Raise IAC Fair Value Estimate to $285 (from $248) as 1Q Revenue Trends Were Ahead of Our Prior Expectations; Maintain BUY Rating

• We increase our IAC/InterActiveCorp (NYSE: IAC) earnings estimates and fair value assessment following the report of monthly operating metrics (March 2021) for the company’s businesses.
• Highlights of the report include: 1) ANGI Inc. (NASDAQ:  ANGI) revenue increased 31% in March 2021, although we would note that March 2020 was significantly impacted by COVID-19 shutdowns; and 2) Vimeo revenue increased 60% versus March 2020.
• For ANGI, the top-line increase in March appears to have been driven by a 60% increase in service requests (for which ANGI receives fees whether or not a transaction is consummated) and a 47% increase in monetized transactions. With reduced COVID restrictions, but many still working from home, we view pent up demand for home improvement/remodel services to be a strong tail wind for ANGI in coming quarters. Recall IAC owns 83% of ANGI’s outstanding shares.
• Importantly, as it relates to Vimeo, revenue trends were strong throughout the first quarter, with a 57% increase in January 2021 and a 54% increase in February 2021, versus respective prior year periods, signaling performance is better than we had previously forecasted in our original valuation (which had incorporated 30% annual revenue growth through 2022).
• Additionally, revenue trends at the smaller operating businesses, which will remain with the parent company following the planned Vimeo spin-off, were also ahead of our prior expectations. At Dotdash, revenue increased >45% in each month of the quarter (versus our two-year forecast of 15%), search revenue increased in each of the first three months of the year (9% in January, 8% in February, and 35% in March). Previously, we modeled an annual decline of 5%. Revenue at the Emerging & Other segment increased by more than 41% in the quarter (versus the 8% annual growth rate used in our previous fair value estimate).
• Given these updates, we increase our forecast for Vimeo’s revenue CAGR to 35%, resulting in estimated 2022 revenue of $516 million. Valuing the business at 17x our forecasted revenue results in a value of $8.8 billion, or $98 of value per share of IAC.
• We value IAC’s MGM Resorts International (NYSE: MGM) holdings at the current market value and the ANGI holdings at $20 per share, which is approximately 5x revenue and, in our view, reasonable for an internet marketing company that is expected to grow at approximately 20%+ coming out of COVID.
• As well, we adjust our growth expectations for IAC’s operating businesses and now forecast 35% growth at Dotdash, 5% revenue growth for Search, and 30% annual growth for Emerging & Other. We maintain the respective segment valuation multiples, resulting in IAC’s remaining operating businesses being valued at $3.2 billion, or $36 per share including corporate costs capitalized at 10x.
• As such, we increase our fair value estimate for IAC to $285 per share and maintain our BUY rating. Further, incremental upside could exist from potential share price appreciation at MGM and ANGI driven by operational improvements amid the COVID re-opening, as well as the pending Vimeo spin-off, which we view as a catalyst to unlock shareholder value.
• For more details, please refer to The Spin Off Report dated April 1, 2021.

ALERT: COMM to Spin-Off Home Networks Business

On April 8, 2021, CommScope Holding Company Inc. (NASDAQ: COMM) announced plans that the company intends to separate its Home Networks business via a tax-free spin-off. The transaction, which is subject to customary closing conditions including a final approval by the Board of Directors and an effectiveness declaration of a Form-10 filing with the SEC, is expected to be completed in 1Q 2022. The spin announcement comes following the rollout of the company’s strategic review plan, which COMM refers to as “CommScope NEXT”, and is focused on profitable growth, business optimization, and a continuing portfolio review.

CommScope, as the company stands today is a leading manufacture of end-to-end technology solutions for communications and entertainment networks. COMM’s products serve wired and wireless networks that enable cable, telephone, and satellite operators wired and wireless networks connectivity. The company currently operates under four segments: Broadband (34.3% of revenue in 2021), Home (28.0% of revenue in 2021), Outdoor Wireless Networks (“OWN”) (14.7% of revenue in 2021), and Venues & Campus Networks (“VCN”) (23.0% of revenue in 2021).

The Home Networks business is a leading provider of networking equipment that is used within the customers location, often referred to as Customer Premise Equipment (“CPE”), which includes broadband CPE (modems, gateways, and networking equipment used by global service providers customers), video CPE (set-top boxes, streamers and smart media devices used by global service providers customers), and retail (modems, gateways and home networking hardware sold directly to consumer).

Following the separation, CommScope will be focused on hardware solutions to commercial providers of broadband access, including telco and cable operators, metro cell providers via 5G solutions, and public and private networks for campuses, venues, data centers, and buildings. On an pro-forma basis, following the separation CommScope would have generated $6.1 billion in revenue and $1.1 billion in adjusted EBITDA in 2020, representing an 18% margin versus the actual reported EBITDA margin of 14%.

In conjunction with the spin announcement, management also announced a “significant cost reduction” plan that is expected to offset the non-GAAP adjusted EBITDA impact of the Home Networks spin-off. In terms of rationale, the transaction appears to make sense in terms of the company’s CommScope NEXT review, where the lower margin Home Networks business as a standalone entity will be able to allocate capital to investment projects that would not have been made under the larger corporate umbrella due to better ROIC rates in the other segments. It should also be noted that the two post-spin businesses have different end markets in that Home Networks essentially serves retail users (i.e. home owners) while the remaining COMM businesses serve operators and technician (i.e. telecommunication and cable companies), and the two businesses have differing manufacturing needs, with remain co manufacturing products in house and Home Networks products being contract manufactured.

 
PRELIMINARY VALUATION

As a standalone entity the Home Networks business generated $2.4 billion in revenue and $116.2 million in EBITDA in 2020, representing a 4.9% margin and a 30% decline in year-over-year revenue. Given business trends it should be expected that the Home Network business will continue to decline in revenue and margins will be pressured moving forward. Forecasting a 10% annual decline in revenue and a 4% EBITDA margin, we estimate that as a standalone company, Home Networking will generate $1.9 billion in revenue and $77 million in EBITDA in 2022.

Excluding the contribution of Home Networking, the remaining CommScope businesses would have generated $6.1 billion in revenue and $1.1 billion in EBITDA (18.1% margin). Moving forward it appears reasonable to the individual businesses could grow at a low single digit rate, with improved performance at OWN and VCN based on increased demand for 5G networks. Assuming a 3.5% annual revenue increase, remain co would generate $6.5 billion in revenue in 2022. Incorporating improved margins on the back of managements cost reduction plan, if the company were to operate with a 19% EBITDA margin the post-spin company would earn $1.2 billion in EBITDA.

Following the separation it should be expected that the Home Network business, with lower margins and declining revenue and profit, would be awarded a discounted multiple versus the current COMM multiple of 9.4x the consensus 2022 EBITDA estimate. Conversely the parent company could see a degree of multiple expansion as the company’s margin and growth profile improves on the spin-off. Valuing shares of the Home Networking business at 4.0x, and the parent company at 11.0x, on an enterprise value basis the respective companies would be fairly valued at $306 million and $13.6 billion. Incorporating net debt of $10.2 billion, and shares outstanding of 203.4 million, on a preliminary, sum-of-the-parts basis, shares of COMM can be fairly valued at $18 per share.

Please see the attached Hidden Opportunities Update on Landec Corp. (NASDAQ: LNDC).

LNDC reduces full-year F2021 adj. EBITDA guidance to $27-$29 million (from $33-$37 million), implying 23%-32% y-o-y growth, to reflect 2H F2021 COVID-19 headwinds at Curation Foods, which partially offset consistently solid results at Lifecore; fair value remains $12.50 per share 

• In 3Q F2021, LNDC’s consolidated sales fell 10% to $137.8 million (vs. consensus of $139.7 million) with adj. EBITDA growth of 12.5% to $7.6 million (vs. consensus of $10.7 million and $6.8 million in 3Q F2020). The adj. EPS loss of $0.09 compared with the consensus loss expectation of $0.02 and a $0.04 gain in 3Q F2020.
• Curation Foods (CF) continued to demonstrate improved (albeit uneven) performance as adj. EBITDA advanced 6% to $8.1 million while Lifecore, where sales increased 7% to $27.3 million and adj. EBITDA increased to $0.34 million (from a loss of $0.1 million), remained characteristically consistent. (In the first nine-months of F2021, sales at Lifecore are up 20% to $72 million with a 33.5% increase in adj. EBITDA to ~$17 million.)
• LNDC lowered full-year F2021 consolidated guidance to reflect COVID-19 headwinds at CF (while maintaining its initial guidance at Lifecore; see Exhibit #1 on page 2). To that end, F2021 sales are now expected to be $523-$532 million (previously $530-$550 million) with adj. EBITDA growth of 23%-32% to $27-$29 million (previously $33-$37 million). Anecdotally, LNDC still expects CF to achieve a steady-state gross margin of 11%-14% by the end of F2021, albeit at the lower-end (vs. 8.35% in F2020). Full-year cap ex is projected to be $23.2 million.
• By segment, at CF, LNDC expects F2021 sales will decline 14%-15% to $430-$435 million (previously $437-$453 million) with adj. EBITDA of $8-$9 million (previously $12-$14 million). At Lifecore, management continues to forecast top-line growth of 8%-13% to $93-$97 million with a 12%-22% increase in adj. EBITDA to $22.5-$24.5 million (see Exhibit #1 on page 2).
• LNDC ended 3Q F2021 with net debt of $184 million (vs. $168 million in 2Q F2021 and $190 million at the end F2020) and a net leverage ratio of 5.5x (vs. 5.2x in 2Q F2021, 8.8x in F2020 and a 7.0x covenant, which steps down gradually to 4.0x in February 2025). On a pro-forma basis, incl. the ~$45 million value of its investment in Windset Farms, which has a put/call date in March 2022, the leverage ratio is 4.2x.
• Our fair value estimate remains $12.50 per share based on a blended multiple of 11x on F2022E EBITDA of ~$46 million (previously $46.5 million) and net debt, incl. Windset, of ~$140 million (previously $145 million; see Exhibit #2 on page 2).

NNBR reiterates 2025 targets in investor update; signals increased customer and investor outreach amid improved financial stability and indicates 1Q 2021 sales rose ~9%; fair value remains $9 per share

• In an investor update this morning, NNBR reiterated its previously articulated 2025 targets, which include consolidated sales of ~$600 million (compared with 2020 sales of $428 million and implying a 4.0%-4.5% CAGR off the more normalized 2019 level of ~$493 million) with an adj. EBITDA margin of 16%-18%, implying 2025E adj. EBITDA of $96-$108 million (compared with ~$46.5 in 2020).
• The company also detailed its recent recapitalization, which replaced its primarily short-term mezzanine capital structure with a longer-term facility (i.e. 4-5 year maturities) that includes a $150 million term loan, $65 million of preferred equity and a undrawn $50 million ABL. As well, its blended cost of debt and equity has been reduced to 12% (from 15%).
• Anecdotally, management indicates that the recent refinancing, along with its deleveraging to ~1x (from ~5x) following the sale of Life Sciences in October 2020, has increased customer confidence in NNBR’s long-term financial stability. In that context, NNBR signaled the return of a more offensive playbook, in regard to customer (as well as investor) engagement.
• To that end, the company indicated that 1Q 2021 sales were up 9% (compared with previous commentary that consolidated sales were up ~4% in January and February) and that it expects to conduct several virtual non-deal roadshows (NDRs) in coming months. [Note: formal 1Q 2021 results are expected in early-May.]
• In terms of other modeling specifics, NNBR still expects cap ex to be $22 million in 2021 with depreciation & amortization expense of $47 million and a tax rate of 23%. Anecdotally, management expects to be FCF positive in 2021 (likely around “$10 million”, which is a figure they indicated could “more than double” in 2022.)
• Fair value remains $9.00 per share, based on a blended multiple of ~6x on 2023E adjusted EBITDA of ~$75 million and net debt of ~$74 million. [Note: our forecasts include some expenses, such as stock-based compensation, that NNBR adds back in its internal calculations.]
• That said, given the lack of apparent near-term catalysts we will withdraw coverage of NNBR, as of today’s close, to concentrate on more compelling/timely ideas. For context, shares of NNBR declined 12% since our initial recommendation in December 2019 (versus a 31% gain in the S&P 500 and a ~37.5% rise in the Russell 2000).

Forbes 2021 valuation for The Atlanta Braves increased 4% to $1.875 billion (from $1.8 billion); the loss of the 2021 All-Star Games likely reduces ballpark revenue by $5-$15 million this year  

• Forbes’ 2021 valuation for The Atlanta Braves increased 4.2% to $1.875 billion (compared with its $1.8 billion valuation in 2020).  For context, the value of the Braves franchise, according to Forbes, has risen at compound annual rates of 14.6%, 9.8% and 4.9% over the last 10-, 5-, and 3-year periods, respectively.
• Additionally, by the Forbes metric, the Braves are currently the 11^th most valuable franchise in Major League Baseball (compared with 12^th in 2020 as the Braves edged out The Houston Astros, who saw their franchise value increase only 1% to $1.87 billion in 2021.)
• On another note, MLB Commissioner Robert Manfred has decided to relocate the 2021 All-Star Game from Truist Field (the Braves’ home stadium) to Coors Field in Denver, Colorado (the home of the Rockies), citing opposition to a recent voting law (S.B. 2020) signed by the Georgia governor in late-March.
• In our estimation, the hosting of the game would have increased the team’s 2021 annual ballpark revenue by $5-$15 million (depending on what the ultimate capacity allowances were at the time). As such, while the loss of the game is not a significant needlemover, in terms of long-term value, we will have to monitor whether the issue has any longer-term impact on attendance; on that front, we would note that the team’s opening home series (a 3-game stretch versus the Philadelphia Phillies) at Truist Field, which begins on April 9^th, is currently sold out, per Ticketmaster (albeit at 33% capacity).
• Fair value remains $42 per share, reflecting a $40 per share valuation for the Braves, based on a ~5.5x multiple on 2022E sales, a $9 per share valuation for the company’s real estate/development assets, based on a 6% capitalization rate on stabilized net operating income, and net debt of ~$8 per share.

MSGE to Acquire MSGN in an All-Stock Deal; Lower FVE to $108, Maintain BUY Rating

• On March 26, 2021, before the market open, Madison Square Garden Entertainment Corp. (NYSE: MSGE) announced an agreement to acquire Madison Square Garden Networks Inc. (NYSE: MSGN) in an all-stock deal.
• MSGN shareholders are expected to receive 0.172 shares of MSGE Class A or Class B stock for each share of MSGN Class A or Class B stock owned. The transaction is scheduled to be completed in 3Q 2021 and is subject to customary closing conditions. However, given the Dolan family control of both companies the deal is expected to be consummated.
• The transaction appears to benefit MSGE in that the strong cash flow from MSGN will be able to help fund MSGE’s Sphere project, which is now expected to open in Las Vegas in 2023. MSGN generates approximately $200 million in annual free cash flow. Concerns could be noted over MSGN’s ability to maintain that level of cash flow as it is widely anticipated that subscriber churn is expected to continue at the company’s regional sports networks (“RSN”), which may significantly impact future cash flows.
• In terms of the price paid, given the share exchange ratio of 0.172, MSGE is paying $922 million based on yesterdays closing price of MSGE. Notably, based on the 2022 consensus EBITDA estimate for MSGN this equates to just over 8x, yet represents a 22% free cash flow yield based on a normalized $200 million free cash flow estimate.
• We adjust our MSGE fair value estimate to $108 per share (previously $116 per share) reflect the acquisition, most recent performance, balance sheet, and expectations for MSGE’s operating businesses performance as COVID restrictions begin to be lifted.
• Our fair value estimate reflects $1.2 billion in owned venues, primarily Madison Square Garden, $750 million from MSGE’s operating businesses, based on normalized return of Entertainment and TAO operations, and $213 million in value derived from public and private investments that include shares in Townsquare Media Inc. (NYSE: TSQ) and DraftKings Inc. (NASDAQ: DKNG), SACO Technologies Inc. (private), and land owned in London for a future Sphere project, in addition to the MSGN acquisition.
• We remain positive on MSGE based on our revised fair value estimate implying approximately 15% upside from the current share price, combined with benefits from COVID reopening’s, cash flow benefits from the MSGN transaction, and optionality in terms of sports gambling opportunities and potential air rights sales (upwards of $24 per share by our estimates), and maintain our BUY rating on MSGE.

ARKO reports roughly in-line full-year 2020 results; same store sales are up more than 4% in 2021 (through February) 

• For full-year 2020, consolidated sales declined ~5.3% to $3.9 billion with adjusted EBITDA, excluding $7.8 million in incremental bonuses, of $183.3 million (which compared with management’s most recent commentary calling for $181-$185 million and ~$78 million in 2019).
• At the core-Retail segment, sales fell ~12.5% to $3.49 billion while operating income more than doubled to $200 million (from ~$90.5 million in 2019). On the Fuel-side, retail sales fell 23.5% to $1.94 billion, reflecting a 16.5% in same store gallons, while the retail fuel margin expanded to $0.319 (from $0.207).  On the Merchandise-front, revenue increased almost 10% to $1.5 billion, reflecting same-store sales growth of 3.5%, while the contribution margin improved 10 bps to 27.2%.
• In terms of the balance sheet, the company ended 2020 with net debt of $421.6 million, including cash of $296.4 million, restricted investments of $31.8 million and debt $749.8 million, implying a leverage ratio of 2.3x.  The company generated nearly $174 million in cash flow from operations in 2020 (compared with $43.3 million in 2019) and deployed $45 million toward capital expenditures (compared with $58 million in 2019).  Currently, we project cap ex will total $65.5 million and $93.5 million in 2021 and 2022, respectively.
• Given on-going COVID-related uncertainty, ARKO did not provide formal sales and earnings guidance but did indicate that same-store sales growth was in excess of 4% through February 2021.  (For additional context, we would note that management’s recent previous commentary had suggested that 2021 adjusted EBITDA could be in the $217-$223 million range.)
• Our fair value estimate for ARKO remains $13 per share, reflecting a blended multiple of ~10.5x on 2022E adj. EBITDA of ~$240 million and net debt of ~$577 (see Exhibit #2 on page 2).

STAY to be acquired by Blackstone and Starwood for $19.50 per share in cash; the transaction is expected to close in 2Q 2021 

• Today, prior to the market open, Extended Stay America (STAY) announced it has signed a definitive agreement to be acquired for ~$6 billion or $19.50 per share by Blackstone (NYSE: BX) and Starwood Capital, currently a ~9% holder, in a 50/50 joint venture.
• The all-cash transaction has been approved by STAY’s Board and is expected to close in 2Q 2021, contingent on customary closing conditions, including shareholder approval. (That said, the transaction is not contingent on the receipt of financing.)
• The company will pay its previously scheduled quarterly dividend of $0.09 per share on March 26, 2021 but does not intend to make any further distributions while this transaction is pending.
• By our calculation, the purchase price, which is roughly in-line with our OpCo/PropCo valuation scenario, values STAY at ~12x 2022E EV/EBITDA and 11.1x 2023E EV/EBITDA.  The deal represents an about 15% premium to Friday’s close and a 23.5% premium relative to the company’s 30-day volume-weighted average share price (VWAP).
• As well, for additional context, recall that Starwood, which also controls extended-stay chain InTown Suites, is currently a 9.4% holder of STAY and Blackstone has twice owned the company outright (in 2004 and 20210, when it outbid suitors, including Starwood.) As well, we would note that around the time Starwood disclosed its initial 8.5% stake in April 2020 BX had also built a ~5% position in STAY, which it ultimately sold.
• All things considered; it is our initial view that the deal is likely to close as announced but we will monitor the situation as additional details emerge.

PCS Research Services welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

The Atlanta Braves to allow 33% capacity at Truist Park for opening day on April 9th (compared with previous commentary of 25%); still targeting full capacity The All-Star Game on July 13th.

• Today, The Atlanta Braves announced that it would allow 33% capacity at Truist Field for the team’s home opener on April 9, 2021 (versus the Philadelphia Phillies). Notably, this compares with previous commentary suggesting capacity would likely be limited to ~25% on opening day.
• The team noted that seating capacity would be evaluated for “each homestand” with the ostensible goal of achieving full capacity by The All-Star Game, which will be held at Truist Field on July 13, 2021.
• Our fair value estimate remains $42 per share, reflecting a $40 per share valuation for The Atlanta Braves, based on a ~5.5x multiple on 2022E sales, a $9 per share valuation for the company’s real estate/development assets, based on a 6% capitalization rate on stabilized net operating income (NOI), and net debt of ~$8 per share.

NNBR reports solid 4Q 2020 results, ends the year with a leverage ratio of less than 1.0x and sees a more normalized environment returning in 2021-2022

• NNBR reported 4Q 2020 consolidated sales up 7.5% to $119 million (compared to consensus of $109 million) with adj. EBITDA up 42.5% to $16.8 million and adj. EPS of $0.17 (compared with the consensus loss expectation of $0.05 and a $0.02 loss in 4Q 2019).
• For full-year 2020, total sales fell ~13% to $427.5 million with a 17.5% decline in adj. EBITDA to $46.5 million and an adj. EPS loss of $0.16 (compared with a gain of $0.19 in 2019).
• Recall, NNBR completed the sale of its Life Sciences business for $825 million in October 2020; in that context, NNBR ended 2020 with net debt of $45 million and a leverage ratio of 0.97x (compared with $757.5 million and ~5.2x at the end of 2019).
• For 2021, the company did not provide explicit earnings guidance but indicated that consolidated sales were up ~4% in January & February and it expected adj. EBITDA would “improve” year-over-year. (To that end, management suggested an incremental margin of 30%-32% in 2021 and closer to 40% longer-term.) In terms of modeling specifics, NNBR expects cap ex to be $22 million in 2021 with depreciation & amortization expense of $47 million and a tax rate of 23%. Anecdotally, management expects to be FCF positive in 2021 (likely around “$10 million”, which is a figure they indicated could “more than double” in 2022.)
• Longer-term, NNBR expects consolidated sales to grow to ~$600 million in 2025 (compared with 2020 sales of $428 million and implying a 4.0%-4.5% CAGR off the more normalized 2019 level of ~$493 million) with an adj. EBITDA margin of 16%-18%, implying 2025E adj. EBITDA of $96-$108 million (compared with ~$46.5 in 2020).
• Fair value is slightly increased to $9.00 per share (from $8.50 per share), based on a blended multiple of ~6x on 2023E adjusted EBITDA of ~$75 million (previously ~$72 million) and net debt of ~$74 million. [Note: our forecasts include some expenses, such as stock-based compensation, that NNBR adds back in its internal calculations.]