Drop Coverage of Marathon Petroleum Corp. Effective Immediately

• On Sunday August 2, 2020, Marathon Petroleum Corp. (NYSE: MPC) announced that the company has agreed to sell its Speedway business.
• MPC had previously planned to spin-off Speedway into a standalone company.
• Seven & I Holdings Co., Ltd (3382 JP), the owner of the 7-Eleven brand of retail convenience stores, agreed to purchase Speedway for $21 billion in cash, exceeding recently reported bids approximating $16 billion for the business.
• Given the announcement, we DROP coverage of MPC effective immediately.
• Our prior estimates and fair values for MPC should no longer be relied on.

Potentially interesting datapoint: LNDC adopts a severance plan for the CFO and President of Lifecore and amends its agreement with the CEO in the event of a “change of control”; F2020 results due in “early-August”; fair value remains $12 per share

• Today, in an 8-K, LNDC disclosed the adoption of a change in control severance plan for both its chief financial officer (CFO), Brian McLaughlin, and the President of its Lifecore division, James Hall.
• In the event of their termination without “cause” or within two years of a “change in control” the executives are entitled to, among other things, a cash payment equal to their annual base salary as well as their targeted cash performance bonus. (The package also includes the accelerated vesting of options and 12-months of healthcare subsidies.)
• As well, the company amended its employment agreement with chief executive, Albert Bolles, which runs through July 2023 and includes similar “change of control” provisions to the ones previously highlighted.
• For context, LNDC has been under public pressure from activist-investor Legion Partners, which currently owns ~9.8% of the shares (up from an initial ~5% stake in January 2020), to optimize and monetize its assets, which it has described as an “odd combination of businesses”.  (As well, the investor has previously indicated that it estimates intrinsic value for LNDC’s assets at ~$21 per share).
• Our current fair value estimate of $12 per share is based on a blended multiple of 11x on F2022E EBITDA of $43 million and net debt, including the Windset investment, of ~$134.5 million.
• Notably, the company pre-announced preliminary 4Q F2020 results in late-June but expects to announce actual results in “early-August”. To that end, Landec expects to report consolidated 4Q F2020 (May-ending) sales of $156.1 million with adjusted EBITDA of $12.6 million-$14.6 million. By segment, Curation Foods (CF) is projected to report 4Q F2020 sales of $130.6 million with adj. EBITDA of $5.8-$7.8 million while Lifecore is expected to post fourth-quarter sales of $25.5 million with adj. EBITDA of $7.5 million.

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

• On consolidated basis, LDL expects margins to improve in 3Q 2020 (relative to 2Q 2020) as improvements at TAS will more than offset some modest moderation at PM and TNW (given the add back of some variables costs.)
• On the TAS front, following volume declines of ~90% in April auto industry production improved through 2Q 2020 with LDL’s North American & European customers reaching ~80% of prior year production in late-June. (In China, parts sales were actually up 3%, ex-FX, during 2Q 2020.)
• At PM, the company expects incremental demand for mask-related filtration media will add $10-$12 million of sales in 2H 2020 (and that long-term contracts ensure sufficient demand for its upcoming capacity increases through, at least, 2022.  Longer-term, the company 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.
• Capital spending is expected to be $35-$40 million in 2020 (up from the previous commentary of $25-$30 million), which now includes the incremental investments in increased filtration capacity (but should be offset by the recent $13.5 million contract/grant from the U.S. DOD).
• In terms of the strategic review, management noted that it remains in the process of finalizing its near & long-term strategy but the pandemic has only sharpened the focus on its filtration & engineered materials businesses (although that could ultimately include some specialized auto applications).
• Our fair value estimate is revised to $20 per share (from $18) based on a blended multiple of ~6x (unchanged) 2022E adj. EBITDA of ~$79 (previously $77 million) as well as net debt of $135.5 million (previously $154.5 million).

Trane Reports 2Q 2020; Increase Fair Value Estimate to $116, Downgrade to Neutral on Valuation

• On July 29, 2020, Trane Technologies plc (NYSE: TT) reported 2Q 2020 results that included revenue of $31 billion (down 13% versus the year prior) and adjusted EBITDA of $543 million (margins declined 80 basis point from 2Q 2019 to 17.3%).
• Despite the lower year-over-year revenue and earnings, the company’s results handily exceed consensus estimates as the worst-case scenario due to COVID shutdowns and economic declines did not come to fruition. Shares of TT are up 8.5% in this morning’s trading.
• In the earnings release, management cited the company’s commitment to reducing costs through the current slowdown, adding an additional $30 million of run rate savings in 2021, bringing total run rate savings to $140 million.
• We adjust our forward earnings estimates to account for lower than previously anticipated base 2020 revenue assumption, however we increase our EBITDA margin assumption based on performance through 1H 2020. We now forecast 2021 revenue of $12.0 billion and EBITDA of $1.8 billion (15% EBITDA margin).
• Given the recent market correction and increased trading levels, we increase our applied valuation multiple to 17.0x (previously 13x) resulting in a fair value estimate of $116. Given limited upside from the current share price ($112.83 as of this writing), we downgrade shares of TT to HOLD from BUY.
• Notably, our applied valuation multiple is approximately 2x below peer Lennox International Inc. (NYSE: LII), which is in line with the company’s historic trading discount.
• Trane had historically traded at about a 2-3x multiple discount to LII when it was part of Ingersoll-Rand plc (NYSE: IR).
• For more details, please refer to The Spin Off Report dated January 4, 2020, and UPDATEs dated January 29, 2020, February 14, 2020, March 2, 2020, and May 5, 2020.

Aaron’s to Spin Off Progressive Business

On July 29, 2020 before the market open, Aaron’s Inc. (NYSE: AAN) announced a plan to separate its Progressive Leasing (“Progressive”) business from the Aaron’s Business (“Aaron’s”). The tax-free separation is expected to be completed by the end of the year.

Aaron’s, with a current market capitalization of $3.0 billion, is a lease-to-own retailer serving underserved and credit-challenged customers. The company focuses on leases and retail sales of furniture, electronics, appliances, and computers, and sells through the company-operated and franchised stores in Canada, as well as its e-commerce platform, Aarons.com. The company generated consolidated 2019 revenues and EBITDA of $3.9 billion and $2.2 billion, respectively, and operates in three segments: Progressive Leasing, Aaron’s Business, and Veve. The company also engages in the sale, lease ownership, and specialty retailing of furniture, consumer electronics, home appliances, and accessories. The company completed the acquisition of Progressive Finance in 2014. In February 2013, the company was involved in litigation which alleged its use of spyware on rented computers to send over 185,000 emails to the rental company, including customers’ Social security numbers, passwords and captured keystrokes, as well as explicit images.In October 2013, Aaron’s agreed to a settlement with the Federal Trade Commission that limited how it used monitoring technology and ordered deletion of all customer information that had been improperly collected.

While as a retailer, Aaron’s has been impacted by the COVID-19 pandemic, suffering from showroom closures and more limited retailer operating hours, the recent resumption of economic activities has resulted in a rebound in both Progressive Leasing and the Aaron’s Business segments. Progressive’s retail partners have begun to reopen stores, and government stimulus has supported improved invoice volumes and write-offs from April lows. The company has indicated that Lease revenues are expected to improve owing to lower write-offs, longer customer retention, and improved customer payments.

Following the separation, Progressive, with approximately $2.2 billion of revenue in 2019, will be comprised of the Company’s current Progressive business segment as well as Vive Financial. As a standalone company, Progressive will be well-positioned for continued strong growth with existing and new retail partnerships. Steve Michaels, the Company’s Chief Financial Officer and President of Strategic Operations, has been appointed Chief Executive Officer of the Company’s Progressive Leasing business segment, effective July 31, 2020, succeeding Ryan Woodley.

Post-spin Aaron’s generated approximately $1.8 billion of revenue in 2019, and will be comprised of approximately 1,400 company-operated and franchised stores in 47 U.S. states and Canada, the e-commerce platform Aarons.com, and Woodhaven Furniture Industries (“Woodhaven”). An established leader in the lease-to-own industry, Aaron’s is expected to continue to consolidate and reposition its real estate footprint and expand its e-commerce business model. Effective July 31, 2020, Douglas Lindsay, President of the Company’s Aaron’s Business segment, will become Chief Executive Officer of the Aaron’s Business, and Steve Olsen, Chief Operating Officer of the Aaron’s Business, will become President of the Aaron’s Business.

PRELIMINARY VALUATION

In approaching valuation, we consider the current company’s operating segments recent performance, current and historical trading multiples for the combined company, and competitors relative trading ranges. In terms of revenue and earnings, through 2Q 2020, the Progressive Leasing business (including Vive operations) increased revenue by 19.9% to $1.3 billion. Assuming the current trend maintains through 2020, with a degree of moderation in 2021 before resuming growth in 2022, it could be forecast that the standalone Progressive Leasing business would generate almost $3 billion in revenue in 2022. Further, assuming the company is able to leverage fixed costs over the increased revenue base, estimating EBITDA margins expand t 13.5% (from 12.4% in 2019), the company would earn $405 million in EBITDA.

The Aaron’s Business has seen revenue decline through 1H 2020 by 8.0%. Considering management’s commentary on reduced availability of product for both retail and online business over the next six to nine months, it could be estimated that revenue declines could persist through 2021. Assuming a modest rebound in 2022, the company would generate $1.6 billion in revenue in 2022. The Aaron’s business operated with a 9.3% EBITDA margin in 2019. Given the forecasted revenue decline, and higher fixed asset costs (i.e. store leases) it could be assumed that the company would experience a degree of margin pressure in the near term before returning to approximate current levels. If the company were to generate a 9.5% EBITDA margin in 2022, the company would earn $156 million in EBITDA over the next two years.

In terms of valuing the separate companies, we look at the current company’s closest peer Rent-A-Center Inc. (NASDAQ: RCII), which currently trades at 6.4x 2022 consensus EBITDA; AAN currently trades at 6.9x 2022 consensus EBITDA. Historically AAN has traded at a slight premium to RCII. Anecdotally AAN traded between 8.0x and 9.0x forward EBITDA since mid-2017 until the market volatility arising from the COVID-related sell off in 1Q 2020. Under this mindset, it could be assumed that following the spin-off, the Progressive Lending business would experience a degree of multiple expansion given the higher (and currently positive) revenue growth and wider margins. Conversely, the Aaron’s business may see slight multiple compression, particularly in the near-term given current revenue trends. Estimating Progressive receiving an 8.0x multiple, at the low end of AAN’s pre-COVID trading range, the company would be valued at $3.2 billion on an enterprise basis. Assuming Aaron’s Business multiple contracts to 6.5x, approximating RCII’s multiple, the company would have an enterprise value of $1.0 billion. Of note, given Aaron’s Business retail focus, it is worth considering that Best Buy Inc. (NYSE: BBY) currently trades at roughly 7.7x forward earnings, with a five-year historical average of 5.8x. Accounting for $452 million in net debt and shares outstanding of 67.6 million, results in a preliminary, pre-spin, sum-of-the-parts fair value estimate of $56 per share for AAN. Based on this morning’s share price of approximately $50, the preliminary fair value estimate implies less than 10% upside potential from the planned spin-off.

PM’s filtration business, which supports N95 mask production, is a bright spot amid broad weakness at TNW and TAS; fair value remains $18 per share ahead of the 10 a.m. (ET) conference call

• In 1H 2020, LDL’s consolidated sales fell ~21% to $346.7 million, as strength in PM’s filtration business (up 20% in 2Q) was more than offset by weakness at TNW (down 18.5% in 1H) and TAS (down ~60% in 2Q due to the auto industry shutdown and 35.5% in 1H).  Adj. EBITDA fell ~33% to $31.4 million (on a consolidated margin that fell 170 bps to 9.0%).
• For context, with the exception of filtration-related sales at PM, which were in-line with our expectations, LDL other business (i.e. PM sealings, TAS and TNW) broadly missed our top-line forecasts but generated better than expected margins.
• The company ended 2Q 2020 with a net leverage ratio of 3.5x (vs. 2.9x at the end of 1Q 2020 and its 6.5x covenant), including cash of $92.5 million and debt of $285.5 million.  (Note: LDL’s leverage covenant steps down to 4.5x in 2Q 2021 and its next relevant debt maturity is in August 2023.)
• While LDL does not provide earnings guidance, management anecdotally expects that while PM’s sealings business will face continued headwinds in 2H 2020 strength at filtration will persist with N95 mask-related media sales generating $10-$12 million of incremental revenue (versus our initial ~$7.5 million forecast). Notably, LDL’s efforts to support domestic N95 mask production garnered praise from President Trump at a press conference last night.
• At TNW, management sees strength in its construction-and medical-related verticals (i.e. geosynthetics and PPE) being offset by weakness in industrial filtration sales. At TAS, management expects the North American & European auto markets to experience a similar recovery to China with production stabilizing in 3Q 2020 albeit with lower volumes than in 2H 2019.
• Our current FVE of $18 per share is based on a blended multiple of ~6x 2022E adj. EBITDA of ~$77 million; that said, we will make adjustments following this morning’s conference call at 10 a.m. (ET); call-in at (888) 338-7142.

RTX Reports Q2 Results, Showcasing Cost-Cutting Actions; Rate RTX at BUY

• Raytheon Technologies Corp. (NYSE: RTX) reported Q2 2020 earnings results today pre-market. Adjusted Q2 sales of $14.3 billion reflected a year-over-year decline of 24%. EPS of $0.40 exceeded consensus of $0.10, largely reflecting aggressive cost-cutting actions. As expected, commercial aerospace remains challenging, as production levels and aftermarket sales remain low. Collins Aerospace and Pratt & Whitney sales declined 35% and 30%, year-over-year, respectively. Commercial OE (Original Equipment) and commercial aftermarket sales declined 53% t and 48%, respectively, while military sales increased 10%.
• RTX’s defense business, reported a record backlog of $73.1 billion; total backlog was $158.7 billion, including $85.6 billion from commercial aerospace.
• Cost reduction actions of $600 million outperformed expectations; the company took an additional $1 billion in cash conservation actions. 
• Our fair value estimate remains $78 per share.  We adjust our estimates to reflect a combination of increasing conservatism on the commercial aerospace business and improving cost reduction actions. Assuming revenue growth of 6% and 7% in 2020 and 2021, RTX can be expected to generate 2021 revenues of $84.7 billion. Based on an estimated EBITDA margin of 15% (versus 17% previously), the company would generate $12.7 billion in 2021E EBITDA.
• We continue to rate shares of RTX at BUY. Given continued pressure from aircraft manufacturers Boeing (NYSE: BA) and Airbus (AIR EN) to bring down costs, Raytheon will leverage a stronger balance sheet to support ongoing aerospace product development. In addition, the company is less exposed to government and commercial sector cyclicality. Raytheon ranks behind only Boeing and Airbus globally in terms of total aerospace sales.
• For more details, please refer to the United Technologies Corp. Spin-Off Report dated March 10, 2020 and UPDATEs dated April 6, 2020 and March 30, 2020.

GLIBA still trades at a 15% discount to NAV; fair value increased to $88 per share (from $87) on increased guidance at TREE

• Today, LendingTree (NASDAQ: TREE), which comprises roughly 10% of GLIBA’s overall value, increased 2Q 2020 sales and adj. EBITDA guidance to $182-$186 million (from $160-$175 million) and $28-$32 million (from $12-$18 million), respectively, as increased demand in the Home segment, driven by refinance activity amid historically low interest rates, has offset on-going weakness in the Insurance and Consumer segments.
• As a result, our fair value estimate for TREE is increased to $290 per share (from $255), which, in turn, lifts our valuation for GLIBA to $88 per share (from $87 per share; see Exhibit #1 on page 2).
• Meanwhile, we would note that GLIBA shares still trade at a 15% discount to the market value of its publicly traded holdings, the purchase price of its operating asset, GCI Communications, and net debt (i.e. NAV).  This dynamic exists despite the fact that GLIBA is in the midst of finalizing an agreement with Liberty Broadband (NASDAQ: LBRDK) on a combination of the two entities, which should help narrow the current discount as well as pave the way for an ultimate (but likely still longer-term) merger, most probably via a Reverse Morris Trust (RMT) transaction, with Charter Communications (NASDAQ: CHTR).
• For context, the transaction, which was disclosed June 30^th, currently contemplated by GLIBA & LBRDK would entail LBRDK acquiring all the outstanding shares of GLIBA in a stock-for-stock merger where each of GLIBA’s outstanding A & B shares would 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, GLIBA is scheduled to host a conference call to discuss, among other things, 2Q 2020 results on Monday August 10^th at 11:15 a.m. (ET).
• CHTR, which is the primary driver of GLIBA’s value, is scheduled to report 2Q 2020 results before the market open on Friday July 31^st with a conference call that morning at 8:30 a.m. (ET).

• Last night, after the market close, SXI announced that it had agreed to sell its Cooking Solutions Group, which makes up about 25% of Food Service segment revenue (or ~$98 million) and includes the APW Wyott, Bakers Pride, Tri-Star, BKI and Ultrafryer brands, to Middleby Corp. (NASDAQ: MIDD) for ~$105 million.
  
• While this is a somewhat encouraging development in SXI’s efforts to monetize underperforming assets and recycle capital into higher growth/higher margin areas the company’s performance (both operating and stock price) have been disappointing over the last several months and we prefer to focus our time & resources on more compelling ideas.
  
• To that end, we withdraw our recommendation of SXI, as of todays close. For context, SXI shares have declined ~21% since our initial recommendation in August 2018 (versus increases of 2% and ~7% in the S&P and Russell, respectively).

• L shares returned ~29.5% since our initial recommendation in February 2015 (versus a 31.5% gain in the S&P 500 and a 28% rise in the Russell 2000)
• That said, with the stock trading roughly in-line with our fair value estimate of $52 per share, we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.
• We will continue to monitor L for an opportunity to rerecommend the shares if valuation shifts or if incremental steps toward potential strategic alternatives materialize.