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

EHC tops consensus in 2Q 2021 and raises full-year sales, adj. EBITDA and EPS guidance; strategic review remains ongoing, but the Board has deemed that a full or partial separation of HH&H will enhance shareholder value and a transaction is expected in 2H 2021; maintain fair value of $101 per share

• EHC reported 2Q 2021 sales up 20% to $1.288 billion (compared with consensus of $1.27 billion) with a 72% increase in adjusted EBITDA to $279 million (versus consensus of $250 million) and adj. EPS of $1.17 (compared with $0.31 in the year-ago period and consensus of $0.98). Adjusted free cash flow increased 22% to ~$206 million (versus consensus of ~$80 million).
• By segment, Inpatient Rehabilitation sales increased 21.5% to $1.0 billion with a 41% rise in adjusted EBITDA to $254 million while Home Health & Hospice revenue increased ~15% to $286 million with a more than three-fold increase in adj. EBITDA to ~$62 million (versus $15 million in the prior period).
• The company ended 2Q 2021 with net debt of ~$3.1 billion, including cash of $73 million and debt of $3.1725 billion, and a leverage ratio, by our calculation, of 3.1x (compared with 3.6x at year end 2020 and its covenant of 5.5x, which steps down to 4.25x in 2022).
• As well, management increased full year sales, adjusted EBITDA and EPS guidance to $5.1-$5.25 billion (from $5.06-$5.23 billion), $1.05-$1.07 billion (from $1.0-$1.03 billion) and $4.32-$4.47 (from $3.94-$4.16), respectively (see Exhibit #1 on page 2). For context, these figures compare with current consensus for sales, adj. EBITDA and EPS of $1.02 billion, $413.5 million, and $4.11, respectively.
• Importantly, the company indicated that while its exploration of strategic alternatives remains on-going the Board has determined that a full or partial separation of the HH&H business will enhance long-term shareholder value. To that end, the company is pursuing a “separation transaction by either public or private means” and it expects to announce a result in 2H 2021.
• Our fair value estimate for EHC remains $101 per share, which reflects a blended multiple of ~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 (877) 587-6761 with passcode #7294490.

Drop Coverage of DuPont Inc., International Flavors & Fragrances Inc., TechnipFMC PLC, and Technip Energies NV Effective Immediately

• On February 2, 2021, DuPont Inc. (NYSE: DD) completed the split-off of its Nutrition & Biosciences (N&B) business, which upon separation merged with International Flavors & Fragrances Inc. (NYSE: IFF) in a Reverse Morris Trust (RMT) transaction.
• TechnipFMC PLC spun off Technip Energies NV (TE FP) on February 16, 2021.
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of DuPont Inc., International Flavors & Fragrances Inc., TechnipFMC PLC, and Technip Energies NV effective immediately.
• Our prior estimates and fair values for DD, IFF, FTI, and TE FP should no longer be relied on.

Drop Coverage of Madison Square Garden Sports Corp. and Madison Square Garden Entertainment Corp. Effective Immediately

• On April 17, after the market close, The Madison Square Garden Co. completed the spin-off of the Entertainment business from the Sports business. Shareholders of record received one share of Madison Square Garden Entertainment Corp. (NYSE: MSGE) for each share of MSG owned. The Madison Square Garden Co. was renamed Madison Square Garden Sports Corp. (NYSE: MSGS).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Madison Square Garden Sports Corp. and Madison Square Garden Entertainment Corp. effective immediately.
• Our prior estimates and fair values for MSGS, and MSGE should no longer be relied on.

THC Reports 2Q 2021, Adjusts 2021 Guidance; Increase Fair Value Estimate to $82 (from $74 per share), Maintain BUY Rating

• On July 21, 2021, Tenet Healthcare Corp. (NASDAQ: THC) reported 2Q 2021 earnings results, which included consolidated revenue and adjusted EBITDA of $4.9 billion and $810 million (excluding grant income), respectively.
• The company continues to see a rebound in operations following restricted access to healthcare due to COVID-19. At the Hospital segment, same-hospital admissions increased by 13.7%, outpatient visits increased 70.6%, and surgeries increased by 37% versus the prior year period (with year-to-date increases were 0.1%, 19.1% and 13.0%, respectively).
• The Ambulatory Care segment experienced a similar rebound in demand, with same-facility system-wide surgical cases increasing 68.2% year-over-year in 2Q 2021, and 29.1% on a year-to-date basis versus 1H 2020.
• Conifer revenue increased 4.6% to $319 million in 2Q versus the prior year period, with adjusted EBITDA increasing to $90 million, representing a 28.2% margin, which was a 430-basis point improvement over 2Q 2020, driven by increased revenue and cost controls.
• During the quarter, THC completed the sale of its urgent care platform, and announced an agreement to sell five owned hospitals located in Florida to Steward Health Care, LLC. The asset sales highlight the company’s ongoing portfolio transformation to focus on higher margin Ambulatory Care segment.
• Management revised 2021 guidance, which included reducing consolidated revenue to a range of $19.25 – $19.65 billion (from $19.4 to $19.8 billion) while increasing company adjusted EBITDA to $3.15 – $3.25 billion (previously $3.0 – $3.2 billion). On a segment basis, hospital revenue expectations were reduced by less than 1% while adjusted EBITDA guidance was raised ~5% (at the midpoint), Ambulatory revenue remained intact with the low end of segment EBITDA increased by ~3%, and Confier revenue forecast was reduced by ~3% while segment profit was maintained. See Exhibit attached full details.
• We increase our fair value estimate on Tenet Healthcare Corp. on increased confidence that the current admission and margin trends are sustainable moving forward. Additionally, we account for management’s most recent segment guidance and peer multiples.
• We view the eventual return to declining COVID-19 cases, and the increasing percentage of the U.S. population being vaccinated (or with antibodies) as positives for the Ambulatory and Hospital segment’s outlook for admissions and same facility case metrics, which we estimate will drive 2021 revenue growth. Further the SCD ambulatory care portfolio acquisition, exit of urgent care, and the planned Florida hospital sales, results in a greater percentage of revenue being derived from higher margin sources, which we do not believe is fully discounted in the current share price.
• For Conifer, we view revenue stabilization and management’s ability to contain costs, which resulted in full-year 2020 margins equal to the prior year, despite the full year-over-year revenue decline, as a positive. The segment guidance calls for a low single digit decline in segment revenue and essentially flat EBITDA in 2021. We continue to believe that the revenue cycle management business is undervalued within the current consolidated corporate structure, and the eventual spin-off will result in a rerating of the business, thus unlocking value.
• We adjust our post-spin THC revenue and EBITDA estimates to reflect the current operating performance. We now estimate post Conifer spin-off, THC will generate $19.1 billion in revenue and $2.3 billion of EBITDA in 2022. We now value post-spin THC at $19.9 billion on an enterprise value basis, which is 8.5x our 2022 EBITDA estimate.
• We lower our valuation for Conifer to $4.9 billion based on reduced revenue and profit expectations, and now a valuation multiple of 13.5x, which is in-line with peers.
• On a pre-spin basis, we now fairly value shares of THC at $82 per share (previously $74 per share) when accounting for approximately $16.0 billion in net debt and 109 million shares outstanding and maintain our BUY rating.
• For more details, please refer to The Spin Off Report dated January 26, 2021 and UPDATE dated February 10, 2021, and May 3, 2021.

SolarWinds Completes Spin-Off of N-Able; Maintain NEUTRAL, $9 Fair Value Estimate on Post-Spin SWI, Rate N-Able at NEUTRAL with a $15 Fair Value

• On July 19, 2021, after the market close, SolarWinds Corp. (NYSE: SWI) completed the separation of its MSP business via a spin off.
• SWI shareholders of record as of July 12, 2021, the record date, received one share of N-able Inc. for every two shares of SWI held. N-able regular-way trading began on July 20, 2021, on the NYSE under the symbol “NABL”.
• SWI previously announced that the company has authorized a reverse stock split with a ratio between 2:1 to 4:1. The reverse split authorization is valid at anytime prior to December 31, 2021.
• As a standalone company, N-able would have generated $302.9 million in revenue and $120.69 million in adjusted EBITDA in 2020. Approximately 53% of N-able revenue was derived from North America, while the U.K. accounted for 10.5%. Revenue growth of almost 16% in 2020 benefited from new MSP partners and expanding business for current MSP partners. Subscription revenue increased 16% as the company added new MSP partners and existing partners added new customers. A key difference between SWI’s Core IT business and N-able is in the revenue growth model, with N-able generating increased revenue as its MSP clients expand their own client base.
• Following the separation, the parent company will continue to deal with the fallout from the cyberattack involving its Orion monitoring products between March and June 2020, which will likely result in lower new customer acquisitions and potential cancellations by existing customers. We would expect that revenue growth rates, historically in the mid- to high-single-digits, will be depressed in the near term before returning to previous levels as concerns over the impact of the cyberattack pass. Lower revenue growth and an increased focus on existing customers versus new customer acquisitions is likely to result in lower margins near term, with a return to “rule of 50” operations (revenue growth plus EBITDA margin over 50%) in 2022. Management commentary suggests that the parent company will generate initial margins of roughly 42%-43% as a standalone company while incorporating approximately $20-$24 million in incremental costs that will be phased in over the next year.
• On a post spin basis, we fairly value shares of SolarWinds at $9 per share and shares of N-able at $15 per share (previously $20 per share). We rate both post-spin entities at NEUTRAL. The lower fair value estimate for N-able is a result of a reduced valuation multiple used as we now value shares at 20x EV/EBITDA and a 5% FCF yield, previously 26x and 4%, respectively.
• Our NEUTRAL position is based on what we believe will be residual overhang on both post-spin entities from the recent cyberattack. Although we believe that both N-able and SolarWinds will be able to move past the incident, especially since it appears that minimal damage was actually incurred, we do not see the separation as a catalyst to realize potential price appreciation.
• Further, we note the ownership levels by private equity firms, meaning that shares of both post-spin entities will have a limited float, with the possibility that an eventual exit by either Thoma Bravo or Silver Lake could introduce a degree of volatility. Post-separation, we favor N-able’s business model, as we believe that growing demand from small and mid-sized businesses for affordable monitoring solutions will lead to a greater number of MSP partnerships and an increasing number of clients for existing partners. However, we would need to see a significant margin of safety to our fair value estimate before reconsidering our rating.
• For more details, please refer to The Spin Off Report dated June 7, 2021, and UPDATE dated June 28, 2021.

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

XPO to complete the GXO spin-off on August 2nd; management reiterated GXO’s 25% EBITDA CAGR guidance through 2022E and sees “double-digit” growth and ROIC near 30% longer-term

• Today, XPO’s Board approved the spin-off of GXO Logistics (NYSE: GXO), which is expected to be completed after the market close on August 2, 2021. Shareholders of record on July 23rd will receive a 1-for-1 distribution and “when-issued” trading will begin on or about July 22nd (under the ticker GXO WI).
• As well, GXO held an investor day, in which the company reiterated its 2021E forecasts as well as its 2022E guidance, which calls for organic revenue growth of 8%-12% with pro forma adj. EBITDA growth of 14%-20% to $700-$735 million. Adj. EBITDAR is expected to be $1.5 billion. In terms of the longer-term growth profile, management expects GXO to sustain “double-digit” sales and adj. EBITDA growth.
• GXO did not provide explicit FCF guidance but did indicate that FCF would likely be ~30% of adj. EBITDA and ~80% of net income.
• GXO expects to embark as a standalone with an investment grade credit rating and ~$700 million of net debt yielding average interest of ~2.15%. Longer-term, GXO expects to maintain a leverage ratio of 1.0x-1.5x and minimum liquidity of ~$900 million. Return on invested capital (ROIC) is calculated at 28% and is the primary hurdle for internal capital allocation decisions.
• Thematically, the company reinforced the “secular tailwinds” of E-Commerce, Automation, and Outsourcing that underpin its outlook within a large (i.e., TAM of ~$430 billion) and fragmented (i.e., top 5 players control less than 25%) market.
• The company also highlighted the strength (i.e., cost-inflation pass-throughs & liability protections) of its long-term contracts (i.e., 5-10 years or longer) with a “blue-chip” customer base (i.e., APPL, BA, DIS, NKE and PEP).
• Anecdotally, management reiterated its thinking that given its growth and return profile GXO should trade at a “mid-teens” multiple, which if ultimately the case could push our fair value to ~$200 per share.
• That said, our fair value estimate remains $167 per share (see Exhibit #2), reflecting $117 for XPO/Trans. based on a blended multiple of 12.5x on 2022E EBITDA and $50 for GXO/Logistics based on a 9.5x multiple, ahead of 2Q 2021 results on July 28th (after the market close).

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

XPO to complete the GXO spin-off on August 2nd; GXO reiterates 2021E-2022E guidance and sees “double-digit” long-term growth; ROIC is 28%; FVE remains $167, Reiterate BUY Rating

• Today, XPO’s Board approved the previously announced spin-off of GXO Logistics (NYSE: GXO), which his expected to be completed after the market close on August 2, 2021. Shareholders of record on July 23, 2021, will receive one share of GXO for every share of XPO held. So-called “When-Issued” trading is expected to begin on or about July 22, 2021, under the ticker “GXO WI”.
• As well, GXO held a virtual investor today, in which the company reiterated previously articulated 2022E guidance, which calls for organic revenue growth of 8%-12% with pro forma adj. EBITDA growth, including pro rata corporate costs, of 14%-20% to $700-$735 million. Adjusted EBITDAR is expected to be ~$1.5 billion.
• In terms of the longer-term growth profile, management expects GXO to sustain “double-digit” top-line and adj. EBITDA expansion.
• The company did not provide explicit FCF guidance for GXO but did indicate that FCF would likely be ~30% of adj. EBITDA (including drags of roughly 2% of sales for working capital, 1% for maintenance cap ex and 2% for growth cap ex) and ~80% of net income.
• GXO expects to embark as a standalone company with an investment grade credit rating and ~$700 million of net debt carrying an average cost of ~2.15%. Longer-term, the company expects to maintain a leverage ratio of 1.0x-1.5x and maintain minimum liquidity of ~$900 million. Return on invested capital (ROIC) is calculated to be ~28% and is the primary internal hurdle for all future investments.
• Thematically, the company reinforced the “secular tailwinds” of E-Commerce, Automation and Outsourcing that underpin its outlook within a large (i.e., TAM of ~$430 billion) and fragmented (i.e., top 5 players control less than 25%) market.
• The company also highlighted the strength (i.e., cost inflation pass-throughs and liability protections) of its long-term contracts (i.e., 5-10 year or longer) with a “blue-chip” customer base that includes ~30% of the Fortune 100, including names, such as Apple (NASDAQ: APPL), Boeing (NYSE: BA), Disney (NYSE: DIS), H&M (HMB SS), Nestle (NESN SW), Nike (NYSE: NKE), Kering (KER FP) and Pepsico (NASDAQ: PEP).
• In terms of potential valuation, management continues to anecdotally think that given its growth and return profile the standalone GXO business deserves to trade at a “premium” to the “mid-teens” multiples awarded its best-in-class peers; while we are maintaining our current outlook and $167 per share fair value ahead of 2Q 2021 results, which will be announced after the market close on July 28th, we note that, all else being equal, if management’s prediction came to fruition our fair value estimate would increase to ~$200 per share.
• That said, our current $167 per share fair value reflects $117 for XPO/Trans. based on a blended multiple of 12.5x on 2022E EBITDA, inclusive of pro rata corp. costs and net debt, and $50 for GXO/Logistics based on a 9.5x multiple.
• For more details, please refer to The Spin Off Report dated April 7, 2021.

DTE Energy Completes Spin-Off of DT Midstream; Rate DTM at BUY with a $52 FVE; Rate DTE at NEUTRAL with a $119 FVE

• On July 1, 2021, before the market open DTE Energy Co. (NYSE: DTE) completed the spin-off of its midstream business, DT Midstream Inc. DTE shareholders of record received one share of DT Midstream for every two shares of DTE held. DT Midstream began trading on the NYSE under the symbol “DTM” on July 1, 2020.
• Shares of DT Midstream closed trading yesterday in the when-issued market at a price of $38.66 per share. Shares of DTE Energy, ex-DT Midstream, closed at $109.81 in the when-issued market.
• As a standalone publicly traded company, DT Midstream will focus 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 will 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.
• Following the separation, DTE’s revenue and operating earnings will be predominantly derived from the regulated utilities, with roughly 90% of operating income from the Gas and Electric businesses (~70% previously). The company is targeting 7%-8% operating earnings growth at DTE Electric and 9% growth at DTE Gas over the long term. Consolidated operating EPS are expected to increase 5%-7% annually when factoring in declines at Power and Industrial. The mid-point of 2021 guidance suggests EPS of $5.51 per share (excluding DT Midstream). With ~$15 billion in capital investments to be made at the Gas and Electric utilities over the next several years, the rate base should continue to increase, driving earnings in what we view as a constructive regulatory environment based on historical rate base increases at both the Gas and Electric utilities.
• DTM management issued an initial outlook for 2021, which includes operating earnings of $296 – $312 million ($3.06 – $3.22 per share), and adjusted EBITDA of $710 -$750 million, which represents a 7% increase versus 2020.
• We adjust our DTM fair value estimate to reflect management commentary and slightly lower our EV/EBITDA and P/E multiples to better reflect the current peer trading averages. We now forecast 2022 EBITDA of $767 million and 2022 EPS of $3.48. Our revised fair value estimate of $52 per share is based on a 10.5x EV/EBITDA multiple and a 15.0x P/E multiple.
• Based on current DTM share price, shares are valued at 9.3x the mid-point of 2021 EBITDA guidance and 12.3x the mid-point of 2021 EPS guidance.
• Notably DT Midstream will not be included in the S&P 500, instead the shares will be added to the S&P MidCap 400 effective prior to the open on July 2, 2021. DTE will remain in the S&P 500.
• We maintain our post-spin fair value estimate of $119 per share on DTE, which is based on ~20x our estimated 2022 earnings of $5.71 per share, and includes an estimated dividend of $3.43 per share.
• Given upside potential from the current share price, we rate shares of DT Midstream at BUY, and rate post-spin DTE Energy at NEUTRAL.
• For more details, please refer to The Spin Off Report dated June 10, 2021

XPO prices a 5.75 million share stock offering, including the over-allotment, at $138 per share; FVE lowered to $167 (from $168 per share), Reiterate BUY Rating

• This morning, XPO priced a 5.75 million share offering, including a 0.75 million share over- allotment, at $138 per share; half of the shares will be offered by the company and half will be sold by current chairman and CEO Brad Jacobs.
• Regarding the insider portion of the sale, we think it is important to highlight that even following the disposition Mr. Jacobs will still be XPO’s largest shareholder at ~13.2% (previously 16.1%).
• In terms of the financial impact on the company, we expect XPO will garner net proceeds of ~$380 million (including their pro-rata share of the over-allotment and underwriting fees), of which we expect $350 million will be used to reduce outstanding debt; by our calculation, the offering, which represents ~2.5% of XPO’s diluted share count, will reduce the company’s consolidated net leverage ratio, based on 1Q 2021 results, to ~2.8x (from 3.1x). (On a post-spin basis, we expect XPO will be levered at roughly 2.5x and GXO around 1x).
• On the cash flow front, we project the company, on a consolidated basis, will generate $740 million and $893 million of free cash flow in 2021E and 2022E, respectively.
• For additional context, we would remind investors that one of the driving forces behind the impending spin off transaction, along with increasing management/investor focus and narrowing the conglomerate discount, has been for both of the soon to be standalone companies to achieve an investment grade credit rating.
• Ultimately, we think XPO shares will continue to move higher into the spin-off as underlying fundamentals remain supportive of further increases to forward financial guidance, robust FCF generation portends incremental de-leveraging (over & above the stock sale proceeds) and we continue to see the opportunity for XPO’s portfolio of businesses to re-rate toward levels more in-line with their respective LTL, brokerage and contract logistics peers.
• The spin-off is still expected to be completed in 3Q 2021 and XPO plans to hold an investor day in New York on July 13, 2021.
• Accounting for incremental dilution from the offering, which is partially offset by debt reduction, our fair value estimate is revised to $167 per share, reflecting $117 for XPO/Trans. based on a blended multiple of 12.5x on 2022E EBITDA, inclusive of pro rata corp. costs and net debt, and $50 for GXO/Logistics based on a 9.5x multiple.
• For more details, please refer to The Spin Off Report dated April 7, 2021.

XPO prices a 5.75 million share stock offering, including the over-allotment, at $138 per share; fair value lowered to $167 per share (from $168)

• This morning, XPO priced a 5.75 million share offering, including a 0.75 million share over-allotment, at $138 per share; half of the shares will be offered by the company and half will be sold by current chairman and CEO Brad Jacobs.
• Regarding the insider portion of the sale, we think it is important to highlight that even following the disposition Mr. Jacobs will still be XPO’s largest shareholder at ~13.2% (previously 16.1%).
• In terms of the financial impact on the company, we expect XPO will garner net proceeds of ~$380 million (including their pro-rata share of the over-allotment and underwriting fees), of which $350 million will be used to reduce outstanding debt; by our calculation, the offering, which represents ~2.5% of XPO’s diluted share count, will reduce the company’s consolidated net leverage ratio, based on 1Q 2021 results, to ~2.8x (from 3.1x). (On a post-spin basis, we expect XPO will be levered at roughly 2.5x and GXO around 1x). On the cash flow front, we project XPO, on a consolidated basis, will generate $740 million and $893 million of free cash flow in 2021E and 2022E, respectively.
• For additional context, we would remind investors that one of the driving forces behind the impending spin off transaction, along with increasing management/investor focus and narrowing the conglomerate discount, has been for both of the soon to be standalone companies to achieve investment grade credit ratings.
• Ultimately, we think XPO shares will continue to march higher into the spin-off (& beyond) as underlying fundamentals remain supportive of further increases to forward financial guidance, robust FCF generation portends incremental de-leveraging (over & above the stock sale proceeds) and we continue to see the opportunity for XPO’s portfolio of businesses to re-rate toward levels more in-line with their respective LTL, brokerage and contract logistics peers.
• The spin-off is still expected to be completed in 3Q 2021 and XPO plans to hold an investor day in New York on July 13, 2021.
• Accounting for incremental dilution, partially offset by debt reduction, our fair value is revised to $167 per share (from $168; see Exhibit #2), reflecting $117 for XPO/Trans. based on a blended multiple of 12.5x on 2022E EBITDA and $50 for GXO/Logistics based on a 9.5x multiple.