CNDT reaffirms 2019 sales and adj. EBITDA guidance; anticipates completion of strategic review in 4Q 2019 or 1Q 2019 with any potential divestitures in 1H 2020; fair value modestly increased to $8.50 per share (from $8)

• In the first nine months of 2019, CNDT’s consolidated sales, ex-divestitures, declined 3.8% to $3.332 billion with an almost 6% decline in adjusted EBITDA to $363 million.
• Importantly, the company reaffirmed its previous 2019 guidance (see Exhibit #1 on page 2) calling for consolidated sales to decline 4%-5% with adj. EBITDA margins of 10.8%-11.6%, implying adj. EBITDA of $480-$510 (compared with current consensus of $490 million).
• For 2020, the company anecdotally maintained its expectation that consolidated sales will decline 4%-6%, including the 3% impact of the California MMIS contract loss, with flat margin and free cash flow conversion (i.e. 20%) profiles. (By segment, Transportation is expected to see low-single digit top-line growth while sales declines will moderate and accelerate at Commercial and Government, respectively.)
• Notably, management indicated that it will complete the on-going strategic and operational review (disclosed in August 2019) in late 4Q 2019 or 1Q 2020 with any potential divestiture actions likely in 1H 2020.
• On the topic of potential divestures, management is anecdotally looking to monetize assets that could command a premium valuation from third-parties due to their scale and scarcity value (e.g. BenefitWallet), are underperforming and/or serve to reduce overall portfolio complication.
• The use of potential proceeds could include debt reduction, share repurchases and/or strategic M&A; regardless, the company targets a net leverage ratio of ~2.0x by year-end 2019 (versus 2.5x at the end of 3Q 2019 and its 3.75x covenant).
• Our fair value estimate is modestly increased to ~$8.50 per share (from $8; see Exhibit #2 on page 2), reflecting a blended multiple to ~7x (unchanged) on 2020E adj. EBITDA of ~$447.5 million (previously $435 million) and net debt of $1.29 billion (previously $1.26 billion).

Nielsen to Spin-Off its Global Connect Business

On November 7, 2019, before the market open, Nielsen Holdings plc (NYSE: NLSN) announced its intention to separate its Global Connect business via a spin-off from the company’s Global Media operations. The transaction, which is expected to be tax-free to shareholders, will be accomplished via a 100% distribution of shares in a new publicly traded company, that will contain the Nielsen Global Connect business, to NLSN shareholders. The spin-off is expected to be completed in nine to twelve months from the date of announcement (roughly in 3Q 2020), and is subject to customary closing conditions including final board approval, an effectiveness declaration of the company’s Form 10 filings with the SEC, and the receipt of an opinion on the tax-free nature of the transaction.

Nielsen in its current corporate structure is a leading global measurement and data analytics company. The company’s products allow customers to make business critical decisions based on detailed customer analytic data. The company, know primarily for its legacy business of delivering television and radio ratings, has expanded its product offerings to include information on consumer buying trends for packaged goods companies, as well as other product offerings.

Nielsen Holdings historically reported results under two segments: (1) Buy (47.5% of consolidated sales and 25% of adjusted EBITDA in 2018), which provided consumer purchase measurement and analytics services; and (2) Watch (52.5% of consolidated sales and 75% of adjusted EBITDA in 2018), which provides media audience measurement and analytics services. 

In February 2019 the company realigned its business segments from Watch and Buy to Nielsen Global Media and Nielsen Global Connect. Global Connect (47% of revenue and 20.8% of EBITDA through 1H 2019) primarily consists of the company’s core tracking and scan data (measurement data and consumer behavior information) to businesses in the consumer packaged goods industry. Global Media (52.7% of revenue and 79.2% of EBITDA through 1H 2019) revenue is derived from measurement services on television, radio, digital and mobile audience measurement services.

In part due to pressure from Elliott Associates, NLSN engaged in a strategic review of its operations, which presumably included a broad range of strategic alternatives, including its continuing to operate as a public/independent company, a separation of either the Media or Connect segment, or a sale of the entire enterprise. This mornings spin-off announcement concludes NLSN’s strategic review.

In conjunction with the spin-off announcement, NLSN also released 3Q 2019 results, which included quarterly revenue increase of 1%, which was driven by a 3.9% increase in Media that was partially offset by a 2.2% revenue decline from Connect. Management reiterated its full year 2019 guidance for most line items and increased its forecasted EPS to $1.77 – $1.83 per share (previously $1.70 – $1.80). Additionally, the company announced that it will reduce its quarterly dividend payment to $0.06 per share from $0.35 per share. On the company’s conference call management noted that he dividend cut was primarily rooted in strengthening the company’s balance sheet and allowing for flexibility in the post-spin companies capital allocation.

PRELIMINARY VALUATION

Nielsen Global Media has generated revenue and adjusted EBITDA of $3.4 billion and $1.5 billion, respectively over the trailing twelve months. The Nielsen Global Connect business generated revenue of $3.0 billion and adjusted EBITDA of $400,000 over the past twelve months. Within this morning’s earnings release, the company reiterated its full year consolidated revenue (~$6.5 billion, or flat to +1.5% vs. 2018), adjusted EBITDA ($1.8 – $1.9 billion) and FCF ($525 – $575 million) guidance for 2019, while increasing its adjusted EPS guidance to $1.77 – $1.83 per share (previously $1.70 – $1.80).

For the Connect business, through 3Q 2019 revenue has decreased by 4.0% to $2.3 billion with segment EBITDA margins remaining roughly flat at 12.5%. Media’s revenue has decreased 1.0% over the same time period with similarly stable EBITDA margins of ~42.6%. Assuming similar trends and margins in 2020, it could be forecast that the Connect business would generate $3.0 billion in revenue and $366 million in EBITDA in 2020. Media is forecast to generate $3.4 billion in revenue and $1.4 billion in EBITDA in 2020.

The broader information services sector, which includes CoreLogic (NASDAQ: CLGX), Emis Group (EMIS LN), Relx Plc (REL LN), and Wolters Kluwer (WKL NA), trades at approximately 11x 2019E EV/EBITDA. Applying a slight discount to the peer multiple of 10.0x to Media segment EBITDA of $1.4 billion implies an enterprise value of $14.3 billion. Applying a discounted multiple of 8.0x, which is roughly in-line with what KKR (NYSE: KKR) paid for GfK SE (formerly GFK GR) in 2017, to Connect 2019E EBITDA implies an enterprise value of almost $3.0 billion.

Accounting for $50 million in corporate costs, capitalized at 9.5x, as well as $8.3 billion in net debt, yields a preliminary sum-of-the-parts fair value of $9.4 billion, or $26 per share (based on ~356 million shares outstanding).

Online Spin-Off Tracker: Real-Time Tracking of All Spin-Off Announcements, Form-10 Filings, and Recently Completed Spin-Offs, with market prices compared against The-Spin-Off Report’s fair value estimates to highlight investment opportunities.

EVRI maintains 2019E adjusted EBITDA guidance at $252-$255 million; free cash flow is expected to be $42-$45 million in 2019 (and roughly “double” in 2020)

• In the first nine months of 2019, EVRI’s consolidated sales increased almost 11% to $388 million with an 8% increase in adjusted EBITDA to $190 million.  EPS were $0.27 compared with $0.11 in the same nine-month period of 2018.
• By segment, Games revenue increased more than 7% to $206 million with a ~5.5% increase in adj. EBITDA to $102 million while FinTech sales increased 15% to ~$182 million with an ~11.5% increase in adj. EBITDA to $97 million.
• The company maintained its full-year 2019 adj. EBITDA guidance of $252-$255 million (compared with consensus of $253 million and $230 million in 2018).
• At the end of 3Q 2019, EVRI had net debt of $1.1 billion and a net leverage ratio of 4.5x (compared with 5.0x at year-end 2018). The company’s secured leverage ratio was 2.97x at quarter-end, which remained well within its main covenant of 4.75x.
• The company expects to generate free cash flow of $42-$45 million in 2019 on capital expenditures of $130-$133 million (previously $122-$125 million).
• Importantly, management commentary suggests free cash flow is expected to roughly “double” in 2020, which should allow for incremental progress toward its short-term (i.e. 12-15 month) leverage target of below 4.0x (as well as its longer-term goal of 3.0x-3.5x).
• Our fair value estimate remains $13 per share (see Exhibit #1 on page 2), reflecting a blended multiple to ~8.5x on 2020E adj. EBITDA of $250 million (previously $243 million), projected net debt of $1.085 billion (previously $1.095 billion) and a diluted share count of 80.5 million (previously 75.5 million).  [Note: our adj. EBITDA forecasts do not add back stock-based compensation.]

NPO lowers full-year 2019E adj. EBITDA guidance to $210-$214 million (from $225-$229 million) and adj. EPS guidance to $3.90-$4.04 (from $4.45-$4.59) on weakness in the heavy-duty trucking market; fair value estimate trimmed to $80 per share (from $81)

• In the first nine months of 2019, NPO posted consolidated sales down 2.6% at $1.12 billion with a 2.5% decline in adjusted EBITDA to $159 million.  Adjusted EPS increased almost 8% to $3.16.
• Year to date 2019 results reflect weakness in the heavy-duty trucking portion of NPO’s Sealing Products segment offset by ongoing strength in the Power Systems segment, which posted a 20% gain in sales to $201 million with adj. segment EBITDA growth of more than 80% to $31 million.  Adj. EBITDA was down ~7.0% to $117 million at Sealing Products and 21% to $37 million at Engineered Products.
• The company ended 3Q 2019 with net debt of ~$554 million, including the ~$310 million deployed toward the Aseptic and LeanTeq acquisitions, and a leverage ratio of 2.6x (compared with $335 million and 1.5x at year-end 2018).
• In terms of guidance (see Exhibit #1 on page 2), NPO lowered its full-year adj. EBITDA target to $210-$214 million (compared with the previous guide of $225-$229 million and $217 million in 2018) and its adj. EPS target to $3.90-$4.04 (compared with the prior guide of $4.45-$4.59 and $3.91 in 2018).
• During 3Q 2019, NPO completed the sale of its brake shoe business, which was within the Stemco heavy-duty truck business unit of the Sealing Products segment, and indicates that it will “continue to evaluate businesses as part of portfolio shaping strategy”.
• Our fair value estimate is reduced to $80 per share (from $81 per share; see Exhibit #2 on page 2), reflecting a blended multiple of ~7.5x (unchanged) on 2021E EBITDA of ~$260 million (previously $271 million and projected net debt of ~$375 million (previously $395.5 million).

WAB reports Q3 Earnings; Maintain Fair Value Estimate of $83; Maintain BUY

• Wabtech Corp. (NYSE: WAB) reported Q3 earnings results on October 31, 2019.As background, WAB acquired GE Transportation, which was spun off from General Electric Company (NYSE: GE) in a Reverse Morris Trust (RMT) transaction completed on February 25, 2019. Q3 revenues of $2.0 billion and EPS of $0.48 were broadly in line with consensus estimates and prior guidance.
• 2019 revenue guidance calls for revenues of $8.2 billion and adjusted EBITDA of $1.6 billion; EPS guidance was adjusted up slightly to $4.15-$4.20 (from $4.10-$4.20 previously); cash flow guidance was maintained at $900 million. Product mix and revenue growth are expected to improve throughout the year, with operating margins expected at 14% for the year. Management stated that the company is ahead of plan on its merger-related synergies target of $250 million to be delivered before 2022.
• As anticipated, poor weather conditions, declining intermodal traffic and sales declines in railcar components and electronics continue to weigh on the Freight segment, with backlog declining 3% YoY. Fundamentals in the Transit segment remain positive, owing to upgrade of ageing fleets in the U.S. and Europe, coupled with infrastructure spending increases in emerging economies.
• Our estimates remain unchanged. We continue to model 3.5% consolidated revenue growth for 2019.Our fair value estimate remains $83, based on applied multiples of 13x EBITDA and 17x EPS. 
• With the shares currently trading at 9x forward EBITDA, we maintain our BUY recommendation. Relatively conservative revenue expectations and the potential for incremental acquisition synergies (approximately $20 million this year) represent upside catalysts.
• For more details, please refer to The Spin Off Report dated January 14, 2019 and UPDATE dated October 25, 2019.

CTVA Reports Q3 Earnings; Fair Value Revised to $34; Maintain BUY

• On October 31, 2019, Corteva Inc. (NYSE: CTVA) reported Q3 earnings results. Recall that Corteva spun off from DowDuPont Inc. (formerly NYSE: DWDP) on June 3, 2019. Q3 EPS of ($0.39) exceeded consensus by $0.06. Revenue of $1.91 billion (-2% YoY) was just below consensus of $2 billion, owing to continued delayed seasonal rainfall, which negatively affected crop protection sales (-7% YoY). Delayed planting and harvest have slowed restocking, delaying the timing of fall crop protection sales to Q4. Operating EBITDA of 18% improved from 200 bp from year-ago levels, benefiting from cost synergies and introduction of new higher-margin products.  

• CTVA generally reaffirmed its 2019 outlook, albeit weather and volume shifts have delayed soybean planting in Brazil, shifting a greater portion of crop protection sales into Q4. Revenue guidance remains intact at -3% Y/Y; operating EBITDA guidance was tweaked to $1.9 billion (representing the low end of prior guidance of $1.9-$2.05 billion), owing to currency impacts, higher raw materials costs and continued weather-related softness in North America. F2019 EPS guidance of $1.20-$1.26 exceeded consensus of $1.17 2020 guidance remains intact at 4%-6% revenue growth, and EPS of $1.06-$1.31.

• We modestly reduce our 2019 EBITDA estimates to reflect the low end of the guidance range. Our fair value estimate has been revised downward to $34 (from $36), based on EV/EBITDA and P/E multiples of 15x and 28x, respectively, and reflect updated capitalization information. The applied multiples remain conservative, in our view, in light of more diversified industrial chemical peers trading at 14x 2019E EV/EBITDA.

• We maintain our BUY recommendation, viewing Corteva as a 2020 growth story. We continue to expect an improving demand outlook throughout the year and into 2020, 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 August 15, 2019.

Marathon to Spin Off Speedway Business

On October 31, 2019, Marathon Petroleum Corp. (NYSE: MPC) announced its intention to separate its Speedway retail fuel business into an independent publicly-traded company via a tax-free spin-off to shareholders. As part of the Speedway separation process, MPC will also initiate a nationwide search for a Speedway CEO from both internal and external sources. An expected completion date for the separation is was not disclosed. In conjunction with today’s announcement, CEO Gary R. Heminger also announced his plans to retire in 2020 after 45 years with the company. A nationwide search process has begun for a successor to Heminger. Additionally, MPC announced its intent to form a special committee of the Board, led by Independent Director J. Mike Stice, to evaluate potential value-creating options for the Midstream business.

Speedway, based in Enon, Ohio, will consist of MPC’s company-owned retail store operations, which includes more than 4,000 U.S. convenience stores. The post-spin company is projected to generate 2019 EBITDA of approximately $1.5 billion. MPC will retain its direct-dealer business, with an expected 2019 EBITDA of approximately $0.4 billion, which is also included in the Retail segment as currently reported. Post-spin MPC will consist of the company’s refining and market and Midstream businesses.

Marathon Petroleum, with a current market capitalization of $42 billion, is a petroleum refining, marketing and transportation company.  The company generated 2018 revenues and EBITDA of $96 billion and $8.1 billion, respectively. Following its acquisition of Andeavor on October 1, 2018, the company is the largest petroleum refinery operator in the United States. MPC reports in three primary segments: (1) Refining & Marketing, which refines crude oil and other feedstocks via a network of seven refineries; (2) Speedway, which sells fuel and other products via a network of gas stations and convenience stores; and (3) Midstream, which includes the operations of MPLX (NYSE: MPLX), a publicly traded master limited partnership (MLP) that operates a network of pipelines for the transportation of crude oil.

Today’s strategic announcements and management change appears to be the culmination of pressure from activist investors, which have been calling for a breakup to the corporate structure and executive leadership for some time. In September 2019, Elliott Management Corp., which holds a 2.5% stake, sent a letter to the Marathon Petroleum board with a plan “to unlock the value currently trapped in Marathon’s conglomerate structure” by splitting it into three independent businesses: refining, midstream and retail. The potential separation of PMC’s Midstream operations also underscores an ongoing industry trend among integrated oil and gas companies to separate their Midstream and Upstream operations.

VVI tempers 2019E adj. segment EBITDA guidance to $153-$157.5 million, primarily due to higher incentive comp; in our estimation, Pursuit will approach the key $250 million revenue benchmark in 2020

• In the first nine-months of 2019, VVI posted revenue growth of 5.1% to ~$1.05 billion with a ~23% decline in adj. segment EBITDA to ~$90 million.
• In terms of full-year 2019E guidance, VVI expects “mid-single digit” consolidated sales growth (unchanged) with adj. segment EBITDA of $153.5-$157.5 million (compared with previous guidance of $159-$166 million, an initial guide of $152.5-$158.5 million and $146.3 million in 2018; see Exhibit #1 on page 2).
• By segment, VVI expects GES to post 2019E sales growth in the “low-single digit” range (unchanged) with adj. segment EBITDA of $71.5-$74.5 million (previously $76-$80 million).  At Pursuit, VVI projects sales growth of 20%-21.5% (previously 20%-23.5%) with adj. segment EBITDA of $81.5-$83.5 million (previously $82.5-$86.5 million).
• Looking into 2020, the company expects roughly $100 million of positive “show-rotation” (with a flow-through rate of ~30%) at GES.
• In 2021-2022, VVI expects to add two new attractions to its Pursuit portfolio, including a new FlyOver location in Toronto and a geothermal lagoon experience in Iceland.
• With the recent purchase of Mountain Park Lodges in June 2019, we expect VVI’s high-margin Pursuit segment will approach $250 million of sales, which we discern remains the starkest benchmark precipitating an eventual split of the company’s disparate businesses, during 2020.
• Our fair value estimate is modestly adjusted to $74 per share (previously $75 per share) based on a blended multiple of ~9.5x on 2019E/2020E blended EBITDA of ~$177 million (previously $180 million) as well as projected net debt of ~$194 million (see Exhibit #2 on page 2).  The slight reduction notwithstanding, we would view any weakness in shares today as a longer-term buying opportunity.

Revising WAB Fair Value Estimate to $83 (from $90); Maintain BUY

• Wabtech Corp. (NYSE: WAB) is scheduled to report Q3 earnings results on October 31, 2019 pre-market As background, WAB acquired GE Transportation, which was spun off from General Electric Company (NYSE: GE) in a Reverse Morris Trust (RMT) transaction completed on February 25, 2019. Since, WAB has declined approximately 5%, versus an 8% increase for the S&P 500, albeit shares have rebounded from a $62 lows in August. Near-term margin compression, owing to the sheer scale and complexity of the GE Transportation integration, coupled with economic uncertainty and volatility in the global trade outlook, represent primary overhangs on the stock.
• WAB’s 2019 revenue guidance calls for revenue of $8.3 billion and EBITDA of $1.6 billion. Note that last quarter, the company increased the low end of adjusted EPS guidance to $4.10-$4.20 and its full-year cash flow guidance to $900 million. 2019. Product mix and revenue growth are expected to improve throughout the year, with a 14% operating margin target set for 2019.
• Poor weather conditions, declining intermodal traffic and decreasing commodity prices are likely to weigh on the Freight segment, with consensus expectations largely calling for freight rail revenues to be flat-to-down in 2019. The Transit segment should experience growth in the U.S. and Europe owing to upgrade of aging fleets. We model 3.5% consolidated revenue growth for 2019.
• Given the expectation of challenging fundamentals in the North American locomotive market, we modestly adjust applied multiples downward to 13x EBITDA (from 14x) and 17x EPS (from 20x) and accordingly revise our price target to $83 (versus $90 previously). 
• With the shares currently trading at 9x forward EBITDA, we maintain our BUY recommendation. Relatively conservative revenue expectations (tweaked downward last quarter), and further acquisition synergies (approximately $20 million this year) represent upside catalysts.
• For more details, please refer to The Spin Off Report dated January 14, 2019 and UPDATE dated July 30, 2019.

Drop Coverage of IAA Inc. Effective Immediately

• On June 28, 2019, IAA Inc. (NYSE: IAA) was spun off from KAR Auction Services Inc. (NYSE: KAR).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of IAA Inc. effective immediately.
• Our prior estimates and fair values for IAA should no longer be relied on.