Drop Coverage of HD Supply Holdings Inc. Effective Immediately

• On August 11, 2020, before the market open, HD Supply Holdings Inc. (NASDAQ: HDS) announced that the company has agreed to sell its construction and industrial business, referred to as White Cap, to private equity firm Clayton, Dubilier & Rice.
• HDS had previously planned to spin-off White Cap into a standalone company.
• Clayton, Dubilier & Rice agreed to purchase White Cap for $2.9 billion in cash, with HDS expected to receive approximately $2.5 billion after taxes and transaction costs. The sale is expected to be completed in October 2020.
• HDS expects to use proceeds from the sale to return capital to shareholders, fund M&A, and reduce debt.
• Given the announcement, we DROP coverage of HDS effective immediately.

• Our prior estimates and fair values for HDS should no longer be relied on.

LBRDK to acquire GLIBA in stock-for-stock merger; the combination, in our view, should mitigate the long-standing discount to net asset value (NAV), which currently stands at ~$96 per share 

• Liberty Broadband (LBRDK) has agreed to acquire GCI Liberty (GLIBA) in an all stock deal where each of GLIBA’s outstanding A & B shares will receive 0.58 shares of LBRDK C & B shares, respectively, while GLIBA’s preferred shares would receive 1 share of newly issued LBRDK preferred stock. (Notably, these ratios were in-line with the preliminary understating announced by the two companies on June 30^th).
• Former holders of GLIBA common shares will own ~30.6% of LBRDK and Mr. John Malone, the Chairman of both GLIBA and LBRDK, will have ~49% of the combined entity’s aggregate voting power.
• The deal is expected to close in 1H 2021 and should mitigate the so-called “double-discount” to net asset value that has existed for some time as well as eliminate the corporate level tax on its LBRDK gains while still maintaining its attractive long-term exposure to Charter Communications (CHTR). As well, management noted that the deal would “improve flexibility for future combinations”, which we think alludes to the longer-term (but, in our view, inevitable) merger, likely via Reverse Morris Trust (RMT), with CHTR. (To that end, while small, we think GCI Communications would likely be highly synergistic asset for CHTR.)
• Our current fair value estimate is $96 per share based on our estimated value of GLIBA’s holdings, which include LBRDK, Lending Tree (TREE) and, most impactfully, CHTR, for which our outlook remains constructive amid a mix shift toward higher-margin broadband subscribers and improved free cash flow (FCF) generation. As well, we would note that our valuation of GLIBA’s operating asset, GCI Communications, represents a ~20% discount to the price it was purchased for in April 2017 and we assign no value to the company’s ownership of Evite.

CNDT posts encouraging 2Q 2020 results, particularly new business signings, and 3Q 2020 guidance 

• CNDT posted 2Q 2020 consolidated sales, down 8.6% to $1.016 billion (vs. consensus of $925 million) with adj. EBITDA down 3.5% to $110 million (vs. consensus of ~$57.5 million).
• Broadly, Government Services, primarily driven by payment services (e.g. CARES Act/unemployment), showed top-line strength while Transportation, which seems to be rebounding along with improved mobility (e.g. tolling), and Commercial were weaker. Cost cuts helped across the portfolio and CNDT expects to well exceed its $100 million 2020 target (of which ~60% are permanent).
• Importantly, the company indicated that new business signings were $623 million in 2Q 2020, an increase of more than 90% year over year. (For context, 1H 2020 new business singings were $947 million compared with $995 million in all of 2019.)
• The net leverage ratio was 2.6x (compared with 2.1x at the end of 1Q 2020 and its 3.75x covenant), including $428 million of cash. (On the debt front, CNDT indicated that it would refinance well-ahead of its next significant maturity of ~$720 million in 2022.)
• The company did not re-issue full-year guidance but did indicate the expectation that 3Q 2020 sales would be $960 million-$1.01 billion (vs. prior consensus of ~950M) with an adjusted EBITDA margin of 10.0%-11.5%, implying adj. EBITDA of $101-$115 million (vs. prior consensus of ~$88.5 million)
• Longer-term, CNDT seemed 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).
• While management noted that opportunistic divestitures remain “on the table” despite the end of its strategic review we view its improving fundamental performance (albeit an unmitigated 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 $1.25 billion.

Howmet Aerospace Reports 2Q 2020; Downgrade to NEUTRAL on Valuation

• On August 6, 2020, before the market open, Howmet Aerospace Inc. (NYSE: HWM) released 2Q 2020 earnings, which included revenue of $1.25 billion, a 31% year-over-year decline, and income from continuing operations of $55 million ($0.12 per share), down from $147 million ($0.32) in the prior year period.
• Revenue and profit declines were primarily related to both COVID-19 disruptions and the ongoing 737 MAX production issues, which were partially offset by defense and industrial gas turbine sales.
• Highlights from the quarter include positive free cash flow generation (quarter end cash balance of $1.28 billion) with an undrawn revolver of $1 billion. Positive FCF signals progress on the company’s previously cost savings efforts, which was increased to $100 million from the $50 million annual savings.
• Full year guidance was issued including revenue of $5.1 – $5.3 billion and adjusted EBITDA of $995 million – $1.065 billion (implying an EBITDA margin of 19% – 21%)
• We adjust our HWM earnings estimate and now forecast 2022 EBITDAP and EPS of $1.366 billion and $1.21 per share, respectively. The lowered estimates reflect the revised 2020 baseline guidance and EBITDA margin of 21% reflects the current concerns on the company’s ability to drive wider margins given the uncertainties surrounding future aircraft manufacturing and fleet size to drive consumable and maintenance products.
• We revise our Howmet fair value estimate to $17 per share, reflecting the lowered earnings estimates and increased valuation multiples to 9.0x EBITDA (previously 8.0x), 15.0x EPS (previously 12.0x), and a 6% FCF yield (previously 7.5%) reflecting current peer trading multiples.
• Given limited upside to our revised fair value estimate, we downgrade HWM to NEUTRAL (from BUY).
• For more details, please refer to The Spin Off Report dated March 10, 2020, and UPDATEs dated April 1, 2020, and May 5,2020.

On August 6, 2020 before the market open, Bausch Health Companies Inc. (NYSE: BHC) announced a plan to separate its eye health business via a spin-off, The spin-off is subject to certain conditions and approvals including the reorganization of the company’s reporting segments, which will begin being reported in 1Q 2021.

The announcement comes at the end of a four-year, multi-phase plan that resulted in the divestiture of $4 billion in non-core assets, reduction of approximately $8 billion in debt, and the resolution of various legal issues, while managing the loss of exclusivity on a product portfolio totaling $1.4 billion in annual sales. Management commented that separating the businesses will provide improved focus and enhanced financial transparency, which will allow investors to better evaluate the standalone businesses.

Following the separation Bausch + Lomb (NewCo) will be a global leader in vision care and consumer ophthalmic business with 2019 revenue approximating $3.7 billion (exhibiting a 4.1% revenue CAGR over 2017-2019). Over 50% of NewCo’s sales are outside of the U.S. and key brands include BAUSCH + LOMB ULTRA, Biotrue, and ONEDAY, amongst others. BHC (RemainCo) will have revenue of approximately $4.7 billion (1.8% CAGR since 2017) and will control a diverse portfolio of products including specialty pharmaceutical brand Salix, International Rx, Solta, and neurology and medical dermatology businesses. BHC’s announcement follows Novartis’s (NOVN SW) spin-off of Alcon (ALC SW) in April 2019.

Currently, BHC operates four reportable business segments: (1) Bausch + Lomb, the eye-health business (55% of sales and ~34.5% of segment profit in 2019); (2) Salix (23.5% of sales and 35% of segment profit in 2019), which primarily focuses on gastrointestinal health via its Xifaxan product; (3) Ortho Dermatologics (6.5% of sales and 6% of segment profit in 2019), which serves the dermatological market with a portfolio of products that include Duobrii, Bryhali, Jublia, and Siliq; and (4) Diversified Products (15% of sales and 24.5% of segment profit in 2019), which sells a range of pharmaceutical products, including Ativan, Cuprimine, Librax, Migranal, and Wellbutrin. The company recently updated its consolidated 2020 guidance, which currently calls for sales of $7.8-$8.2 billion (compared with the previous guide of $8.65-$8.85 billion and $8.6 billion in 2019), with adjusted EBITDA of $3.15-$3.35 billion (compared with previous guide of $3.5-$3.65 billion and $3.571 billion in 2019). Cash flow from operations was initially projected to be ~$1.5 billion in 2020.

PRELIMINARY VALUATION

In 2019, Bausch + Lomb (B+L) posted top-line growth of ~2% to $4.739 billion, with adjusted segment profit of $1.332 billion (compared with $1.33 billion in 2018). For 2020, based on guidance and current trends, it can be reasonably projected that, assuming a pro rata distribution of depreciation expense, B +L could post 2020E sales and adjusted EBITDA of $4.3 billion and $1.15 billion, respectively. The B+L business could be compared with stand-alone Alcon as well as with Cooper Companies (NYSE: COO), which trade at ~18x 2020E EV/EBITDA. Applying a discounted multiple of 15x to Bausch + Lomb’s 2020E adjusted EBITDA forecast implies segment value of ~$17.3 billion.

The remainder of BHC’s business, including Salix, Ortho Dermatologics, and Diversified Products, posted aggregate sales growth of almost 4% to $3.9 billion, with adjusted segment profit of ~$2.5 billion (compared with $2.4 billion in 2019). For 2020, based on guidance and current trends, it can be reasonably projected that, assuming a pro rata distribution of depreciation expense, the three businesses could post 2020E sales and adjusted EBITDA of $3.7 billion and $2.2 billion, respectively. For valuation purposes, these businesses could be imperfectly compared to a range of specialty and generic pharmaceutical players, including Amneal (NYSE: AMRX), Endo (NASDAQ: ENDP), Mallinckrodt (NYSE: MNK), Mylan (NASDAQ: MYL), Perrigo (NYSE: PRGO), and Teva (NYSE: TEVA), which trade, on average, at ~7x 2020E EV/EBITDA (in a range of ~5x-9x). Applying a discounted blended multiple of ~6.0x, which assumes a 7.0x multiple for Salix, a 6.0x multiple for Ortho Dermatologics, and a 5x multiple for Diversified Products, to 2020E EBITDA implies aggregate value of roughly $13.5 billion.  

Accounting for projected net debt of roughly $22.5 billion yields a sum-of-the-parts valuation of ~$8.2 billion, or ~$23 per share (based on a diluted share count of 352 million).

Q2 Earnings; Maintain BUY on CTVA; Adjusting Fair Value Estimate to $33

• On August 6, 2020, pre- market, Corteva Inc. (NYSE: CTVA), a manufacturer of agricultural chemicals and seeds, announced Q2 earnings results. As background, Corteva was spun off from DowDuPont Inc. (formerly NYSE: DWDP) on June 3, 2019.
• CTVA reported Q2 results of $1.26 on $5.4 billion (-3% year-over-year), versus consensus of $1.24 on $5.44 billion. As expected, results reflected negative foreign currency impacts (30% weakness in Brazilian real relative to the U.S. dollar) and reduced U.S. corn demand.
• Seeds (69% of Q2 sales; includes corn, soybean and other oilseeds) grew 8% year-over-year on an organic basis for 1H 2020, reflecting volume and price growth across all regions. Crop Protection (31% of Q2 sales; includes herbicides, insecticides, and fungicide) increased 1% organically in 1H 2020, benefitting from new product introductions. Sales gains in EMEA and Asia Pacific were offset by declines in Latin America and North America.
• 1H 2020 merger cost synergies totaled $130 million and are on track for $230 million for the full year.
• The outlook for the agriculture sector appears to be improving, with fertilizer demand improving in India and Brazil. There are recent concerns about a corn deficit in China, and the Chinese government appears highly incentivized to purchase U.S. corn due to efforts to complete Phase 1 trade agreements. Additionally, corn and soybean prices have increased, owing to dry and hot weather forecasts during the critical reproductive phases of the planting season.
• We adjust our estimates to reflect recent results and forward guidance. We model 2021E revenues of $14.3 billion (+2% year-over-year) and EBITDA of $1.9B (14% margin), essentially flat with management’s 2020 guidance. These changes result in an adjustment of our fair value estimate to $33 (versus $34 previously), reflecting a 17x multiple on 2021E EBITDA. The applied multiple represents a premium to agricultural chemical peers (13x), which we view as justified based on CTVA’s leadership position in seeds [second to Bayer AG (BAYN GY), which owns Monsanto] and scarcity value as a pure-play, diversified agricultural company. 
• CTVA shares are essentially flat year-to-date, versus a 2% gain for the S&P 500 over the same period.  We continue to rate the shares a BUY. We expect an improving demand outlook throughout the year, we see the potential for CTVA to gain share in seeds and crop protection, and see long-term value in the shares as a pure-play agriculture science company—particularly amidst industry consolidation.
• For more details, please refer to The Spin Off Report dated January 14, 2019 and UPDATE dated November 1, 2019.

UHAL reports core-Moving & Storage EBITDA down ~7% in 1Q F2021, by our calculation, but saw Moving trends improve throughout the quarter and we perceive the ongoing slowdown in Storage spending as a positive

• UHAL reported 1Q F2021 sales fell 8.5% to $987.2 million with a 28% decline in operating income to $154.1 million and EPS of $4.47 per share (compared with $6.76 per share in 1Q F2020).
• At the core-Moving & Storage segment, sales decreased 7.4% to $926.3 million, reflecting a 12.6% decline at Moving and a 10.9% increase at Storage. Operating income declined 24.9% to $151.7 million while EBITDA declined 7.35%, by our calculation, to $317.3 million.
• Anecdotally, equipment-related (i.e. Moving) revenue fell 30% in April, 8% in May and 4% in June. At Storage, average occupied units increased 15% year over year and capital spending on real estate roughly halved to $103 million (from $218 million in 1Q F2020), which we think augurs well for future profitability (and investor sentiment).  To that end, the company had previously indicated, on the year-end conference call, that its pipeline of R.E. projects was down ~$350 million.
• At year-end, UHAL had net debt of ~$3.953 billion (compared with ~$4.127 billion at the end of F2020) with ~$841 million in available liquidity (compared with ~$500 at the end of F2020) and a net leverage ratio of 3.5x, by our calculation.
• We continue to view UHAL, at ~6x F2022E EV/EBITDA, as an undervalued equity that has durable competitive advantages and a business model that has proven resilient in periods of economic dislocation (e.g. 2008-2009).
• Our fair value estimate remains $395 per share, reflecting an ~8.5x multiple on F2022E Moving & Storage EBITDA of ~$1.3 billion, the insurance assets at book value and net debt of ~$3.945 billion.
• That said, we may make adjustments to our forecasts following this morning’s conference call at 11 a.m. (ET).  As well, we would note that UHAL intends to hold its annual virtual investor day on August 20^th at 2 p.m. (ET).

Drop Coverage of Wabtech Corp. Effective Immediately

• Wabtech Corp. (NYSE: WAB) merged with the Transportation business of General Electric Co. (NYSE:GE) in a Reverse Morris Trust combination which was completed on February 14, 2019.
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Wabtech effective immediately.
• Our prior estimates and fair values for WAB should no longer be relied on.

EVRI surprisingly generated positive EBITDA in 2Q 2020 (ahead of the prior 3Q 2020 expectation) with sequential improvement forecasted for 2H 2020; management sees FCF positivity in 3Q 2020 (ahead of the prior 4Q 2020 expectation); fair value remains $10 per share

• In 2Q 2020, EVRI posted consolidated sales of $38.7 million (versus $129.7 million in 2Q 2019 and consensus of ~$21.0 million) with adjusted EBITDA of $3.3 million (versus $64.1 million in 2Q 2019 and our expectation of a ~$15 million loss), reflecting the widespread closure of the gaming industry in early 2Q 2020. (Notably, in August 2020 ~85% of EVRI’s casino customers are open, albeit at lower occupancy, versus ~32% in late-May and essentially none in April.)
• By segment, the Games & FinTech segments both generated positive EBITDA of $3.0 million and $0.3 million, respectively, on sales of ~$20.8 million and ~$17.9 million.
• The company ended 2Q 2020 with net debt $1.13 billion, including cash of $133 million, and a net leverage ratio of 6.2x (versus 4.1x in 1Q 2020). Notably, EVRI’s debt covenants have been waived through 2020 and modified through 3Q 2021.
• In terms of forward-looking commentary, EVRI expects EBITDA positivity to continue in 2H 2020, in fact, with sequential improvement in both 3Q 2020 and 4Q 2020. (Anecdotally, quarterly operating expenses are expected to be toward the higher-end of its previously articulated $35-$40 million range in both 2H 2020 and 2021.)
• On the free cash flow front, EVRI expects to be FCF positive in 3Q 2020 (compared with its prior commentary that free cash flow positivity would not come until 4Q 2020). Full-year capital spending is still expected to be $75-$80 million for 2020.
• Our fair value estimate remains $10 per share (see Exhibit #1 on page 2), reflecting a blended multiple of ~8.5x on 2022E EBITDA of $242 million (previously $229 million) as well as net debt of $1.13 billion (previously $1.06 billion). [Note: our adj. EBITDA forecasts do not add back stock-based compensation.]

Announces Key Dates; Maintain BUY on SWBI and $27 Fair Value Estimate

• On July 31, 2020, after the market close, Smith & Wesson Brands Inc. (NASDAQ: SWBI), a provider of firearms and related products, announced dates associated with the separation of American Brands Inc., the company’s outdoor products and accessories business. 
• Smith & Wesson Brands will distribute 100 percent of the shares of American Outdoor Brands common stock to Smith & Wesson Brands’ stockholders of record as of the close of business on the record date of August 10, 2020. The distribution is expected to be completed on August 24, 2020, before the market open, with Smith & Wesson Brands stockholders receiving one share of American Outdoor Brands common stock for every four shares of Smith & Wesson Brands stock held. Following the separation, Smith & Wesson Brands and American Outdoor Brands will trade on NASDAQ under the symbols “SWBI” and “AOUT”, respectively.
• When-issued trading is expected to be begin on or about August 10, 2020 under the symbols “SWBIV” and “AOUTV.” 
• Our pre-spin sum-of-the-parts fair value estimate remains $27 per share. For SWBI, we apply a 12x multiple to estimated 2021 EBITDA, in line with the company’s closest comparable, Ruger Inc. (NYSE: RGR). For AOUT, we apply a 9x multiple to estimated 2021 EBITDA. Post-spin, based on a 1:4 distribution and balance sheet information as of April 30, 2020, we estimate fair values of $25 and $9 for SWBI and AOUT, respectively.
• Given recent demand and the expectation of continued consumer demand for firearms, SWBI has the potential for continued outperformance and further multiple expansion. While the pre-spin fair value estimate implies a more modest 14% upside to SWBI’s current price, we maintain our BUY recommendation given positive near-term catalysts for the shares.
• SWBI shares have experienced a strong recent run of over 160% year-to-date, from $9 levels in January, versus a 3% decline for the S&P 500 over the same period. That said, despite the strong run, following the separation of the lower-margin outdoor business, we would expect SWBI shares to benefit from a re-rating as a pure-play firearms manufacturer. Moreover, a premium multiple to RGR may be warranted given unique near term demand catalysts which could provide further upside to revenue and earnings as well as industry-wide regulatory catalysts. Note that post-spin SWBI will benefit from a leading market share position, an acceleration in domestic gun purchasing related to the COVID-19 pandemic, and growth in adjacent markets.
• For more details, please refer to The Spin Off Report dated June 19, 2020 and UPDATE dated July 7, 2020.