On October 8, 2020 before the market open, IBM Corp. (NYSE: IBM) announced a plan to separate the Managed Infrastructure Services unit of its Global Technology Services division into a new public company (“NewCo”). The tax-free separation is expected to be completed by the end of 2021 and is subject to customary closing conditions, including Form 10 registration with the U.S. Securities and Exchange Commission, receipt of a tax opinion from counsel, and final approval by IBM’s Board of Directors

IBM, with a current market capitalization of $105 billion, is a manufacturer of enterprise hardware, middleware and software, and provides hosting and consulting services. The company generated consolidated 2019 revenues and EBITDA of $77.1 billion and $16 billion, respectively.

The separation makes strategic sense given the diverging needs for application and infrastructure services. In recent years, IBM has de-emphasized its legacy businesses to focus on the growing cloud opportunity, in an effort to offset slowing software sales and more seasonal demand for its mainframe servers. Following the separation, IBM will continue to focus on its open, hybrid cloud platform and AI (Artificial Intelligence) capabilities—a $1 trillion market opportunity. Given IBM’s historical position in enterprise IT infrastructure, the company’s hybrid solution offers customers the ability to leverage their existing infrastructure and mix and match private and public cloud-based offerings. This strategy was enhanced by the $34 billion acquisition of Red Hat Inc. in July 2019. In addition, the separation will allow IBM to streamline its operating model and consolidate shared services. Post-spin IBM, which will generate revenues of approximately $59 billion, will also transition from generating roughly half its revenue in services to generating more than 50% of sales from recurring revenue.

Following the separation, NewCo, (to be named at a subsequent date) will be the world’s leading managed infrastructure services provider, with revenues of approximately $19 billion. The company will hold relationships with more than 4,600 customers in 115 countries, including more than 75% of the Fortune 100, a backlog of $60 billion, and more than twice the scale of its nearest competitor. The separation will also allow the company to partner fully across all cloud vendors, opening new avenues for growth, while maintaining a strong strategic partnership with IBM and continuing to serve existing and new clients

Following the separation the parent company can be compared to enterprise IT hardware and software manufacturers including Cisco Systems Inc. (NASDAQ: CSCO), Hewlett Packard Inc. (NYSE: HPE), and VMWare (NYSE: VMW), among others, which currently trade at approximately 15x EBITDA. Assuming revenue growth of 2% and 3% in 2019 and 2020, respectively, post-spin IBM could reasonably generate 2021 revenues of approximately $62 billion. At an estimated EBITDA margin of 25%, the post-spin parent would generate 2021E EBITDA of $15 billion. Applying a 9x multiple, approximating IBM’s current consolidated multiple, to estimated 2020 EBITDA results in an enterprise value of $139 billion for post-spin IBM.  Note that the applied multiple represents a slight premium to Cisco, given the latter’s mix of lower-,margin equipment sold to telecommunications service providers, and a discount to VMWare, at the upper end of the valuation range, given the latter’s high-margin and recurring revenue growth business model in software.

The spin company will primarily will be a provider of network integration and managed network services, which could be compared to professional services companies such as Accenture plc (NYSE: ACN), Cap Gemini Corporation (CAP.EN), and Genpact Ltd. (NYSE: G), among others, which currently trade at a broad range of valuations from 10x to 16x. Assuming revenue declines of 6% and 4% in 2020 and 2021 respectively, the post-spin services company could be expected to generate revenues of approximately $17 billion in 2021. At an estimated EBITDA margin of 15%, the post-spin company would generate 2021E EBITDA of $2.6 billion. Applying a 15x EBITDA multiple, a modest discount to Accenture at 16x, to estimated EBITDA of $2.6 billion generates an implied enterprise value of $39 billion for the post-spin company.  We view the discount as warranted given NewCo is just under half the size of Accenture.

Factoring in for net debt of $56 billion, IBM can be fairly valued at an implied market capitalization of $122 billion, or $137 per share on a pres-pin sum-of-the-parts basis, representing approximately 4% upside to the shares current intraday price. IBM shares have declined approximately 2% year-to-date, versus a 6% increase for the S&P 500 over the same period. Notably, shares have appreciated approximately 7% on today’s news in intraday trading.

NNBR completes the sale of its Life Sciences business, which will bring its leverage ratio to 1.8x (from 6.1x); fair value remains $8.50 per share

• Today, NNBR completed the previously announced sale of its Life Sciences business to American Securities for $825 million (or ~12.5x 2020E EV/EBITDA). Concurrently, the divested business has been combined with MW Industries, a portfolio company of American Securities.
• NNBR will deploy the ~$700 million of net proceeds to reduce debt, specifically its Term B loan, which will improve its leverage and debt-to-cap ratios to ~1.8x (from 6.1x) and 35% (from 75%), respectively. Additionally, NNBR expects to operate with a leverage ratio below 2.0x through 2025 (versus its revised covenant of 3.5x).
• In terms of the remaining Mobile and Power Solutions businesses, NNBR expects consolidated sales to grow to ~$600 million in 2025 (compared with 2020E sales of $400-$420 million and implying a 4%-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 ~$55-$60 million in 2020E).
• Anecdotally, corporate costs at RemainCo are expected to be $15-$18 million (albeit with a longer-term goal of $11-$13 million) with D&A expense of ~$30-$31 million and capital spending of $20-$22 million (which is a framework that should allow NNBR to pre-pay the $100 million preferred investment it received from shareholders Legion & Corre Partners in December 2019).
• Fair value remains $8.50 per share, based on a blended multiple of ~6x on 2023E adjusted EBITDA of ~$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.]

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

LNDC reiterates full-year F2021 guidance; regains compliance with debt covenants in 1Q F2021 although securing a long-term refinancing arrangement remains a “top” priority; fair value remains $12 per share

• LNDC posted 1Q F2021 consolidated sales down ~2% to $135.6 million with adj. EBITDA of $3.1 million (compared with $314K in the prior period).  The adjusted EPS loss of $0.11 per share improved from $0.16 in 1Q F2020. Curation Foods showed some signs of improvement but Lifecore, where sales grew 81% to ~$22 million and adj. EBITDA improved to ~$1.5 million (from a loss of $675K), was again the clear standout.
• LNDC reiterated full-year F2021 guidance, which calls for consolidated sales of $530-$550 million with adj. EBITDA up 50%-68% to $33-$37 million. Anecdotally, the company expects to generate positive EPS in the remaining quarters of F2021 and to be modestly free cash flow positive for the year, exclusive of asset sale proceeds.  Cap ex is expected to be ~$34 million in F2021 (with $4.6 million having been spent in 1Q F2021, of which ~60% was at Lifecore and ~40% was at CF).
• By segment, at CF, Landec continues to expect F2021 sales down 10%-13% to $437-$453 million, including a planned $50-$60 million reduction in its legacy (and unprofitable) vegetable business, with adj. EBITDA of $12-$14 million. At Lifecore, management forecasts an 8%-13% increase in sales to $93-$97 million with a 12%-22% increase in adj. EBITDA to $22.5-$24.5 million.
• The company ended 1Q F2021 with net debt of $174 million (compared with $221 million at the end F2020) and a net leverage ratio of 4.7x (compared with 5.9x in F2020); as such, the company was in compliance with its debt covenants. [Note: LNDC’s credit facility matures in September 2021 and management indicates that securing a long-term refinancing arrangement is a “top” corporate priority in F2021.]
• Our fair value estimate remains $12 per share based on an ~11x blended multiple of F2022E EBITDA of ~$44 million and net debt, incl. Windset, of ~$150 million.

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

STAY is well positioned and undervalued both near- and long-term: Notes from recent client discussions

• This update will briefly highlight/address some topics/concerns that have commonly arose in our recent discussions with clients.
• On the highlight side, we note that recent management commentary suggests STAY is likely to exceed its initial 3Q 2020 guidance, which called for RevPAR declines of 18%-21% with adj. EBITDA of $98-$105 million. Moreover, we expect STAY is (and will remain) solidly cash flow positive (i.e. $10 million-plus per month), in stark contrast to peers.
• On that relative outperformance front, two investor concerns we have encountered are: 1) Why did STAY reduce its dividend?; and 2) Will STAY underperform its transient/group/destination-levered  peers in a post-pandemic rebound?
• On the former, the primary impetus for the dividend cut was simply an abundance of caution amid unprecedented uncertainty.  That said, we would note that minimizing the C-Corp.’s taxable income, which receives dividends from the internal REIT has provided tax advantages in 2020.  In any event, we expect STAY will markedly increase its cash return to shareholders during the next six months.
• On the latter, while we acknowledge that STAY’s rebound, at least in terms of RevPAR, will likely lag its more traditional lodging peers (where is RevPAR is still currently down ~50%-75%) we think its relative outperformance in this environment (i.e. positive earnings and cash flow), coupled with our forecasts for incremental mid-single digit RevPAR growth in 2021-2022 actually suggest a premium valuation is warranted (as opposed to STAY’s current discount below 9x).
• On the shareholder front, while Blackstone recently sold its 4.99% stake in STAY, after essentially doubling its money, we would note that over the same time period Starwood Capital, which also owns InTown Suites, increased its stake to almost 9.5% (from 8.4%).
• On the management front, we don’t think the recent CFO change is overly concerning considering executive shifts are common under new leadership regimes and given Mr. Clarkson’s extensive experience with STAY (and in the extended-stay sector).
• Fair value remains $15 per share, based on a blended multiple of 9.5x 2022E EBITDA of ~$499 million and net debt of $2.1 billion, albeit with incremental upside, in the event of strategic alternatives, to ~$17-$20 per share.

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

Fortive Begins When-Issued Trading; Maintain NEUTRAL Rating, Revise Pre-Spin FVE to $78 (from $85); Revise Post-Spin VNT to $40 (from $56)

• Fortive Corp. (NYSE: FTV) is expected to complete the spin-off of 80.1% of Vontier Corp. on October 9, 2020, before the market open. FTV shareholders of record as of September 25, 2020, after the close, will receive two share of Vontier for every five shares of Fortive holed. Following the distribution, on October 9, 2020, shares of Vontier Corp will trade “regular-way” on the NYSE under the ticker “VNT”.
• Shares of Vontier currently trade on a “when-issued” basis, under the ticker “VNT WI” Shares of FTV trade on an “ex distribution” basis under the ticker “FTV WI”.
• We adjust the post-spin fair value estimate for VNT to reflect a discounted multiple relative to specialty industrial peers, given the company’s exposure to weakness in the transportation end market, which could limit near-term revenue and earnings growth.  We currently value post-spin VNT at 15x 2021E EBITDA (versus 18x previously). Accordingly, we rise our fair value estimate for Vontier to $40 per share (previously $56), based on 170 million shares outstanding.
• The post-spin fair value estimate for Fortive remains $63 per share, consisting of $59 per share in the core Fortive business and $4 per share in the 19.9% ownership stake in VNT.
• On a pre-spin basis we assign a fair value estimate of $78 per share to Fortive (versus $85 previously), consisting of $59 per share in value for the core Fortive business and $19 per share in value from Vontier (based on 357 million shares outstanding).
• With the pre-spin sum-of-the-parts estimate approximating FTV’s current consolidated share price, pre-spin shares are not recommended for purchase.
• FTV’s current premium multiple to diversified industrial peers suggests that management’s rationale for the spin-off may be principally strategic rather than reflecting the view that the conglomerate structure is a hindrance to valuation.
• The company has demonstrated short-cycle recovery leverage, while a recurring revenue stream helps insulate from cyclicality and provides visibility, and a growing software business offers optionality on earnings upside. That said, with the shares trading in line with premium diversified industrial peers, it appears that investors are discounting for improving trends.
• We expect post-spin Fortive to continue its strategic focus on deleveraging and liquidity while making strategic acquisitions and investing in new products and an expanded sales force. Order growth trends appear favorable, particularly in North America, positioning the company for a potential return to more normalized growth.
• For Vontier, we expect the company to similarly focus on strategic acquisitions while expanding its telematics offerings. Of note, VNT management will host a virtual investor day on October 5, 2020, at 10 a.m. EDT.
• For more details, please refer to The Spin Off Report dated September 14, 2020 and UPDATE dated September 16, 2020.

LDL indicates at a conference that the results of its on-going strategic review are likely to be disclosed by year-end; fair value remains $21 per share

• Yesterday, at a conference presentation, LDL indicated that the results of its strategic review (as well as the articulation of a more comprehensive go-forward operating plan) are likely to be disclosed by year-end 2020. [Note: the company will formally report 3Q 2020 results in mid-October.] 
• Management did not explicitly discuss the specifics of its on-going efforts to reshape the portfolio other than to indicate that LDL is likely to “look very different” in future years. In that context, we would note the company has made no secret that specialty filtration & engineered materials would the “cornerstone” of its long-term strategy.  That said, while we do not view the bulk of LDL’s auto-related business as “core” we discern that the portfolio could ultimately include some specialized (i.e. non-commoditized) auto applications. 
• On the topic of LDL’s recent investments to increase its production capacity for mask-related filtration media (e.g. N95 and their European FFP2/FFP3 equivalents), of which a large portion have been subsidized by either the U.S. or French governments,  management indicated that it has contracts with almost all of the large, branded personal protective equipment (PPE) suppliers, including Honeywell (NYSE: HON), which ensure sufficient demand for through, at least, 2022.
• Longer-term, the company still expects to see sustainable demand given the localization of supply chains as well as the growing requirement, by both guideline and mandate, for clean air applications in the global HVAC-sector.  (In their words, PPE is the armor protecting against outdoor air quality while indoor air quality will be key in the return to normalcy.)
• Our fair value estimate for LDL shares remains $21 per share, reflecting a ~6x blended multiple on 2022E adj. EBITDA of ~$80.5 million as well as net debt of $134 million. 

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

Fortive Corp. Announces Spin-Off of Vontier to be Completed on October 9, 2020; Maintain NEUTRAL Rating, Revise Pre-Spin FVE to $85

• On September 15, 2020, after the market close, Fortive Corp. (NYSE: FTV) announced that it would complete the spin-off of 80.1% of Vontier Corp. on October 9, 2020, before the market open.
• FTV shareholders of record as of September 25, 2020, after the close, will receive two share of Vontier for every five shares of Fortive held.
• Following the distribution, FTV shareholders will own 80.1% of Vontier common stock, with FTV controlling the remaining 19.9%.
• Following the distribution, on October 9, 2020, shares of Vontier Corp will trade “regular-way” on the NYSE under the ticker “VNT”. Shares of Vontier are expected to trade on a “when-issued” basis, under the ticker “VNT WI” beginning on September 24, 2020. Shares of FTV will trade on an “ex distribution” basis on or about September 24, 2020, under the ticker “FTV WI”.
• Of note, VNT management will host a virtual investor day on October 5, 2020, at 10 a.m. EDT.
• FTV’s current premium multiple to diversified industrial peers suggests that management’s rationale for the spin-off may be principally strategic rather than reflecting the view that the conglomerate structure is a hindrance to valuation.
• The company has demonstrated short-cycle recovery leverage, while a recurring revenue stream helps insulate from cyclicality and provides visibility, and a growing software business offers optionality on earnings upside. That said, with the shares trading in line with premium diversified industrial peers, it appears that investors are discounting for improving trends.
• We expect post-spin Fortive to continue its strategic focus on deleveraging and liquidity while making strategic acquisitions and investing in new products and an expanded sales force. Order growth trends appear favorable, particularly in North America, positioning the company for a potential return to more normalized growth.
• For Vontier, we expect the company to similarly focus on strategic acquisitions while expanding its telematics offerings.
• We adjust our post-spin estimates to better reflect the current operating environment. We now assign a fair value estimate of $56 per share of Vontier, based on 170 million shares outstanding, and a post-spin fair value estimate of $63 per share to Fortive, consisting of $58 per share in the core Fortive business and $5 per share in the 19.9% ownership stake in VNT.
• On a pre-spin basis we assign a fair value estimate of $85 per share to Fortive, consisting of $58 per share in value for the core Fortive business and $27 per share in value from Vontier (based on 357 million shares outstanding).
• With the pre-spin sum-of-the-parts estimate approximating FTV’s current consolidated share price, pre-spin shares are not recommended for purchase.
• For more details, please refer to The Spin Off Report dated September 14, 2020.

CNDT expects 3Q 2020 sales and adj. EBITDA margins to be “at or above the mid-point” of previous guidance and that it would “meet or exceed” its 60% full-year growth target for new business singings; fair value remains $6.50 per share 

• At a conference appearance yesterday, CNDT CEO, Cliff Skelton, indicated that he expected 3Q 2020 sales and adj. EBITDA margins would be “at or above” the midpoint of its previous guidance despite the lack of extension in Federal unemployment insurance.
• For context, during its 2Q 2020 earnings call, CNDT did not re-issue full-year guidance but did indicate that 3Q 2020 sales would be $960 million-$1.01 billion (vs. prior consensus of ~950M and current consensus of $994M) with an adjusted EBITDA margin of 10.0%-11.5%, implying adj. EBITDA of $101-$115 million (vs. prior consensus of ~$88.5M and current consensus of $109M).
• Importantly, CNDT also indicated in its presentation that it was on track to “meet or exceed” its 60% full-year growth target for new business signings, which suggests the positive momentum demonstrated in 2Q 2020, when new business signings were up more than 90% to $623 million, has persisted.
• Longer-term, CNDT seemingly remains optimistic that a return to top-line growth could be achieved in 2021-2022 and indicated that its ultimate margin goal remained 15% (albeit likely rangebound between 10.5%-11.5% over the next year or two).
• On the leverage front, net leverage ratio was 2.6x at the end of 2Q 2020 (compared with 2.1x at the end of 1Q 2020 and its 3.75x covenant), including $428 million of cash. (CNDT also indicates that it would refinance well-ahead of its next significant maturity of ~$720 million in 2022.)
• On the strategic action front, management remains open to opportunistic divestitures despite the formal end of its strategic review; that said, we continue to view its improving fundamental performance (albeit a positive for the stock price) as somewhat of a double-edged sword, at least near-term.
• Our fair value estimate remains ~$6.50 per share, reflecting a blended multiple of ~6x on 2022E adj. EBITDA of ~$423 million and net debt of $1.125 billion.

LDL will expand fiber meltdown capacity at its facility in Saint-Rivalain, funded, in part, by the French government with completion expected in 2Q 2021; fair value increased to $21 per share (from $20)

Notes from the conference call: LDL sees sustainable demand for filtration even beyond 2022; fair value increased to $20 per share (from $18)

• Today, LDL announced that it will expand its fiber meltdown capacity (used for N95 masks and their European FFP2/FFP3 equivalents), at their production facility in Saint-Rivalain, France.
• The expansion, which his expected to be completed in 2Q 2021 and provide the materials necessary to produce 600 million FFP2/FFP3 respirators or 2.2 billion surgical masks per year,  will be subsidized (up to ~30%) with a grant from the French Ministry of the Economy and Finance as part of the French government’s broader effort to expand its domestic supply chain of essential national security and public health products.
• Recall, LDL is also expanding fiber meltdown capacity at its plant in Rochester, NH, in part, with grants from the U.S. Department of Defense, which are scheduled to come on-line in 4Q 2020 and May 2021, respectively, as the U.S. government has also sought to increase their domestic supply of personal protective equipment (PPE).
• On a different front, while we would note that LDL’s strategic review remains on-going as the company continues to finalize its near & long-term strategy we think this announcement serves to further highlight the company’s sharpened focus on its filtration & engineered materials businesses.
• Our fair value estimate is revised to $21 per share (from $20) based on a blended multiple of ~6x (unchanged) 2022E adj. EBITDA of ~$80.5 million (previously $79 million) as well as net debt of $134 million (previously $135.5 million).  That said, we may make further adjustments following discussions with management.

SunPower Completes Spin Off of Maxeon Solar Technologies; Adjust Post-Spin Fair Value Estimates, Rate SPWR at SELL and MAXN at NEUTRAL

• On August 26, 2020, after the market close, SunPower Corp. (NASDAQ: SPWR) completed the spin-off of Maxeon Solar Technologies Ltd., which now trades on the NASDAQ under the symbol “MAXN”. Shareholders of record as of August 17, 2020, received one share of Maxeon Solar for every eight shares of SunPower owned.
• Maxeon controls the former company’s panel manufacturing business and operations outside of the U.S. Post-spin the parent company essentially transforms into a North American focused residential and commercial installer of solar solutions.
• When-issued trading was light in terms of volume, with shares of SPWRV closing at $10.76 and MAXNV closing at $37.62 yesterday.
• We adjust our fair value estimates to reflect updated comp multiples. We now value shares of MAXN at $39 per share (previously $31 per share), and shares of SPWR at $5.50 per share (previously $4 per share).
• Our revised post-spin fair value for SPWR is derived by applying a 13.0x multiple (previously 11.0x), which remains at a discount to peer residential and commercial DG installers that trade in excess of 20.0x the consensus 2022 EBITDA estimate. It is our opinion that the multiples currently being awarded these companies appear overly full given increased competition, risks to tax credits, and the current economic environment (10.2% unemployment rate), which may all stunt future growth in new installations. For SPWR, with near term revenue growth below 20%, risks to achievement of our forecasted 7% EBITDA margin, and likely negative free cash flow generation, we view a 13x multiple, which is a slight premium to SPWR’s historic trading multiple, as appropriate.
• We acknowledge regulatory changes, including similar requirements to those put in place in California for new home solar installs, may occur if Democrats win the November elections that could benefit SPWR and keep trading multiples elevated in the near-term, however we view the current multiples on DG installers as presenting a longer-term risk/reward scenario that skews to the downside.
• For MAXN, we view shares as approaching full valuation trading at ~11.0x our 2022 EBITDA estimate. Panel manufacturing peers First Solar Inc. (NASDAQ: FSLR) and JinkoSolar Holding Co. Ltd. (NYSE: JKS) trade at 11.5x and 11.8x the consensus 2022 EBITDA estimate, respectively.
• For more details, please refer to The Spin Off Report dated August 12, 2020.