faceted turnaround, in terms of both its financial results and brand positioning, gains further traction in the near/medium-term and the potential for a sale in the longer-term.  (On that latter point, the company indicates that before deciding on a spin-off it held “substantive” discussions with and received “significant” interest from “multiple” potential buyers.)
• For more details, please refer to The Spin Off Report dated July 14, 2021.

Please see the attached Hidden Opportunities Update on Arko Corp. (NASDAQ: ARKO).

ARKO reports above consensus 2Q 2021 results; M&A pipeline is full (but valuation expectations are high) and the remodel initiative looks to gain steam in 2022

• ARKO reported 2Q 2021 consolidated sales up 134% to $1.9 billion (versus consensus of $1.8 billion) with adjusted EBITDA growth of 10.5% to $75.7 million (versus consensus of $65.5 million). For context, in 1H 2021 ARKO’s sales almost doubled to $3.39 billion while adj. EBITDA advanced ~38% to $118 million.
• At the core-Retail segment, sales increased ~53% to $1.2 billion while operating income fell ~7% to $71.2 million. On the Fuel-side, retail sales essentially doubled to $768.7 million, reflecting acquisitions (e.g,. ExpressStop) and same store sales growth of 12%, while the retail fuel margin contracted to $0.343 (from an abnormally high $0.425). On the Merchandise-front, revenue increased ~9% to $426.4 million, reflecting same-store sales growth of 2.4% (or 4.3%, ex-cigarettes), while the contribution margin improved 140 bps to 28.7%. (On a two-year stacked basis, same store sales were up 7.4% or 10.2%, ex-cigarettes.)
• In terms of the balance sheet, the company ended 2Q 2021 with net debt of $424.5 million, including cash of $229.4 million, restricted investments of $31.8 million and debt $685.7 million, implying a leverage ratio of less than 2.0x (compared with ~2.3x at the end of 2020). The company generated ~$26 million of free cash in 1H 2021 and deployed $32.6 million toward capital expenditures. We continue to project cap ex will total $65.5 million and $93.5 million in 2021 and 2022, respectively.
• ARKO did not provide formal sales and earnings guidance but we would note that management’s previous commentary has suggested that 2021 adjusted EBITDA could be in the $217-$223 million range.
• Our fair value estimate remains ~$13 per share, reflecting a blended multiple of 10x (previously ~10.5x) on 2022E adj. EBITDA of ~$243.5 million (previously $240 million) and net debt of ~$568 (see Exhibit #1 on page 2).

Organon Reports 2Q 2021 Revenue and EPS Ahead of Consensus, Initiates Quarterly Dividend; Maintain BUY, Adjust FVE to $42 per Share

• On August 10, 2021, before the market open, Organon & Co. (NYSE: OGN) reported 2Q 2021 results that included revenue of $1.59 billion, adjusted EBITDA of $627 million, and adjusted EPS of $1.72. While year-over-year revenue increased 5% (down 1% ex FX), EBITDA declined 19%, and EPS was 32%, it should be noted that OGN was spun-off from Merck & Co. (NYSE: MRK) on June 2, 2021, which make year-over-year comparisons not entirely apples to apples. In relation to 2Q expectations, revenue exceeded the consensus estimate by 5%, while EBITDA was 9.6% better than estimates, and EPS beat by 21.8%.
• The company also initiated a quarterly dividend of $0.28 per share, payable on September 13, 2021, to shareholders of record as of August 23, 2021 (close of business). Based on yesterday’s closing price the dividend represents a 3.7% yield.
• OGN reaffirmed 2021 guidance that includes revenue of $6.1 – $6.4 billion, and adjusted EBITDA margins of 36% – 38%, implying 2021 EBITDA of $2.196 – $2.432 billion. For reference the current consensus EBITDA estimate for 2021 is $2.321 billion and our revised 2022 EBITDA estimate is $2.273 billion (previously $2.122 billion).
• In terms of 2Q performance, Women’s Health revenue increased 19% year-over-year (16% ex currency), Biosimilars increased 43% (35% ex currency), and Established Brands declined 4% (down 10% ex currency). (Approximately 80% of OGN revenue is generated outside of the U.S.)
• Management believes it can grow revenue in the low- to mid-single digit range over the medium-term as the growth segments of Women’s Health and Biosimilars increase at a double digit rate annually, while the Established Brands portfolio declines should stabilize as most loss of exclusivity (“LOE”) in the portfolio has already passed. (Management commentary suggests a total impact from LOE of $300 million post-2021 through 2025). The Biosimilar portfolio currently consists of 5 products, but is expected to increase with a keen interest in the 2023 introduction of a Humira biosimilar. (Branded Humira generated $19.8 billion in 2020 sales.)
• The current Biosimilar portfolio generates approximately $350 million in annual revenue based on 2Q annualized.
• For Women’s Health, Nexplanon, a long lasting reversible hormonal contraceptive (“LARC”), the #2 LARC worldwide, has significant growth potential with targeted annual sales in excess $1 billion (with U.S. patent protection until 2027). Nexplanon generated $326 million in sales in 1H 2021.
• We adjust our 2022 earnings estimate to better reflect current performance and a lower than previously incorporated 2022 LOE and now forecast 2022 revenue and EBITDA of $6.143 billion and $2.273 billion, respectively. Our new fair value estimate of $42 (previously $48 per share) reflects the adjusted earnings estimate and a lower EV/EBITDA multiple of 8.5x (previously 9.5x). We view the lower multiple as more realistic in today’s market versus generic peers while still awarding a premium to account for the growing, albeit still relatively small versus the rest of the company, biosimilars business. We maintain our BUY rating.
• For more details, please refer to The Spin Off Report dated May 13, 2021, and UPDATEs dated June 3, 2021, and June 9, 2021.

Please see the attached Hidden Opportunities Update on ECN Capital Corp. (TSX: ECN).

ECN to sell Service Finance to Truist Bank for US$2 billion and distribute net proceeds of ~US$1.5 billion (or C$7.50 per share) via a special dividend; transaction expected to close in late-4Q 2021

• Last night, after the market close, ECN announced an agreement to sell its Service Finance (SFC) business to Truist Financial Corp. (NYSE: TFC), one of its core funding partners, for US$2 billion (versus our previous ~US$1.425 billion valuation and its September 2017 purchase price of US$309 million); by our calculation, the purchase price implies an about 15x multiple on 2022E EBITDA (and roughly 20x 2022E operating earnings).
• The company cited SFC’s increased scale amid solid underlying fundamentals as well as “recent industry dynamics”, which we think alludes to the recent purchase of Enerbank USA, a home improvement lending subsidiary of CMS Energy (NYSE: CMS), by Regions Financial (NYSE: RF), as the primary drivers of the transaction.
• The company intends to distribute ~US$1.5 billion of net after-tax proceeds to shareholders via a C$7.50 per special dividend following the transaction close, which is expected in late- 4Q 2021. (As well, the company expects to carry net debt, post transaction, of ~$350 million and to reduce corporate overhead to ~$12 million.)
• Concurrently, ECN reported 2Q 2021 EPS of $0.12 (versus $0.07 in the prior year period), which was in-line with consensus and at the mid-point of management’s guidance of $0.11-$0.13 per share.
• In terms of 2021 guidance for the remaining Triad and Kessler (KG) businesses, management expects adjusted operating earnings of $43-$46 million (previously $39-$44 million) and originations of ~$1 billion (versus $700 million in 2020) at Triad along with adj. operating earnings of $46-$49 million (previously $46-$52 million) at KG.
• For 2022, the company expects ECN, ex-SFC, to generate EPS of US$0.25-$0.30 per share (compared with our pro rata forecast of ~$0.23), including adj. operating income of $57-$65 million (on originations of $1.25-$1.5 billion) at Triad and $52-$59 million at KG (implying year over year growth, at the midpoint, of 37% and 17%, respectively).
• Our initial fair value estimate, including the SFC special dividend, is C$12.00 per share, reflecting a blended multiple of ~9.5x on 2022E adj. EBITDA of US$125 million and net debt of US$350 million as well as a USD/CAD conversion rate of 1.25x (see Exhibit #1 on page 2).

DT Midstream Reports 2Q 2021 Results; Declares $0.60 Dividend Payment, Maintains Guidance with “Bias to High End”; Maintain BUY Rating, Adjust FVE to $51 per Share

• On August 6, 2021, before the market open, DT Midstream Inc. (NYSE: DTM) reported 2Q 2021 results that included adjusted operating earnings of $89 million and adjusted EBITDA of $191 million, representing 25.4% and 12.4% year-over-year growth, respectively.
• Additionally, the company declared its initial quarterly dividend at $0.60 per share, reaffirmed 2021 adjusted EBITDA growth of approximately 7%, and 2022 “early outlook” of 5% – 7% adjusted EBITDA growth.
• As a standalone publicly traded company, DT Midstream is focusing on its portfolio of natural gas pipelines (intra- and interstate), storage systems, gathering pipelines and systems, treatment plants, and compression facilities. The company’s assets and operations control the Pipeline & Storage business that was formerly part of DTE’s Non-Utility segment. DT Midstream’s assets connect demand centers in the Midwest U.S., Eastern Canada, Northeastern U.S., and Gulf Coast regions to production from the Marcellus/Utica and Haynesville shale plays.
• We adjust our DTM fair value estimate and now forecast 2022 EBITDA of $767 million and 2022 EPS of $3.33. Our revised fair value estimate of $51 per share (previously $52 per share) is based on a 10.5x EV/EBITDA multiple and a 15.0x P/E multiple. The slight lowering of the fair value is a result of a lower forecasted EPS ($3.33 versus $3.48) to conform with management’s guidance.
• Based on the current share price and newly declared dividend, shares of DTM yield 5.4%,.and are valued at 9.6x our 2022 EBITDA estimate and 13.4x our 2022 EPS estimate.
• For more details, please refer to The Spin Off Report dated June 10, 2021, and UPDATE dated July 1, 2021.

Vimeo Reports 2Q 2021 Results Including 43% Revenue Increase; View Shares as Attractive Given Sales, Subscriber, ARPU Growth; Maintain BUY Rating, $54 FVE

• On August 5, 2021, after the market close, Vimeo Inc. (NASDAQ: VMEO) reported 2Q 2021 results, which included revenue of $96 million, a 43% increase versus the prior year period. Operating loss was negatively impacted by increased costs, including sales, marketing, and R&D, which were significantly higher as the company continued to rollout new product offerings and increased subscribers by 16.6% year-over-year.
• VMEO reported an operating loss of $20.3 million and a loss of $3.8 million before interest, taxes, depreciation, and amortization, versus losses of $12.3 million and $5.3 million, respectively, in the prior year period. Notably management has previously stated it does not expect to be EBITDA positive in 2021 given investment spending.
• The underlying fundamentals of revenue growth remained healthy, with total subscribers increasing to 1.627 million (from 1.395 million in 2Q 2020) with average revenue per user (“ARPU”) of $240 per user (was $203 per user in 2Q 2020).
• We continue to be attracted to the significant top line, user and ARPU growth from Vimeo, and believe the current investment spending will support profitability beginning in 2022, which we view as underappreciated in the current share price. Thusly we maintain our $54 per share fair value estimate and BUY rating.
• At current levels, Vimeo shares are trading at 14.1x our forecasted 2022 revenue estimate of $516 million and a roughly 20% discount to our fair value estimate, which is derived by a 17x sales multiple. For reference, IAC raised equity in Vimeo three times over the past two years at implied valuations of 9.7x, 18.4x, and 20.1x revenue, respectively.
• We see the potential for a reversion toward our fair value estimate as recent trends, which include 35%-plus top-line growth, should support multiple expansion from current levels. Over the longer-term, we think concerns about the sustainability of growth could limit incremental multiple expansion over currently projected levels.
• For reference, VMEO increased revenue by 44% in 2020 and 49% in 1H 2021. Management’s medium term (5+ years) goals include a top-line CAGR of over 30% and an adjusted EBITDA margin of 20%-plus.
• For more details, please refer to The Spin Off Report dated April 1, 2021, and UPDATEs dated April 14, 2021, May 24, 2021, and May 25, 2021.

Please see the attached Hidden Opportunities Update on Amerco (NASDAQ: UHAL).

Operating leverage persists into F2022; fair value increased to $630 per share

• UHAL reported 1Q F2022 sales up ~49% to $1.47 billion while operating income and EPS jumped to $494.2 million and $17.60, respectively, from $$154 million and $4.47 in the prior year period. By our calculation, EBITDA almost doubled to $615.9 million.
• At the core-Moving & Storage segment, sales increased ~50% to $1.39 billion, reflecting a ~58% increase at Moving and a 26% rise at Storage. Operating income jumped ~220% to $483 million.
• At quarter-end, UHAL had net debt of ~3.15 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 less than 2.0x, by our calculation.
• As mentioned in previous notes, we think the recent, primarily pandemic-driven, slowdown in spending at UHAL, particularly on real estate, and the seeming two-year runway back toward “normalization” augurs well for continued improvements in profitability (and investor sentiment); to that end, capital spending at Storage, primarily aimed at footprint expansion, roughly halved in F2021, which, in part, drove a 26% increase in average occupied units in 1Q F2022 as well as an improvement in average monthly occupancy, which stood at 79.7% in 1Q F2022 (vs. 74.3% at the end of F2021 and 67.6% in 2Q F2021). These improvements, coupled with increases in utilization at Moving, resulted in operating margin expansion at the core-Moving & Storage segment to 34.6% in 1Q F2022 from 16.4% in the prior year period.
• Our fair value estimate is increased to $630 per share, reflecting an ~8.5x multiple on F2022E Moving & Storage EBITDA of $1.84 billion, the insurance assets at book value and net debt of ~$3.15 billion (see Exhibit #1 on page 2).
• That said, we may make further adjustments following this morning’s conference call at 11 a.m. (ET).

IAC Reports 2Q 2021 Results Below Expectations on Weaker Than Anticipated ANGI Profitability; Long-Term Prospects Remain Positive, We Contend Sum-of-the-Parts Valuation Remains Attractive; Maintain BUY Rating, FVE to $179 per Share

• IAC/InterActiveCorp (NASDAQ: IAC) reported 2Q 2021 earnings that included revenue of $829.5 million, and adjusted EBITDA of $26.4 million, representing year-over-year increases of 26% and 34%, respectively.
• The largest component of IAC’s operations comes from its 84.1% ownership stake in ANGI Inc. (NASDAQ: ANGI), which also reported 2Q results. ANGI generated revenue of $421 million and an adjusted loss before interest, taxes, depreciation, and amortization of $4.4 million. In the prior year period ANGI generated revenue of $375.1 million and EBITDA of $57.9 million.
• ANGI’s loss of profitability is being attributed to the company’s brand transition to singular branded offerings. The company changed its corporate moniker from ANGI’s List to ANGI and is now investing in the ANGI name away from previously branded services under the Home Advisor name.
• ANGI management highlighted what they described as a “V shape recovery” in the revenue and awareness that happens in a rebranding. Notably Home Advisor traffic significantly declined without investment spending during the quarter, which resulted in a loss of high margin revenue and profitability.
• In terms of IAC’s operating businesses, Dotdash and Search increased year-over-year revenue by 64% to $73.3 million and 40% to $183.6 million, respectively. Dotdash contributed $20.5 million in segment EBITDA and Search contributed $25.7 million in EBITDA, as compared to $12.1 million and $9.4 million during 2Q 2020, respectively. The Emerging & Other segment increased revenue to $151.7 million (40% increase) and generated segment EBITDA of $6.9 million, compared to a $2.6 million loss in 2Q 2020.
• While acknowledging the current ANGI profitability hurdles given the rebranding efforts and continued residual COVID related impacts (i.e. labor), we continue to see value in IAC’s portfolio of holdings.
• We adjust our fair value estimate for IAC to $179 per share (previously $182 per share), which primarily reflects a reduction in our estimated value for the company’s holdings of Angi Inc. (NASDAQ: ANGI). We lower our estimated value per share to $17 per share of ANGI held (from $18) to reflect lower than previously anticipated margins at ANGI.
• We maintain our BUY rating on IAC as we see upside in the publicly traded holdings of ANGI and MGM Resorts International (NYSE: MGM), and minimal value being assigned to the company’s operating businesses.
• Additional value could be unlocked on a spin-off of the ANGI shares, or continued improved operations at DotDash, Search, and Emerging & Other business segments that would warrant a rerating of the core operating businesses.
• For more details, please refer to The Spin Off Report dated April 1, 2021, and UPDATEs dated April 14, 2021, and May 25, 2021.