Per an internal survey, UHAL’s core equipment rental business dominates the 20’-22’ one-way truck market and is highly competitive versus peers in the 10’-16’ market

• As we approach the back-to-school season, we thought it might be an interesting exercise to evaluate a snapshot of the do-it-yourself (DIY) moving market’s competitive landscape. To that end, we simulated 20 potential moving transactions of students returning to college.  In our view, the following results support the contention that UHAL’s core truck rental offering has durable competitive advantages in what we discern are the main factors of differentiation, namely the availability of equipment, the proximity of rental locations, and price.
• First, our internal survey confirmed that U-Haul’s primary competitors in the one-way/inter-city box-car market are Budget and Penske (because players such as Enterprise and Ryder offer only intra-city/round-trip moves).
• Next, in the market for 20’-22’ trucks, which are designed for two-to-three bedroom moves, we observed that U-Haul was the “clear” or “likely” choice in 95% of the transactions we contemplated.
• On the smaller end of equipment sizes, specifically the markets for 10’-12’ and 15’-16’ trucks, the industry is decidedly more competitive, particularly between U-Haul and Budget, with the latter primarily competing on price. Still, in the 20 markets we surveyed, U-Haul was the “clear” or “likely” choice in 45% of transactions (and a reasonable choice for the consumer in 60% of the potential transactions).
• It remains our view that at ~6.0x F2020E EV/EBITDA, UHAL is undervalued relative to the sum value of its parts, which includes a leading (and profitable) equipment rental business as well as a high-margin/low-capex self-storage business. Notably, our $470 per share fair value estimate reflects an 8.5x multiple on F2020E EBITDA and implies nearly 30% of incremental upside.

On August 13, 2018, V.F. Corporation (NYSE: VFC), a global leader in the branded lifestyle apparel, footwear and accessories, announced that its Board of Directors intends to separate the company into two independent, publicly traded companies: VF Corporation, a global apparel and footwear company, and a yet-to-be named company (NewCo), which will hold VF’s Jeans and VF Outlet businesses and will be a global leader in the denim category. The company expects to create these companies through a tax-free spin-off of NewCo to VF’s shareholders. The transaction is expected to be completed in the first half of calendar 2019, subject to final approval by the company’s Board of Directors, customary regulatory approvals and tax and legal considerations. The post-spin parent company will also move its corporate headquarters from Greensboro, North Carolina, to Denver, Colorado. The spin entity will be based in Greensboro.

VFC owns a broad portfolio of brands in the jeans wear, outerwear, packs, footwear, sportswear and occupational apparel categories. Products are marketed to consumers shopping in specialty stores, upscale, traditional department stores. V.F. generated consolidated 2017 revenue and EBITDA of $11.8 billion and $1.9 billion, respectively. The company consists of the “Big 3” brands Vans, The North Face, and Timberland. By product category, Outdoor represents the largest product category (69.5% of sales), followed by Jeanswear (22.5%), Imagewear, or work-inspired apparel and footwear and occupational apparel (7.0%), and Other, which is mostly comprised of outlet sales (1.0%). Management recently raised its 2019 revenue guidance, (+10-11% vs. +9-10% previously), primarily due to higher revenue expectations in the Outdoor category, owing to the strength of the North Face and Timberland brands, as well as the recent acquisitions of  the Icebreaker and Altra brands. 

The spin off allows V.F. to increase its focus on activity-based lifestyle brands. In particular, the identifiably American Wrangler and Lee brands have slowed in recent years as consumers Preference has shifted to premium denim brands as well as alternatives to jeans, such as yoga pants. Notably, V.F.’s jeans wear sales declined almost 3% in 2017.

NewCo will be a global leader in the denim category, with brands including Wrangler® and Lee®. The VF Outlet business will also be part of NewCo’s portfolio. The company is expected to generate annual revenue of more than $2.5 billion, EBITDA of more than $450 million (high teens EBITDA margin), gross margin of over 40%, and $300 million in free cash flow. NewCo will also have an 8-10% total shareholder return target and projected dividend yield of approximately 5%. The post-spin entity will have diversified geographic exposure and plans to further extend its geographic footprint with a focus on Asia, building on its established presence in China. Scott Baxter, who led the jeans brands from 2011 through 2015, will become CEO of the new company. Post-spin, NewCo can be compared to other specialty casual apparel retailers, including GAP Inc. (NYSE: GPS), Guess Inc. (NYSE: GES), and Lululemon Athletica Inc. (NASDAQ: LULU). 

Post-spin VFC is expected to generate more than $11 billion in revenue, more than $1.5 billion in EBITDA (mid-teens EBITDA margin), gross margin of over 50%, and approximately $1.1 billion in free cash flow. The company projects a dividend yield of 2% and total shareholder return of 14-16%. Post-spin, VFC can be most aptly compared to active apparel and footwear brands including as PVH Corp. (PVH), Columbia Sportswear Co. (NASDAQ: COLM), Under Armour (NYSE: UAA), Canada Goose Holdings Inc. (NYSE: GOOS), and Carter’s Inc. (NYSE: CRI).

In estimating a preliminary pre-spin sum-of-the-parts valuation, we begin with 2017 revenues. Given recent revenue trends, with the Jeans segment experiencing sales declines, and  RemainCo seeing positive growth, we estimate that RemainCo will increase revenue by 8% and 12% in 2018 and 2019, respectively, resulting in 2019 revenue of $11 billion. NewCo could be expected to generate flat revenue in 2018, and experience a modest increase of 2% in 2019 to achieve $2.8 billion in revenue. Assuming 14.5% and 16.0% margins at post-spin VFC and NewCo, respectively, the separate entities would generate $1.6 billion and $452 million in EBITDA in 2019, respectively.

VFC shares have had a strong recent run, reflecting the outperformance of the Outdoor segment and strength of its Big 3 brands. Shares have appreciated approximately 30% year-to-date, versus approximately 5% for the S&P 500. Given the increase in VFC’s stock price, shares currently trade at 19.1x, well above most general apparel company’s valuation range. In fact only companies such as LULU and UAA trade at higher valuations. Given the elevated valuation, it is difficult to project significant multiple expansion arising from the proposed spin-off. If the post-spin company trades roughly in line with the current valuation at 20.0x, while the Jeans company receives a discounted multiple of 16.0x (at the higher end of apparel peers given higher than average margins and cash flow but a discount to the parent company for lack of growth), the post-spin entities would be valued at $31.7 billion and $7.2 billion, respectively. Accounting for net debt of $3 billion and shares outstanding of 396.5 million, a preliminary pre-spin sum of the parts fair value can be estimated at $91 per share, which is roughly in line with the current share price ($92.84 as of this writing).

BEL to explore strategic alternatives, including a potential sale; reiterates 2018 adjusted EBITDA guidance of $140-$150 million

• Belmond announced its intent to conduct a “robust review of the full range of strategic, operational and financial alternatives”, including a potential sale of the company.  Goldman Sachs and J.P. Morgan have retained as financial advisors.
• Concurrently, the company reaffirmed its 2018 adjusted EBITDA guidance of $140-$150 million (as well its 2020 target of ~$240 million).
• In terms of the timing of this undoubtedly welcome announcement, BEL declined to comment on whether it had already been approached by any potential acquirers and indicated the decision was rather a reflection of the company’s strong operating momentum as well as the current strength of the global hospitality market, generally, and the market for luxury hotel assets, specifically.  (The company also declined to comment on any potential corporate governance changes, including the dual-class share structure, but indicated that the Board was in unanimous support of the strategic review.)
• It has long been our view that the sale of Belmond to a strategic luxury hotel operator who could leverage wider brand recognition and scale was likely the avenue that would unlock the most value from BEL’s diverse portfolio of one-of-a-kind assets.  To that end, an asset valuation of just the company’s owned-hotel portfolio, implying a blended per key value of ~$735K, suggests its value alone could exceed $2.1 billion (see Exhibit #1).  As well, we would highlight that in 2007 and 2012 the company garnered takeover offers from strategic players of 17x and 21x EBITDA, respectively.
• Notably, our current sum-of-the-parts fair value estimate reflects a blended operating multiple of ~14.5x on 2019E EBITDA.  If a 17x multiple, the lower of previously offered takeout multiples, were applied BEL’s value could potentially exceed $19 per share, by our calculation.

Withdraw recommendation of TRS with shares trading at a modest premium to our fair value estimate

• TRS shares have returned ~63% since our initial recommendation in July 2016 (versus a 30% gain in the S&P 500 and a 38% rise in the Russell 2000).
• That said, with the stock trading at a modest premium to our fair value estimate of $29 per share, which reflects a ~9.5x blended multiple on 2018E EBITDA (see Exhibit #1 on page 2), we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.
• We will continue to monitor TRS for an opportunity to re-recommend the shares if valuation shifts or incremental steps toward potential strategic alternatives materialize.  (Notably, on the latter front, TRS recently combined its Energy & Engineered Components segments into one business segment dubbed Specialty Products.)
• Note: TriMas will report 2Q 2018 results before the market open on August 7^th with a conference call that morning at 10 a.m.; call-in at (877) 874-1569.

Fair value increased to $48 per share (from $42); TFII raised 2018E adj. EBITDA guidance of $635-$645 million and introduced adj. EPS guidance of $3.21-$3.29

• In 1H 2018, TFII posted adjusted EBITDA growth of ~24% to $315.7 million on a 2% increase in total revenue to $2.5 billion.  Adj. EPS increased 63% to $1.55.
• Results reflected markedly improved performance at the Truckload segment, particularly the U.S.-based business, which posted a 640 basis point improvement in profitability, as well as solid results at the P&C, LTL and Logistics businesses.
• Management increased 2018E adjusted EBITDA guidance to $635-$645 million (from an acquisition adjusted figure of $610-$615 million).  Anecdotally, TFII also increased its free cash flow guidance to ~$325-$330 million (from ~$300 million).
• In terms of a potential spin-off of the U.S. TL business, while the company is now providing more granular disclosure into its Truckload business (by breaking out its U.S., Canadian and Specialized operations) it is our sense that the near-term focus is squarely on internal execution amid strong fundamentals.  That said, management remains open to any and all strategic options that could unlock incremental value for shareholders and with the stock trading at 7.75x 2018E EV/EBITDA, 12x 2018E EPS and with a free cash flow yield of ~9.5% clearly views the stock as being undervalued.
• For our part, we continue to see TFII as offering highly attractive exposure to the earnings leverage associated with both the broad improvements in underlying transport fundamentals and the company’s own internal improvement efforts (as well as any longer-term portfolio optionality).
• Our revised base case fair value estimate of $48 per share (previously $42) reflects a blended multiple of 8x on 2019E EBITDA of $674.5 million (previously $623 million) and projected net debt of ~$1.125 billion, implying more than 20% of incremental upside.

Fair value estimate increased to $38 per share (from $33) on robust 1H 2018 results and our improved full-year outlook

• In 1H 2018, MCS posted top-line growth of 11% to $361.5 million with EBIT growth of 22.5% to $26 million and EBITDA growth of 20% to $74.5 million.  EPS advanced 45% to $1.00 in 1H 2018.
• Theatre segment sales advanced 15.5% to $238 million while EBIT and EBITDA both rose 21% to ~$52 million and ~$71 million, respectively (see Exhibit #1).
• MCS estimates it outperformed overall U.S. box office receipts by 4% during 1H 2018 and in 16 of the last 18 quarters. Anecdotally, management indicated continued industry outperformance so far in 3Q 2018 but noted increasingly difficult comparisons moving into September and 4Q 2018.  Looking into 2019, MCS expressed tentative optimism on the “family-friendly” slate of movies, which tend to be popular with its core mid-western audiences.
• At the Hotel & Resorts segment, revenue increased ~3% to $123 million while EBIT increased 18% to almost $4 million and EBITDA increased 9% to $13 million  Results were primarily driven by higher food & beverage sales as well as increased management fees.  On the fee-front, the company noted that it would assume management of the newly constructed Courtyard by Marriott in downtown El Paso later this summer.
• The company ended 2Q 2018 with net debt of $308 million and a leverage ratio of 2.1x.  Capital expenditures are still expected to be $65-$80 million in 2018.
• Our revised fair value of $38 per share reflects a blended multiple of 9.3x on 2018E EBITDA of ~$146.5 million (previously $142 million) less projected net debt of roughly $300 million (see Exhibit #2).
• For context, MCS shares have returned 48% since our initial recommendation in August 2017 (versus a 15% gain in the S&P 500 and a 20% rise in the Russell 2000).

Fair value increased to $130 per share (from $126 per share) on increased 2018 guidance; see additional optionality for the CBF segment following the sale of CFS in 1Q 2018

• In 1H 2018, CSL posted ~26% top-line growth to $2.2 billion with an ~8% increase in EBIT to ~$254.5 million and a 17% increase in adjusted EPS to ~$2.94 per share.  Results were primarily driven by increased volume & price at CCM, higher volume at CIT and a rebound in CBF’s core construction, mining & agriculture markets.
• The company ended 2Q 2018 with net debt of $838 million, a net leverage ratio of 0.8x and a net debt to capital ratio of 24%.
• Given 1H 2018 results and current trends, management increased its full-year consolidated sales guidance to growth of ~20% (up from mid-to-high teens growth) with notable improvements at CCM, CIT and CBF (see Exhibit #1). Capital expenditures are projected in the $135-$150 million range and free cash flow conversion is expected to be 100% (of net income).
• Additionally, the company backed its previously articulated Vision 2025 plan, which calls for a doubling of revenues to $8 billion, consolidated margins of ~20%, ROIC of ~15% and EPS of $15 per share in 2025 (compared with $5.71 per share in 2017).  In that pursuit, we expect CSL will continue to narrow its focus on the core CCM, CIT and CFT segments, which have comparably higher growth and margin profiles.  As such, we see additional optionality for the CBF segment, which could be monetized to provide incremental growth capital to core businesses and/or be returned to shareholders.  (Recall, CSL, sold its CFS business for $750 million or ~12x 2018E EBITDA in 1Q 2018.)
• Our revised sum-of-the-parts fair value estimate of $130 per share (previously $126 per share) reflects a blended multiple of ~11x on 2018E EBITDA of ~$786 million (previously $745 million) less net debt of $773 million (see Exhibit #2).
• For context, CSL shares have returned ~23% since our initial recommendation in July 2017 (versus a 14% gain in the S&P 500 and a 18% rise in the Russell 2000).

On July 19, 2018, Danaher Corp. (NYSE: DHR) announced its intention to separate its dental business into a separate publicly traded company (“DentalCo”).  The transaction is intended to be tax-free to Danaher shareholders and expected to be completed in the second half of 2019, subject to several closing conditions, including obtaining final approval from the Danaher Board of Directors, completion of financing, favorable rulings from the Internal Revenue Service and other regulatory approvals. Amir Aghdaei, currently Group Executive with responsibility for the Dental segment, will become President and Chief Executive Officer of DentalCo upon completion of the transaction, and will join DentalCo’s Board of Directors.

Danaher, with a current market capitalization of $69 billion, is a diversified manufacturer of medical, industrial, and commercial products across a number of sectors, including test and measurement, environmental, life sciences, dental, and industrial technologies. In 2017, the company generated consolidated revenue and EBITDA of $18.3 billion and $4.3 billion, respectively.  Danaher maintains one of the strongest M&A track records in the sector, which has been integral to the company’s above-average earnings growth. In addition, the company’s relative diversity across end markets has provided revenue and earnings stability against the backdrop of a volatile healthcare sector. In recent years, Danaher has evolved from a conglomerate with significant interests in the industrial markets to more of a healthcare-focused business. The company has a history of spin-offs; in July 2015, Danaher split off its Communications business, which was acquired by NetScout (NASDAQ: NTCT) in a RMT transaction. DHR shareholders received 59.5% ownership interest in the merged NTCT.  In July 2016, the company spun off its test & measurement as Fortive Corp. (NYSE: FTV).  

Danaher’s Dental segment generated 2017 revenue of $2.8 billion (15% of total), representing essentially flat growth on a year-over-year basis. The segment generated 2017 operating income of $400.7 million (12.6% of the company’s consolidated total), representing a 4.4% year-over-year decline. Segment weakness has been driven in part by a demand decline in dental implants and dental consumables as well as inventory de-stocking among customers. Given recent underperformance of the business, the separation allows Danaher to focus on its higher margin businesses.

DentalCo will be a premier global partner for the dental community, with industry-leading positions and brands. The post-spin company will be comprised of Danaher’s current Dental segment operating companies: Nobel Biocare, Ormco, and KaVo Kerr. The Dental business generated revenue of $2.8  billion in 2017, and is expected to have an investment-grade credit rating and a global team of approximately 12,000 associates. Post-spin, DentalCo can be most aptly compared with other Dental equipment suppliers, including Dentsply Sirona Inc. (NASDAQ: XRAY), which currently trades at approximately 22x EBITDA. Assuming 1% revenue growth in 2018 and 2019, the post-spin DentalCo could reasonably generate 2019 revenues of $2.9 billion. At a stable EBITDA margin of 19%, DentalCo would generate 2019 EBITDA of $544.8 million. Applying a multiple comparable to XRAY implies an enterprise value of $12 billion for the business. Note, however, there is some execution risk associated with the implied enterprise value, particularly given recent revenue and margin weakness.

Following the Dental spin-off, DHR will be comprised of Life Sciences & Diagnostics and Environmental segments. Excluding the Dental business, the company generated 2017 revenues of $15.5 billion and an EBITDA margin of 25%. The post-spin company can be most aptly compared to other medical diagnostics companies, including PerkinElmer Inc. (NYSE: PKI), Luminex Corp. (NASDAQ: LMNX), and Bio-Rad Laboratories Inc. (NYSE: BIO), among others.  These companies trade at an average multiple of 18x EBITDA. Assuming 8% and 4% revenue growth in 2018 and 2019, in line with consensus estimates, post-spin DHR could generate approximately $17.5 billion in revenue in 2019. At a stable EBITDA margin, the company could generate $4.4 billion in EBITDA. Applying an 18x peer multiple results in an implied enterprise value of $78.4 billion for post-spin DHR.

The above exercises generate a total implied enterprise value of $90.4 billion for pre-spin DHR. Assuming net debt of $9.5 billion (balance sheet as of Q1 2018), pre-spin DHR can be fairly valued at $116 per share. With the implied fair value estimate representing upside of 10% to the current DHR share price (as of intra-day), the transaction appears to unlock modest incremental value.

Withdraw recommendation of MSG with spin-off likely and shares trading roughly in-line with our revised fair value estimate; coverage will be continued by our colleagues at The Spin-Off Report

• While we expect MSG will ultimately move forward with a tax-free separation of its Sports and Entertainment businesses, with the shares trading roughly in-line with our revised fair value estimate (see Exhibit #1 on page 2) we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.
• Notably, coverage of MSG’s exploration of a spin-off and the ultimate transaction will be continued by our colleagues at The Spin-Off Report.
• Our revised fair value estimate of $312 per share (previously $293) anticipates that the value of the Knicks and Rangers franchises rise about 10% from their most recent appraisals and assigns modest value to assets previously valued at zero, such as the Boston Calling Music Festival.  (The valuation still assigns zero value to MSG’s WNBA & esports franchises or the potential value of its so-called air rights.)
• Shares of MSG have appreciated ~43% since our initial recommendation in October 2017 (versus a 5.5% increase in the S&P 500 and 10% rise in the Russell 2000).

On June 29, 2018, Novartis AG (SIX: NOVN, NYSE: NVS) announced that following a strategic review, the company will seek shareholder approval to spin-off 100% of its Alcon eye care devices business. In addition the company announced plans to institute a share repurchase program of up to $5 billion through 2019. If shareholders approve the spin-off plan, management expects that it the separation would be completed in 1H 2019, subject to Board and shareholder approval. Current Alcon CEO Mike Ball will be designated Chairman while current COO David Endicott will be promoted to Alcon CEO, both appointments effective July 1.

On an enterprise basis, Alcon can be valued at $18.9 billion, while post-spin Novartis is fairly valued at $220.4 billion. Accounting for $27.8 billion in net debt and 2.6 billion shares outstanding, shares of Novartis (NVS) are fairly valued at $83 per share, representing approximately 14% potential upside from the current share price. For reference, USDCHF exchange rate is currently 0.9936.