EVRI reports solid 4Q 2020 results, in-line with preliminary disclosures; 1Q 2021 and full-year 2021 commentary suggest upside to our estimates; fair value increased to $17 per share (from $16 per share)

• Last night, after the market close, EVRI reported 4Q 2020 consolidated sales fell ~17.5% to $119.5 million with a 3% decline in adj. EBITDA to $61.2 million. Adj. net income of $1.1 million or $0.01 per share (compared with losses of $6.4 million and a $0.05, respectively, in the year ago period).
• Recall, in late-January 2021, the company disclosed some preliminary 4Q 2020 guidance, which was modestly above our initial expectations and consensus; specifically, EVRI projected 4Q 2020 sales would be $117-$121 million with adj. EBITDA of $60-$62 million and a net loss of $0.3-$1.4 million, including $1.5 million of facility consolidation and inventory write-off charges.
• For context, EVRI ended 4Q 2020 with net debt of $1.095 billion (roughly flat with 3Q 2020) and a net leverage ratio of 6.2x (vs. 6.1x in 3Q 2020). Notably, EVRI’s debt covenants have been waived or modified through 3Q 2021.
• The company did not provide explicit 2021 financial guidance but anecdotally indicated that it expected 1Q 2021 sales and adj. EBITDA would be in-line or slightly better than 4Q 2020. Net income is again expected to be positive, and FCF is expected to see sequential improvement (vs $14.4 million in 4Q 2020). Additionally, barring any macro setbacks, EVRI expects that 2H 2021 results will exceed those generated in 1H 2021, which, all told, suggests upside to our previous forecasts.
• To that end, our fair value estimate is increased to $17 per share (from $16 per share), reflecting a blended multiple of ~9.5x on 2022E EBITDA of ~$284.5 million (previously $261.5 million) as well as net debt of $1.1 billion and a diluted share count of ~94 million (previously 91 million). [Note: our adj. EBITDA forecasts do not add back stock-based compensation.]

ARKO acquires 61 C-stores in Michigan and Ohio

• Last night, after the market close, ARKO disclosed they had agreed to acquire 61 convenience stores (with fuel stations) operating in Michigan and Ohio under the ExpressStop banner. (The purchase will add to the company’s existing footprint of 165 and 9 locations in those respective states.)
• The aggregate purchase price is ~$102 million (plus inventory and site-level cash), of which $92 million will be paid, by the seller, to two unrelated real estate funds that will purchase the underlying locations and lease them back to ARKO (under customary terms).
• The deal, which is expected to close in 1H 2021, includes provisions for ARKO to purchase 26 of the locations following an initial 4-year period.
• While granular financial details were not disclosed and the company made no explicit change to its previous 2021E adj. EBITDA guidance of $210-$215 million we think this deal, its first as a U.S. listed company, fits the model of ARKO’s previous 18 acquisitions, in which the company purchased small/mid-sized C-store chains and integrated the target onto its platform while maintaining the local brand equity. Historically, the company has, on average, paid gross purchase multiples of ~6.6x and realized post-synergy multiples of ~2.6x.
• To that end, with the U.S. C-store industry remaining highly fragmented (i.e. the top 10 players control less than 20% of the ~150K nationwide locations) we expect ARKO will remain an active consolidator in coming years.  (Broadly, ARKO’s in-house M&A team evaluates ~30 deals a year and targets the addition of ~$20 million of annual incremental EBITDA from acquisitive growth.)
• Our fair value estimate for ARKO remains $13 per share, reflecting a blended multiple of ~10.5x on 2022E adj. EBITDA of $250 million (previously $240 million) and net debt of $669 (previously ~$574 million).

Withdraw sell recommendation on MDP as broader market turbulence (and modestly improving underlying operating trends) warrant caution

• We withdraw our sell recommendation on MDP, as of today’s close, as the current market turbulence, particularly among heavily shorted stocks, such as GameStop (NYSE: GME), along with some signs of modest improvement in MDP’s underlying operating trends warrant near-term caution, in our view.
• On the former point, while MDP’s so-called “short interest”, at ~12% of its float, is considerably lower than other potential “short squeeze” candidates it is our view that the unpredictability of the current environment decidedly (and negatively) skews the current risk/return scenario.
• On the former, point MDP recently announced an agreement to sell the Travel + Leisure brand to Wyndham Destinations (NYSE: WYND) for $100 million and as well indicated that its estimated cash balance at year-end 2020 (or MDP’s 2Q F2021) was ~$350 million (compared with $201 million at the end of 1Q F2021).
• As well, at a recent investor conference, Meredith management indicated that it expected political advertising revenue in 2H 2020 (which is MDP’s 1H F2021) would total ~$165 million (compared with its previous commentary, which did not include the run-off race in Georgia, of ~$143 million, and the ~$65 million that was spent during the last presidential cycle in F2017).
• For context, MDP shares have increased ~6% since our initial report in December 2020 (compared with a 2.5% gain in the S&P and a 7.5% gain in the Russell 2000).

ALERT: CFX to Separate MedTech and FabTech in A Tax-Free Spin

On March 4, 2021, Colfax Corp. (NYSE: CFX), before the market open, announced that its Board of Directors had approved a plan to separate its specialty medical technologies (MedTech) and fabrication technology (FabTech) businesses into standalone, publicly traded companies. The separation if consummated, is intended to be tax-free to shareholders with targeted completion in 1Q 2022, subject to standard approvals including final Board approval, an effectiveness declaration of the company’s Form 10 filing by the SEC, and regulatory approvals, amongst others.

Notably, CFX sold its Air & Handling business to KPS Capital Partnes for $1.8 billion in late 2019 and management estimates that this transaction is a further step in unlocking the full inherent value of the company. To that end, the rationale for the announcement is a sharpened strategic focus for its two businsses, which operate in distinct markets (i.e. orthopedics versus welding & cutting solutions), that increases operating flexibility, improves capital allocation and better allows investors to target their investments. Broadly, the seperation is expected to better position MedTech to continue focusing on its strategic growth plan, including both M&A and R&D investments, while FabTech will seemingly pursue a somewhat more balanced capital allocation plan, including bolt-on acquisitions, growth investments and capital returns to shareholders.

The company indicated that current Colfax chief executive, Mr. Matt Trerotola, would lead the MedTech business, which would be renamed prior to the separation and be based in Wilmington, Delaware, while the FabTech business, which would continue to operate under its well-known brand name ESAB, would be led by current CFX EVP Shyam Kambeyanda and remain based in Maryland. As well, management indicated that it would provide additional details on the transaction as well as go into a deeper discussion of each businsses’ standalone financials and prospects at its Investor Day on March 11, 2021.

PRELIMINARY VALUATION

Today, CFX operates two business segments: (1) Specialty Medical Technologies (MedTech), which is a growth company focused on the fast-growing surgical implant market (i.e. hips and knees) as well as the bracing and recovery sciences sectors. Per management, the business is expected to generate segment-level sales and adjusted EBITDA of ~$1.4 billion and $0.3 billion, respectively, in 2021. (At least on the top-line, this guidance appears consistent with management’s previous commentary that MedTech segment sales would grow 21%-24% in 2021.) In terms of valuation comparisons, MedTech could be compared with peers such as Stryker Corp (NYSE: SYK), Zimmer Biomet (NYSE: ZBH), and Smith & Nephew Plc (NYSE: SNN), which trade on average at ~15x EV/EBITDA. Applying the peer multiple to projected 2021E EBITDA of ~$0.3 billion implies segment value of ~$4.49 billion. (2) Fabrication Technology (FabTech; to be branded EASB as a standalone), a leader in the welding and cutting solutions sectors, is expected, per management, to generate 2021 sales and adjusted EBITDA of $2.2 billion and $0.4 billion, respectively. (Again, this guidance is in-line with CFX’s prior sales commentary calling for FabTech growth of 11%-14% in 2021.) In terms of valuation comparisons, FabTech/EASB could be compared with peers such as Eaton Corp. (NYSE: ETN), Enerpac Group (NYSE: EPAC), Illinois Tool Works (NYSE: ITW) and Lincoln Electric (NASDAQ: LECO), which trade on average at ~16.5x EV/EBITDA. Applying the peer multiple to 2021E EBITDA of ~$0.4 billion implies a segment value of ~$6.6 billion. Accounting for corporate costs as well as net debt of ~$2.2 billion yields a sum-of-the parts valuation for CFX of ~$7.7 billion, or $55 per share (based on shares outstanding of ~139 million).

Withdraw recommendation of LDL, as of today’s close, with shares trading roughly in-line with our fair value estimate 

• For context, Lydall shares have returned 176% since our initial recommendation in July 2020 (compared with a ~21% gain in the S&P 500 and a ~56.5% rise in the Russell 2000).
• That said, with shares trading in-line with our fair value estimate we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.
• To be sure, we will continue to monitor LDL for an opportunity to re-recommend if valuation shifts or if incremental steps toward potential strategic alternatives materialize.

4Q 2020 results top guidance and consensus; STAY resumes quarterly dividend with an implied yield of ~2.25% and sees “multiple” opportunities to return incremental capital to shareholders via accretive dispositions in 2021; fair value increased to $17.50 per share 

• STAY reported 4Q 2020 consolidated sales down ~9% to $259.3 million (vs. consensus of $250.6 million) with adj. EBITDA of $89.3 million (compared with consensus of $84.2 million, guidance of $78-$88 million and ~$109 million in the prior year period). Adj. EPS were $0.16 (compared with consensus of $0.02 and $0.14 in 4Q 2019).
• STAY ended 2020 with debt of ~$2.3 billion, including $410 million of cash; given its financial position STAY resumed its quarterly dividend at an initial $0.09 per share, which implies a current yield of ~2.25%.
• For 1Q 2021E, STAY guided to comparable system-wide RevPAR declining 3%-6% with a net loss of $4-$8 million and adj. EBITDA of $78-$84 million. For full-year 2021E, STAY expects capital expenditures of $155-$175 million, depreciation & interest expense of $202-$207 million and $126-$130 million, respectively, and an effective tax rate of 10%-12%.
• Also, STAY is introducing a new brand under the ESA umbrella called Premier Suites (PS), which will launch with ~30 company-owned locations. PS will have an ADR of $80-$100 (compared with $60-$70 for ESA’s core product) and target corporate markets with “white space” between ESA and higher-priced players, such as Candlewood. Despite some added amenities, management expects these locations to have incremental flow through of 60%-75% and margins that are 200-300bps higher.
• Anecdotally, management indicated it would not pursue any downstream products and noted that those types of properties are where its alternative-use asset disposition plans currently focus; to that end STAY indicated it had “multiple transactions” for “multiple properties” (at prices significantly above the company’s trading multiple) in “various stages of completion right now”, which should provide an additional avenue of cash return to shareholders in 2021.
• Our fair value estimate is increased to $17.50 per share, based on a blended multiple of 9.5x 2023E EBITDA of ~$529.5 million and net debt of $1.93 billion, albeit with incremental upside to ~$20 per share, in the event of strategic alternatives.

Legion Partners, a 6.8% holder, nominated four independent directors to OSPN’s Board; maintain fair value of $34.50 per share, implying ~45% of incremental upside from current levels

• Today, Legion Partners, which increased its stake in OSPN to 6.8% during January 2021 (from 5.6% in 2020) and is currently the company’s second largest shareholder, nominated four independent directors for election to the company’s Board at its 2021 Annual Meeting (likely in mid-June).
• Nominated directors include, Sarika Garg, the former chief strategy officer of Tradeshift (a business commerce SaaS platform), Sagar Gupta, the senior TMT analyst at Legion, Michael McConnell, a private investor with Board experience in the SaaS space, and Rinki Sethi, the chief information security officer at Twitter (NYSE: TWTR).
• To that end, Legion contends that many of OSPN’s long-tenured Board members lack the relevant cloud-first/recurring revenue experience, have overseen a prolonged period of stock price underperformance and have failed to take strategic actions that would unlock value (which, from the investors point of view, could include the monetization of the Hardware business as well as other non-core assets, such as its e-signature offering, OneSpan Sign.
• In fact, on the latter point, Legion contends that it has been informed, by “credible market sources”, that the Board has seemingly ignored incoming inquiries from interested parties regarding “strategic transactions”.
• Moreover, the investor re-iterated its assessment that OSPN’s shares are worth ~$43 per share, assuming a 13.5x EV/ARR multiple and “modest values for the remaining non-recurring components” of the business.
• For our part, we maintain our current fair value estimate of $34.50 per share, which implies almost 45% of incremental upside from current levels. For context, our valuation framework values OSPN’s Hardware business at 2.5x 2022E EBITDA, applies sales multiples of 1.0x and 8.5x to the company’s legacy/non-recurring licensing and core/recurring software & services businesses, respectively, and accounts for ~$100 million of projected net cash.

ALERT: EXC to Spin-Off Exelon Generation

 On February 24, 2021, Exelon Corp. (NASDAQ: EXC), before the market open, announced that its Board of Directors has approved a plan to spin-off the company’s competitive power generation and customer-facing energy businesses into a standalone, publicly traded company, which is currently being refrenced to as Exelon Generation. Following the transaction, the parent company will retain control of he company’s six fully regulated electric and gas utilities with over 10 million customrers spread over five states.

The seperation if consumated, is expected to be completed via a tax-free distribution of shares in Exelon Generation to EXC shareholders, and is subject to standard approvals including final Board approval, an effectiveness declarion of the company’s Form 10 filing by the SEC, and regulatory approvals, amongst others. EXC is currently targeting completion of the spin-off in 1Q 2022.

The announcement comes following a November 3, 2020, disclosure that Exelon had retained advisors to assist with a strategic review of its corporate structure aimed at determining the best potential avenues to create value and position its businesses for success, including the separation of Exelon Generation and Exelon Utilities. For context, this development comes following reports in the business press that the company had seemingly come under a degree of pressure from activist investor Corvex Management, which currently holds 2.1 million shares, or about 0.2% position (albeit filed under a 13F), which was down in the most recent filing from ~3.7 million shares, or a ~0.4% position.

Investors tend to value the consistent earnings streams provided by pureplay utility companies more highly than the more volatile results of unregulated power concerns (as well as those of more hybrid/integrated models), particularly in the wake of a number of transactions at the time that were aimed at improving corporate focus on regulated assets. These included NiSource’s (NYSE: NI) spin-off of its pipeline assets and PPL Corp.’s (NYSE: PPL) spin-off of its unregulated power plants as well as the sale of unregulated power assets by both Duke Energy (NYSE: DUK) and Ameren Corp. (NYSE: AEE) to Dynegy Inc. (formerly NYSE: DYN). (Previously, Exelon management had indicated a preference for its integrated approach, stressing the quality of its assets and the balance sheet/cost-of-capital advantages it created, although the stock’s persistent underperformance may have left the company open to criticism from outside investors.)

PRELIMINARY VALUATION

Today, EXC’s business could be delineated under two broad categories: (1) Exelon Utilities, which operates regulated electric and gas utilities, including ComEd, BGE, Pepco, PECO, and Delmarva; and (2) Exelon Generation, which is among the largest generators of nuclear, gas, and renewable power. In 2020, EXC’s regulated utility business had a rate base of $43.9 billion with $1.78 in EPS, which is the base from which management has guided to annual growth of 6% -8% through 2024, implying out-year EPS of $2.15-$2.45. In terms of valuation comparisons, EXC Utility could be compared with regulated utility peers such as Alliant Energy (NASDAQ: LNT), Ameren Corp. (NYSE: AEE), Consolidated Edison (NYSE: ED), Dominion Energy (NYSE: D), Duke Energy (NYSE: DUK), NorthWestern Corp. (NASDAQ: NWE), Public Service Enterprise Group (NYSE: PEG), and Portland General Electric (NYSE: POR), which trade on average at ~17.5x 2022E EPS. Applying the peer multiple to projected 2022E EPS of $2.30 (or the mid-point of EXC’s guidance) implies segment value of $40.3 billion.

In 2019, Exelon Generation generated sales of $18.9 billion and EBITDA, by our calculation, of $2.86 billion. (Note we are basing the spin company financial projections on 2019 actual results given lack of a 2020 10-K filing as of this writing.) In terms of valuation comparisons, EXC Generation could be compared with independent power generators such as NRG Energy (NYSE: NRG) and Vistra Corp (NYSE: VST), which acquired Dynegy in 2018 for ~7x forward-12-month EBITDA. NRG and Vistra trade on average at ~6.5x 2022E EV/EBITDA. Applying the peer multiple to 2022E EBITDA of $2.95 billion and accounting for both segment and holding company debt of ~$14.1 billion implies a segment value of ~$5.1 billion. Thus, on a sum-of-the parts basis, EXC could be fairly valued at ~$45 billion, or $47 per share (based on shares outstanding of 974 million).

OSPN reports 2020 full-year sales ahead of guidance with adj. EBITDA slightly higher than our estimate; 2021 sales guidance, at the midpoint, is in-line with our estimate (including better than expected ARR growth) albeit with a weaker than expected EBITDA outlook; fair value increased to $34.50 per share (from $32 per share) 

• OSPN reported full-year 2020 consolidated sales down 15% to $215.7 million (compared with guidance of $203-$207 million and our $206.8 million estimate) with adj. EBITDA of $14.2 million (vs. our $13.8 million estimate and $31.8 million in 2019). Recurring revenue (ARR) grew 26% to $101.6 million (vs. our $93.7 million forecast) while hardware revenue fell 35.5% to $81.9 million (vs. guidance of $77-$79 million and our $77.5 million forecast).
• The company ended 2020 with net cash of $115 million or $2.88 per share (versus $110 million in 2019 and $113 million in 3Q 2020).  Notably, OSPN repurchased 250K shares for $5 million (or ~$20.10 per share) in 4Q 2020, which marks the first purchases under a $50 million program authorized in June 2020. (That said, we still model ~$6 million of annual repurchases simply offsetting stock-based comp in 2021-2022.)
• For 2021E, OSPN guided to total sales of $215-$225 million (compared with our $219 million estimate and consensus of $225 million) with adj. EBTIDA about “break-even” (compared with our ~$20 million forecast). Anecdotally, management is making strategic growth investments in S&M and R&D in 2021 and expects profitability will improve in 2022-2023.
• Importantly, recurring revenue is expected to grow 22%-26% to $120-$125 million in 2021 (compared to our $111 million forecast and OSPN’s longer-term guidance of 25%-30%), including ~40% growth in term-based software license growth.
• Hardware revenue is expected to decline in the “mid-single digit” range in 2021 (a moderation from the ~39% drop in 2020); management indicates that it continues to restructure/asses the business and will continue to update investors as plans “develop”.
• Our fair value is increased to $34.50 per share (from $32 per share), which values OSPN’s Hardware business at 2.5x 2022E EBITDA, applies sales multiples of 1.0x and 8.5x to the company’s legacy/non-recurring licensing and core/recurring software & services businesses, respectively, and accounts for ~$100 million of projected net cash.

Drop Coverage of Raytheon Technologies Corp. Effective Immediately

• Raytheon Technologies Corp. (NYSE: RTX) (formerly United Technologies Corp. prior to merging with The Raytheon Company on April 3, 2020) completed the spin-off of Carrier Global Corp. (NYSE: CARR) and Otis Worldwide Corp. (NYSE: OTIS) on April 3, 2020.
• Given the current share price is approaching our fair value estimate, and the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Raytheon Technologies Corp. effective immediately.
• Our prior estimates and fair values for RTX should no longer be relied on.