STAY indicates incremental improvements in occupancy, RevPAR and adj. EBITDA trends during 2Q 2020; the company is cash flow positive and a “catch-up” dividend is likely in 1Q 2021

• At an investor conference this morning, STAY indicated that occupancy has increased to over 75% in recent days with RevPAR improving to ~$42 per day in May (from $31 per day in April).  On a percentage basis, same-store RevPAR fell 38% in April and was down ~28% in May (despite tougher comparisons).
• Given these improvements management noted that adj. EBITDA had improved from $15 million in April to $27 million in May with property-level expenses down ~12% quarter-to-date (despite the paying of performance bonuses to selected property managers).
• Importantly, STAY also indicated that it returned to cash flow positivity in May and based on current trends a “catch-up” dividend could be expected in 1Q 2021 (along with the resumption of a more normalized capital return program).  [For context, STAY reduced its quarterly dividend to $0.01 (from $0.23) following 1Q 2020.]
• Anecdotally, industry trends have continued to improve into June; to that end, the company currently has more hotels operating with better than 95% occupancy than less than 60%, and ADR has improved to $56-$57 per day (from the low-$50’s in May) as current conditions have warranted less aggressive discounting measures.
• As described in our recent initiation piece, we think STAY is undervalued and well-positioned, both short-term and long-term, to outperform peers (and the broader market) in the current environment.
• While our forward estimates have been modestly increased in light of this update our base case fair value estimate remains $14 per share with incremental upside, in the event of strategic alternatives, to ~$16 per share.

OI indicates that volume trends have begun to improve since mid-May, but shipments are still expected to be down 5%-10% in 2020; liquidity remains solid and OI has maintained segment profitability in 2Q 2020; fair value increased to $11 per share (from $10)

• At an investor conference this afternoon, OI indicated that segment operating results (i.e. not including corporate expenses) have been “modestly profitable” quarter-to-date (QTD) through May and that cash flow has been comparable to the prior year period (given lower capital spending and the suspension of asbestos-related payments).
• On the volume front, OI noted that daily shipments were down ~18% QTD through May although trends have begun to improve since mid-May as markets have re-opened. Excluding Mexico (and the other Andean countries), where QTD shipments were down ~35% and government mandated shutdowns have only just been lifted, volume has been down ~13% since mid-May (with trends improving to high-single digit declines in early-June.).
• Still, OI maintained its previous articulated expectation that full-year 2020 volume would be down 5%-10%.  (For context, OI’s initial 2020 EPS guidance of $2.10-$2.25, which was withdrawn in early-April, assumed full-year volume would be flat to up 2%.)
• At the end of 1Q 2020, net debt was $5.5 billion (versus $5.6 billion in 1Q 2019) and the leverage ratio, per its credit agreement, was 3.9x (vs. 4.0x at year-end and its 5.0x covenant).  Total available liquidity stood at ~$1.7 billion, including $891 million in cash.
• In terms of near-term bond maturities, OI’s has ~$80 million due in 1H 2021 with an additional ~$500 million due in 2023.  Management indicated that it intends to repay those with a combination of FCF and asset sales.
• Full-year capex is still expected to be ~$300 million (versus the initial forecast of $300-$375 million) and OI targets year-end 2020 net debt at or below the 2019 level of ~$5 billion.
• Given the ongoing uncertainty, OI noted that its strategic review (i.e. a sale of ANZ) remains paused but its tactical divestiture program, which targets $400-$500 million of proceeds by the end of 2021, continues to advance (albeit at a slower pace than prior to the pandemic).
• Our fair value estimate is revised to $11 per share (from $10), reflecting a blended multiple of ~6x on 2022E adj. EBITDA of $1.195 billion (previously 2021E adj. EBITDA of $1.185 billion) as well as net debt, including potential asbestos liabilities, minority interest and unfunded pension liabilities, of ~$5.75 billion.

ECL Completes Split-Off of ChampionX business

• On June 5, 2020, Ecolab Inc. (NYSE: ECL) announced the final proration factor of 4.7060 percent in the split-off exchange offer in connection with the previously completed separation of its Upstream Energy business, Champion X, which closed on June 3, 2020. As background, ChampionX merged with Apergy Corp. (previously NYSE: APY), which was renamed ChampionX Corp. (NYSE: CHX). ECL shareholders received 24.6667 shares of Apergy common stock for each share of Ecolab common stock (approximately 4,930,000 shares in total), which represents 62% of CHX outstanding common stock.
• A total of 97,294,237 ECL shares were tendered and not properly withdrawn in the exchange offer, including 395,463 shares tendered by odd-lot shareholders (the latter of which were not subject to proration). The remaining validly tendered ECL shares were accepted in the exchange on a pro rata basis using the final proration factor of 4.7060 percent. ECL shares that were validly tendered but not accepted for exchange will be returned to tendering shareholders.
• The fair value estimate for ECL is revised to $183 (from $188) reflecting the separation of the ChampionX business; the fair value estimate for CHX remains unchanged at $11. We maintain our HOLD rating on shares of ECL and CHX.
• In the near term, reduced consumer activity as a result of the coronavirus is likely to affect Ecolab’s institutional business–75% of which is comprised of restaurants, lodging, and recreation customers. Management has forecast sales to decline over the next three months, but at a slower pace, leading to a gradual recovery over a couple of quarters thereafter.
• For ChampionX, declining oil prices and the ensuing reductions in capital spending by oil and gas companies represent a major near-term headwind. Despite the implementation of near-term cost reductions, the current challenging macro environment, coupled with the now completed merger, raises concerns about the company’s 2020 outlook. We see risk to forward revenue and earnings estimates. Shares of CHX, currently at $12, have appreciated almost four-fold from their $3 lows over the same period. 
• For more details, please refer to The Spin Off Report dated April 29, 2020 and UPDATE June 1, 2020.

EVRI’s early-2020 results were impressive, 2Q 2020 will be expectedly dismal but early indications on the gaming industry’s re-opening are very encouraging; in fact, EVRI expects to generate positive EBITDA in 3Q 2020 and be FCF positive in 4Q 2020 

• In 1Q 2020, EVRI posted consolidated sales down 8.5% to $113.3 million with a ~15% decline in adj. EBITDA to $52.3 million, which masks that sales were up ~20% in the first two months of the year (prior to the industry shutdown in March.)
• Not surprisingly, sales are likely to be negligible in 2Q 2020 (against ~$35-$40 million of quarterly opex) but management anecdotally indicated that it expects to generate positive EBITDA in 3Q 2020 and be free cash flow positive in 4Q 2020.
• To that end, while it is still early, the company’s commentary on initial trends in the gaming industry’s re-opening were very encouraging with EVRI indicating that at the roughly 32% of the U.S. casinos that have reopened its installed base of gaming machines are generating average daily win rates that exceed pre-COVID levels and that the number & value of cash access transactions are experiencing similar results.
• In terms of the balance sheet, EVRI ended 1Q 2020 with cash of ~$40 million and debt of ~$1.04 billion.  Subsequent to the end of the March-quarter, the company secured a $125 million term loan and indicated that at the end of May 2020 it had available cash of ~$125 million (with a monthly cash burn rate that is roughly $2 million for payroll, $5 million for rent/utilities and ~$5-$6 million for interest payments).  As well, the company’s debt covenants have been waived through 2020 and modified through 3Q 2021.
• Despite encouraging signs for a recovery in the gaming industry, our fair value estimate is reduced to $10 per share (from $13 per share), reflecting a blended multiple of ~8.5x multiple on our 2022E EBITDA estimate of ~$229 million as well as net debt of $1.057 billion. [Note: our adj. EBITDA forecasts do not add back stock-based compensation.]

ECL Announces Final Exchange Ratio for Split-Off and Merger with APY; Adjust ECL Fair Value Estimate

• On June 1, 2020, before the market open, Ecolab Inc. (NYSE: ECL) announced details associated with the split-off of its upstream energy business, ChampionX, which is to merge with Apergy Corp. (NYSE: APY). The final exchange ratio, announced today, is 24.6667 shares of Apergy common stock for each share of Ecolab common stock. Based on the final exchange ratio, Ecolab expects to exchange approximately 4,930,000 shares of its common stock.
• The exchange offer will expire at 12:01 a.m. EST on June 3, 2020, unless terminated or extended. The closing of the merger with Apergy is expected to occur promptly following the consummation of the exchange offer. Tendering Ecolab stockholders are expected to receive approximately $104.14 of Apergy common stock for each $100 of Ecolab common stock, depending on the per-share value of Ecolab common stock and the per-share value of Apergy common stock at the expiration of the exchange offer.
• Upon completion of the merger, ChampionX’s stockholders will own approximately 62% of the outstanding common stock of Apergy on a fully diluted basis. ChampionX will become a subsidiary of Apergy.
• We adjust our fair value estimate on ECL to $188 (versus $185 previously) after updating for new share count information. The fair value estimate for APY remains unchanged at $11. We maintain our HOLD rating on shares of ECL and APY.
• In the near term, reduced consumer activity as a result of the coronavirus is likely to affect Ecolab’s institutional business–75% of which is comprised of restaurants, lodging, and recreation customers. Management has forecast sales to decline over the next three months, but at a slower pace, leading to a gradual recovery over a couple of quarters thereafter.
• For Apergy, declining oil prices and the ensuing reductions in capital spending by oil and gas companies represent a major near-term headwind. Despite the implementation of near-term cost reductions, the current challenging macro environment, coupled with the impending ChampionX merger, raises concerns about Apergy’s 2020 outlook. We see risk to forward revenue and earnings estimates. Shares of APY, currently at $11, have appreciated almost four-fold from their $3 lows over the same period. 
• For more details, please refer to The Spin Off Report dated April 29, 2020.

UHAL reports roughly in-line F2020 results; 1Q F2021 is challenged but we think commentary on a near-term slowing of expansion at Storage is a positive for investor sentiment (and profitability); fair value raised to $395 per share (from $382)

• UHAL reported full-year F2020 sales increased 5.5% to ~$3.98 billion with EPS, excluding a $7.45 tax benefit from the CARES Act, of $15.10 (compared with $18.93 in F2019).  EBITDA, by our calculation, was $1.177 billion (versus our $1.135 billion forecast and $1.175 billion in F2019).
• Moving-related revenue, excluding products & services, increased 1.5% to ~$2.7 billion in F2020 (but fell 2.1% in 4Q F2020) while Storage segment revenue increased 14% to ~$419 million (with a 13% in 4Q F2020).  Anecdotally, Moving-related revenue was down ~30% in April and ~15% in May.
• At year-end, UHAL had net debt of ~$4.127 billion with ~$500 million in available liquidity. (Given the current state of the commercial auction market, which has essentially eliminated equipment sales, the company secured a $200 million term loan in May 2020 that was borrowed against ~$380 million in expected tax refunds from NOL & depreciation adjustments allowed by the CARES Act.)
• Importantly, we think management’s commentary surrounding plans to slow near-term expansion, particularly in its Storage footprint (i.e. focus on asset utilization), is an incremental positive for investor sentiment (and profitability).  To that end, UHAL plans net equipment cap ex of ~$460 million in F2021 (compared with ~$700 million in F2020) and its pipeline of R.E. projects is down ~$350 million.
• Anecdotally, in a question related to the obvious valuation disparity between UHAL and its Storage peers we perceived a slight change in tone with the CEO indicating that a REIT conversion of its real estate portfolio was not “beyond the pale”. (That said, we do not presume such a move is currently under serious near-term consideration).
• 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 revised fair value estimate of $395 per share (up from $382) reflects an ~8.5x multiple on F2022 Moving & Storage EBITDA of ~$1.3 billion, the insurance assets at book value and net debt of ~$3.95 billion.

New 13-F filings further illuminate the shareholder shift with Starwood, Blackstone, HG Vora and Long Pond now controlling ~26% of STAY

• In addition to the Starwood’s previously disclosed 8.5% stake, new 13-F filings have confirmed Blackstone’s (NYSE: BX) ~5% (or 8.6 million share) ownership in STAY. (Notably, Starwood owns extended-stay competitor InTown Suites and Blackstone has twice owned the company outright.)
• As well, HG Vora, an, at times, activist investor, increased their holdings in STAY by 7.25 million shares to ~5.6% (from 1.5%) and Long Pond Capital, a real estate-focused but primarily passive investor, hiked their holdings by 5.6 million shares to almost 7% (from 3.8%).
• Together, these four shareholders now control roughly 26% of STAY. (And the top-20 shareholders now control ~69% of the company, up from ~64%.)
• In our view, these investments highlight the underlying value in STAY as well as increase the likelihood that either the market recognizes that value or the company re-visits strategic alternatives.
• Additionally, in response to client inquiries, we have included a rough liquidity analysis supporting management’s commentary that even at April-type business levels, where RevPar was down ~35% (but from which it has since rebounded), STAY would have enough cash to sustain itself for nearly four year (excluding any potential, but likely, asset monetizations or more material cost cuts).
• As described in our recent initiation piece, we think STAY is undervalued and well-positioned, both short-term and long-term, to outperform peers (and the broader market) in the current environment.
• Our sum of the parts valuation of $14 per share, implies roughly 30% upside, with incremental appreciation potential, in the event of strategic alternatives, to ~$16 per share.

MSGS Reports 3Q F2020 Results for Historic Combined Company; Maintain BUY on MSGS and MSGE; Adjust MSG Fair Value

• On May 11, 2020, before the market open, Madison Square Garden Sports Corp. (NYSE: MSGS) reported 3Q F2020 (March 31 quarter end) results. Given MSGS (previously The Madison Square garden Corp [MSG]) completed the spin-off of Madison Square Garden Entertainment (NYSE: MSGE) business on April 17, 2020, the reported results were for the combined pre-spin entity. Management cited the results as not being for standalone MSGS as rationale for not holding a quarterly conference call.
• Unsurprisingly the quarterly results were significantly impacted due to the COVID-19 pandemic, which resulted in the shutdown/pause of the NHL and NBA seasons, and the closure of the company’s venues. Entertainment and Sports revenue declined year-over-year by 18% to $136.4 million and $288.4 million, respectively. MSGS generated EBITDA of $55.4 million, a 46% decline from the prior year. MSGE operated with an adjusted loss of $9.6 million before depreciation, interest, taxes, and amortization (adjusted for a $90.2 million non-cash impairment charge related to Tao Group).
• Despite the current lack of operating capability at MSGE and MSGS, we continue to believe that having the majority of the company’s value tied to assets should provide a degree of stability through this current time of market volatility.
• For MSGE, the value is primarily derived from Madison Square Garden arena and a net cash position projected at $1.4 billion (based on December 31, 2019, pro forma financial disclosures). We maintain our BUY rating on MSGE, and adjust our fair value estimate to $130 (previously $140) to account for updated pro forma balance sheet and income statement information reflecting the impact of the sale of The Forum.
• Anecdotally, if you valued the MSGE operating businesses at zero, the fair value for MSGE would decline to $108 per share and consist of the physical venues and a net cash position.
• MSGS’s value is primarily derived from the ownership of the NY Knicks NBA team and NY Rangers NHL team. Our fair value estimate adjusts the most recently reported franchise values from Forbes magazine to account for arena value, projected annual growth, and historical premiums in NBA and NHL franchise sale transactions. Notably our adjustments result in our fair value estimate at an approximate 15% discount to the Forbes values, which may prove conservative in the event MSGS were to take on a minority investor in either sports team franchise. We maintain our $206 fair value estimate and BUY rating on MSGS.
• For more details, please refer to The Spin Off Report dated February 13, 2019, and UPDATEs dated August 20, 2019, November 8, 2019, December 3, 2019, March 6, 2020, March 25, 2020and April 1, 2020.

CARR Reports 1Q 2020 Results; Maintain BUY, Revise Fair Value Estimate to $21

• On May 8, 2020, Carrier Global Corp. (NYSE: CARR) released 1Q 2020 results, the company’s first quarterly report since its spin-off from UTX on April 3, 2020. EPS of $0.35 exceeded consensus by $0.02; revenue of $3.98 billion (-10% YoY) exceeded consensus by $110 million. Revenues declined 9% organically, with roughly half of the decline due to the expected reduction in gas furnace sales, North America truck trailer sales, and the wind-down of residential security business, with the remainder related to COVID-19. Note that excluding the COVID impact, Q1 revenue results were largely consistent with the company’s February 10^th outlook which called a sales decline in the mid-single digits.
• Aggressive cost cutting actions (salary and capital expenditure reductions) resulted in adjusted operating profit of $436 million (10.9% operating margin, versus 11.4% in the year-ago quarter). The company maintained its expectation of $600 million in cost savings over three years, with $420 million in cost actions expected in 2020.
• CARR commented on several key wins in warehouse refrigeration and VRF (Variable Refrigerant Flow), where the company is demonstrating increasing traction. The company accelerated its target of a 30% conversion rate in commercial HVAC to 2020 versus 2021 previously.
• Consistent with peers, CARR withdrew its previously provided 2020 guidance for sales of between $15-$17 billion, adjusted operating profit of $1.7-$2.0 billion, and free cash flow of greater than $1.0 billion.
• We adjust our 2020 revenue estimate modestly downward to $16.4 billion (-12% YoY). For 2021, we model 3% revenue growth to $16.9 billion. These changes result in a revision of our fair value estimate to $21 per share (versus $25 previously).
• We maintain our BUY recommendation on CARR. In the near term, we expect continued restructuring to benefit profitability and cash flow. Longer term, Carrier’s end-markets remain robust, with growth for the company’s HVAC, Refrigeration, and Fire & Security businesses likely to be supported by favorable secular trends, including urbanization, climate change, and increasing requirements for food safety driven by the food needs of the growing global population, rising standards of living, and more energy and environmental regulations. Increased urbanization in emerging market countries, especially India and China, also benefits the industry for air conditioning, cooling, and security systems.
• CARR shares have appreciated approximately 25% since the spin-off on April ^3rd, versus 16% for the S&P 500 over the same period.
• For more details, please refer to The Spin Off Report dated March 10, 2020, and UPDATEs dated March 13, 2020, and March 30, 2020.

Otis Reports 1Q 2020 Results; Maintain HOLD, Raise Fair Value Estimate to $52 

• On May 6, 2020, aftermarket, Otis Worldwide Corp. (NYSE: OTIS) released 1Q 2020 results which reflected more modest COVID-related headwinds to revenue and profitability. Revenues of $2,966 million declined 4.4% on a year-over-year basis, reflecting a 2.1% decline in organic sales. New equipment revenues of $1,123 million (38% of total) declined 11.6%, reflecting job site closures, reduced manufacturing capacity, and weakness in China, although orders were flat at constant currency with double digit growth in the Americas and mid-single digit growth in EMEA offset by a decline in Asia. Excluding China, orders increased 5.6% at constant currency. Management noted that factories are currently operating at full capacity in China. Services revenues of $1,843 million (62% of total) were essentially flat.
• Despite the revenue decline, adjusted operating margin expanded 120 basis points to 15.2%, reflecting labor cost actions and productivity improvements. The company’s board approved a Q2 dividend of $0.20 per share (management targets an annualized dividend payout ratio of 40%).
• OTIS revised its full year outlook downward to reflect the continued impacts of the global pandemic, particularly the company’s exposure to Asia. Consolidated 2020 sales are expected to decline 6% to 10%; organic sales are expected to decline 3% to 7% and adjusted operating profit down $25 to $175 million at constant currency.
• We adjust our 2020 revenue estimate downward, and now forecast 2020 revenues of $12.2 billion (-7% year-over-year), reflecting the beginning of a recovery to consolidated results in Q3 and more limited impacts in Japan and South Korea than previously anticipated. Our 2021 revenue estimate remains $12.6 billion (+3%), reflecting improvement in China. We continue to model EBITDA margin expansion to 17.9% in 2021. Given the continued improvements in profitability and expanding margins in the Services segment, we apply an 18x multiple to 2021E EPS (15x previously), resulting in a fair value estimate of $52 per share (from $44 previously), essentially in line with the current share price.
• We maintain our HOLD recommendation on OTIS shares, which have appreciated approximately 9% since the spin-off on April 3^rd, versus 16% for the S&P 500 over the same period. While the quarter’s results were largely a relief considering the company’s China exposure, we see little in the way of a near-term catalyst for the shares given new equipment orders are trending essentially flat on a forward 12-month rolling basis, and operating margin improvement is already factored into consensus estimates. For more details, please refer to The Spin Off Report dated March 10, 2020, and UPDATEs dated March 13, 2020, and March 30, 2020.