On November 14, 2017, after the close, CBS Corp. (NYSE: CBS) announced the final exchange ratio in connection with its previously announced offer to shareholders to exchange their shares of CBS Class B common stock for shares of CBS Radio Inc. (“CBS Radio”) common stock. The exchange offer to split-off CBS Radio is part of CBS’ agreement to combine its radio business with Entercom Communications Corp. (ETM) (“Entercom”) via a Reverse Morris Trust (RMT) transaction. The fair value estimate for CBS has been decreased to $77 per share (previously $78 per share) based on the updated share count. ETM’s post merger fair value estimate remains unchanged at $11. With the CBS fair value estimate representing 37% implied upside to CBS’ current share price ($56.41), we continue to recommend the shares for purchase. We would avoid shares of ETM, which appear fairly valued.

Attached, please find a Hidden Opportunities update on Chemed Corp. (NYSE: CHE).

CHE settles long-running civil litigation with DOJ; fair value revised upward to $242 per share along increased F2017 guidance

• This week, CHE’s VITAS subsidiary settled a long running civil case with the U.S. Department of Justice (DOJ) for an estimated total pre-tax cost of $85 million ($53 million after-tax), which compares with the $90 million pre-tax ($55.5 million after-tax) of estimated settlement costs that the company recorded in 2Q 2017.
• The settlement will be funded with cash and the company’s credit facility; at the end, of 3Q 2017, CHE had net debt of $64 million, including $19 million of cash, and more than $309 million of availability on its revolver.  As well, we project free cash flow of ~$150 million in F2018.
• In our view, this marks a favorable outcome for CHE from both a financial and strategic perspective. On the latter point, we have long discerned CHE’s management as open to a range of potential strategic alternatives, including a split or RMT, for its disparate businesses, particularly if a potential acquirer emerged with a premium bid.  To that end, the removal of this legal overhang could prompt increased interest in potential combinations within the already consolidating healthcare space.
• Separately, CHE recently increased its F2017 EPS guidance to $8.35-$8.40 (from $8.10-$8.20).  At VITAS, revenue, prior to the Medicare Cap, is estimated to increase in the 2%-3% range with an adjusted EBITDA margin of 15%.  At Roto-Rooter, 2017 sales are expected to advance 13%-14% with an adjusted EBITDA margin of 22.5%.
• Our fair value estimate is increased to $242 per share, reflecting a blended multiple of ~12x on our 2018E EBITDA forecast of $326 million less projected net debt (including settlement funding and assumed share repurchases) of $103 million.

CHE has returned ~65% since our initial recommendation in October 2016 (versus gains of 19% and 20% for the S&P 500 and Russell 2000, respectively).

Attached, please find a Hidden Opportunities update on NACCO Industries (NYSE: NC).

Withdraw recommendation of both NC and HBB shares following strong post-spin appreciation and unexciting guidance for 2018

• NACCO Industries (NC) completed the spin-off of Hamilton Beach Brands (HBB) after the close on September 29^th.  Holders of pre-spin NC shares received one share of post-spin NC as well as one Class A and one Class B shares of HBB.  (Note: Class B shares are convertible to Class A shares at no cost to the holder.)
• In the subsequent trading days, the shares of each public entity have gained appreciably; in fact, on a pre-spin basis, shares of old NACCO Industries (NC) are trading at an implied valuation of ~$111.20 per share (compared with our initial pre-spin fair value estimate of $105 and the  closing price on September 29^th of $85.80).
• Moreover, on a post-spin basis, shares of NC and HBB are trading at modest premium to with the Spin-Off Report’s initial post-spin fair value estimates of $36 and $34 per share, respectively.
• Accordingly, we withdraw our recommendation of both NC and HBB shares, as of today’s close.
• Notably, both companies reported 3Q 2017 results on November 2^nd and provided what we view as unexciting guidance for 2018.  At NC, management expects income for before income taxes and cash flow will both decline in 2018 (versus 2017) while at HBB management projects only modest increases in revenue, net income and cash flow.

For context, on a combined basis, NC shares returned ~59% from our initial recommendation in February 2017 (versus a 13% gain in the S&P 500 and a 10% rise in the Russell 2000).

On October 19, 2017, after the close, CBS Corp. (NYSE: CBS) announced the commencement of an exchange offer for the separation of its radio business as part of its previously announced agreement to combine CBS Radio Inc. (“CBS Radio”) with Entercom Communications Corp. (ETM) (“Entercom”) via a Reverse Morris Trust (RMT) transaction. The fair value estimate for CBS has been increased to $78 per share (previously $77 per share) based on the updated share count. ETM’s post merger fair value estimate remains unchanged at $11. With the fair value estimate representing 35% implied upside to CBS’ current share price ($58), we continue to recommend the shares for purchase. We would avoid shares of ETM, which appear fairly valued.

Follow the link above for the full Spin-Off FLASH Report.

DXC Technology Co. (NYSE: DXC) announced its intention to combine its U.S. Public Sector business (“”USPS””) with Vencore Holding Corporation and KeyPoint Government Solutions—both of which are owned by affiliates of private equity firm Veritas Capital—to form a separate, independent publicly traded company via a tax-free spin-off. The transaction is expected to be completed by the end of March 2018. A preliminary pre-spin sum-of-the-parts valuation for DXC indicates a fair value estimate of $106 per share.

On October 10, 2017, Honeywell International Inc. (NYSE: HON) announced its intention to separate its Homes and Global Distribution (ADI) businesses (“”Homes””), as well as its Transportation Systems business, into two independent publicly-traded companies via a tax-free spin-off. The transactions are expected to be completed by the end of 2018. A preliminary pre-spin sum-of-the-parts valuation for HON indicates a fair value estimate of $111.8 billion, or approximately $147 per share.

TFII completes sale lease back transaction with pre-tax proceeds of ~$70 million; myriad transactional optionality remains and underlying fundamentals are improving

• TFII completed a sale leaseback transaction of 4 properties (in Montreal and Toronto) with Pure Industrial Real Estate (PIRET) in an all-cash transaction that will yield pre-tax proceeds of ~$70 million.

• We would note that TFII realized an $8.3 million gain from the sale lease back of a facility in Vancouver during 2Q 2017 and has signaled that it remains open to unlocking the “hidden value” in its real estate portfolio. To that end, management indicates that the properties included in the transaction represent less than 20% of the net book value of TFII’s real estate portfolio.

• Given recent commentary suggesting management’s desire to reduce its share count by some 4-5 million shares as well as the recent renewal of its normal course issuer bid we think proceeds are likely to be used to step-up share repurchase activity.

• In addition to incremental sale lease back transactions, we see myriad potential optionality for TFII in coming quarters, including the listing of its stock on the NYSE as well as the monetization/separation of assets (e.g. P&C, Logistics and TL).

• We also highlight indications that underlying fundamentals, particularly in the TL sector, have improved amid increased demand and storm-related capacity dislocations, which have been a boon to near-term spot market pricing. As well, we continue to view the impending ELD implementation in December 2017 as supportive of the overall industry pricing environment (and TFII’s stock) in 2018.

• While shares have appreciated roughly 18.5% since our initial recommendation in June 2017 (versus a 5% gain in the S&P 500 and a 7.5% rise in the Russell 2000) we think that at less than 7.5x 2018E EBITDA and with a free cash flow yield of 10% the shares remain attractive.

• The company will report 3Q 2017 results October 26th after the market close with a conference call the following morning at 9 a.m. (ET).

GAMCO, an 18% holder, will submit a request for a separation of KAMN’s Distribution segment at the 2018 Annual Meeting; fair value increased to $60 per share on initial 2018E forecast

• In a 13D filed last night, GAMCO, an ~18% holder of KAMN, indicated that it would formerly request a separation of the company’s Distribution segment by submitting a shareholder proposal to be voted on at the 2018 Annual Meeting.

• Indeed, it has been our contention since our initial recommendation in April 2016 that KAMN’s Distribution and Aerospace businesses, which generate vastly divergent margin profiles and offer limited synergies given distinct manufacturing/distribution footprints, should be separated. To that end, our assertion remains that a separation could benefit longer-term performance in terms of growth, margin and/or capital allocation that would unlock incremental value beyond any potential re-rating, particularly of the Aerospace segment, which generates 20% EBITDA margins (and could be reasonably expected to attract interest from strategic suitors).

• For 2017, KAMN currently expects Distribution segment sales of $1.1-$1.25 billion with an operating margin of 5.0%-5.3%. At Aerospace, the company expects sales of $730-$760 million with an operating margin of 16.5-17.0%. Free cash flow is projected in a range of $70-$100 million.

• Our initial 2018E forecasts implies about 3% consolidated top-line growth to $1.9 billion with an about 10.5% increase in adjusted EBITDA to $192.5 million.

• Our revised fair value of $60 per share (previously $56) reflects an 11.3x blended multiple on our initial 2018E adjusted EBITDA estimate less projected net debt (including unfunded pension liabilities) of $485 million.

• For context, KAMN shares have appreciated ~32% since our initial recommendation in April 2016 (versus a 20.5% increase in the S&P and a 31.5% rise in the Russell).

Withdraw recommendation of AIN with shares trading roughly in-line with our revised fair value of $56 per share; CEO to retire in 2018 and we think a split remains possible in 2019-2020

• AIN shares have returned ~34% since our initial recommendation in September 2016 (versus gains of 15% in both the S&P 500 and Russell 2000 indexes).

• That said, with the stock trading roughly in-line with our revised fair value of $56 per share we prefer to maintain a disciplined approach and withdraw our recommendation, as of today’s close.

• Our revised sum of the parts fair value reflects an 8.5x multiple on 2018E MC EBITDA of $190 million and a 10.5x multiple on 2020E EC EBITDA of $100 million (discounted back to the end of 2018 at 8%).

• We will continue to monitor AIN shares for an opportunity to re-recommend the shares if valuation shifts or if incremental steps toward potential strategic alternatives materialize.

• Notably, the company recently indicated that capital spending of $95-$105 million in 2017 represented the “peak” of its investment program and that Dr. Joseph Morone, the current CEO & President of AIN, would retire in 2018.

• Looking into 2019-2020, assuming the successful execution of the current ramp of new aerospace business, we think EC’s fading reliance on MC’s steady cash flow to fund facility investments will be an important factor in the willingness of AIN’s next chief executive to ultimately separate the company’s two disparate business segments.

Fair value revised to $29 per share (from $26) on initial 2018E forecast; insight into TRS’s longer-term strategic priorities, in terms of portfolio composition and capital allocation, likely to emerge over the next several quarters

• In our view, TRS’s extensive restructuring efforts since 2014 have gained traction this year, which has driven improved results in 1H 2017 and could portend upside to the company’s full-year 2017 EPS guidance of $1.35-$1.45. As well, improved free cash flow conversion (along with the impending refinancing transaction) has enhanced financial flexibility (and could provide accretive capital allocation opportunities).

• It remains our view that improving underlying fundamentals (and internal execution) support additional upside for shares of TRS in addition to the potential optionality embedded in the company’s diverse portfolio. On the latter point, we think CEO Thomas Amato, who took the helm in July 2016, continues to evaluate the strategic fit of TRS’s various business lines with a keen eye toward financial returns and we expect deeper insight into the company’s longer-term strategic priorities over the next several quarters.

• Our revised sum of the parts fair value of $29 per share (previously $26) reflects a blended multiple of 9.4x on our initial 2018E EBITDA forecast of $162 million, which implies year over year growth of about 7%, as well as projected net debt of $217 million.

• For context, TRS shares have increased ~44% since our initial recommendation in July 2016 (versus a 15% increase in the S&P 500 and a 17% rise in the Russell 2000). Our revised fair value estimate implies incremental upside of ~10%.