Since being spun off from Xerox Inc. (NYSE: XRX) in January 2017, Conduent Inc. (NASDAQ: CNDT) shares have appreciated 18% versus 11% for the S&P 500 over the same period. Based on projected 2018 earnings, EBITDA, and free cash flow, the shares can be valued at $20 per share (versus our prior estimate of $18.68), representing 24% upside from current levels ($16.14 as of this writing). Significant challenges in the customer care and legacy businesses will take time to remedy, but valuation largely reflects these challenges, in our view, with the shares trading at 7.3x 2018E EBITDA (versus 8.3x for Business Process Outsourcing peers).

Commentary at a truckload industry forum and the rejection of efforts to delay the impending ELD implementation support our bullish stance on TFII; myriad transactional optionality remains

• Comments from several of TFII’s U.S. truckload competitors at a conference this week were supportive of our contention that underlying industry fundamentals have improved in recent months. In fact, carriers almost universally indicated better than seasonally normal demand trends since May, which have had a positive inflationary impact on industry pricing. (Also, storm-related capacity dislocations are expected to provide an additional tailwind to near-term spot pricing.)
• As well, we see this week’s rejection by U.S. House of Representatives of an effort to delay the December 2017 implementation of the electronic logging devices (ELDs) mandate as offering further support to our view that truckload pricing is likely to see continued improvement in 2018-2019 amid a tighter industry supply/demand balance. (Note: While the ELD mandate is primarily a safety initiative we expect its tangential impact will be an overall reduction in industry capacity. To that end, conference commentary this week from Werner (NASDAQ: WERN) suggested ELDs could have a 2.5%-5% negative impact on overall industry utilization/mileage as well as drive market share gains for larger, more sophisticated players where network disruptions will be minimal.)
• All told, it is our view that improving fundamentals in the U.S. truckload sector support further upside for TFII in addition to the company’s myriad transactional optionality. Moreover, while shares have appreciated roughly 15% since our initial recommendation in June 2017 (versus a 1.25% gain in the S&P 500) we think that at 7.5x 2018E EBITDA and with a free cash flow yield of 11% the shares remain attractive.
• Our current $36 fair value estimate reflects a blended multiple of 7.6x on 2018E EBITDA of $608 million and implies roughly 20% of additional potential upside.

NC to spin-off Hamilton Beach Brands (HBB) and The Kitchen Collection (KC) in a tax-free transaction that is expected to close in 3Q 2017

• Today, NC announced plans to spin-off Hamilton Beach Brands (HBB), which designs and distributes household appliances, as well as The Kitchen Collection (KC), a specialty retailer of kitchenware, into a separate publically-traded entity.

• The spin-off entity, which is expected to list on the NYSE under the ticker HBB, will have a dual-class equity structure similar to NC’s; to that end, NC shareholders will receive one share of HBB for every Class A or Class B share owned on the record date. The transaction is expected to close in 3Q 2017.

• Following the spin-off, the parent company will be comprised solely of the North American Coal Corp. (NA Coal), which mines lignite coal for electricity production and provides mining-related services. Importantly, last week, NA Coal extended its $150 million revolving credit facility through August 2022.

• Upon the spin’s completion, Mr. Al Rankin will retire as NC’s CEO while remaining Chairman at both the parent and spin entities. The current division heads, J.C. Butler and Gregory Trepp, will retain their leadership positions at NC and HBB, respectively.

• Our sum of the parts fair value of $101 per share reflects a blended multiple of 7.7x on 2018E EBITDA of $94 million as well as projected net debt of $31 million. (We note that our net debt calculation includes debt, asset retirement obligations and pension liabilities as well as projected free cash flow generation in 2H 2017 and 2018).

• Given the implied upside to our fair value estimate we continue to recommend NC shares and will monitor the stock in conjunction with our colleagues at The Spin-Off Report as this transaction unfolds. (For more information, please also see the Flash published today by The Spin-Off Report, which we note values NC based on its current debt structure.)

• NC shares returned ~7% since our initial recommendation in February 2017 (versus a flat comparison in the Russell 2000.)

On August 21, 2017, NACCO Industries Inc. (NYSE: NC) announced its intention to spin off its wholly owned subsidiary, Hamilton Beach Brands Holding Company, resulting in two separately traded public companies. The separation is to be conducted via tax-free spin-off to NC shareholders. Subject to the effectiveness of the registration statement, filed today with the SEC, the transaction is expected to be completed in the third quarter of 2017. NACCO Industries will not receive any proceeds from the spin-off. Incorporating peer multiples for Hamilton Beach Brands and NA Coal, while accounting for corporate costs capitalized at the weighted average segment multiple, as well as net debt, asset retirement obligations, and pension liabilities, yields a preliminary pre-spin sum-of-the-parts valuation for NACCO Industries of $604 million, or about $88 per share. For further details, please see the full report via the link above.

On August 4, 2017, Hewlett Packard Enterprise Company (NYSE: HPE) announced that its Board of Directors has set the close of business on August 21, 2017 as the record date for the proposed spin-off of Seattle SpinCo, Inc., which will merge with Micro Focus International plc (MCRO LN) in a Reverse Morris Trust transaction. Our fair value estimates remain unchanged with a pre-spin fair value estimate of $20 per share for HPE, representing 14% potential upside to the shares’ current price at the time of this writing ($17.29). Post-spin, HPE can be fairly valued at $16 per share. Note that this analysis does not account for the potential unlocking of value from further asset sales, which would likely provide upside to the fair value estimate given HPE’s historically depressed multiple relative to networking peers.

Post-merger, Micro Focus can be fairly valued at £21 per share ($27.43 for the NYSE-listed ADSs). With the fair value estimate approximating MCRO’s current share price (£21.22 as of this writing), we believe that in the near term the market has largely priced in the strategic and operational gains associated with the merger. We view HPE as the better way to play the spin/merge transactions at this time. For further details, please see the full report via the link above.

Fair value increased to $57 on initial 2018 forecast; 2017 results continue to exceed expectations; a clear framework for an eventual separation remains intact

• In 1H 2017, VVI reported consolidated revenue growth of 22% to $690.6 million along with an 85.5% increase in total adjusted EBITDA to $74.2 million.

• The company ended 1H 2017 with net debt of $199 million and a leverage ratio of 1.7x.

• For full-year 2017, the company expects consolidated sales growth of 6%-8% with consolidated adjusted segment EBITDA of $153.5-$157.5 million (up from its prior view of $144.5-$148.5 million).

• By segment, at GES, VVI expects 6%-7% top-line growth with adjusted segment EBITDA of $92-$95 million (up from the prior view of $89-$92 million). At T&R (now called Pursuit), management projects segment sales up 7%-11% with adjusted segment EBITDA of $61-$63 million (up from $55-$57 million).

• It remains our view that VVI is open to an eventual separation of its disparate businesses and we discern a clear framework for the conditions management views as necessary to exist for the two businesses to successfully standalone.

• To that end, we think the achievement of a $250 million revenue base at T&R remains the starkest benchmark. In pursuit of that threshold, we think the acquisition of attractions at iconic natural & cultural destinations with perennial demand will remain integral to VVI’s growth plans over the next several years. At M&E, we think it continues to be less about size than a more stable business mix, including ~$250 million of high-margin A/V & event technology work as well as an increased contribution from non-exhibition/corporate events, which is conducive to the maintenance of a higher than historical margin profile through the course of a cycle.

• Based on our initial 2018E consolidated total EBITDA forecast of $153 million and a blended multiple of ~8x our fair value estimate is increased to $57 (from $48).

• VVI shares have returned ~76% since our initial recommendation in May 2016 (versus gains of 18% and 23% in the S&P 500 and Russell 2000 Indexes, respectively).

On August 3, 2017, Spirit Realty Capital Inc. (NYSE: SRC) announced its intention to spin off a separate, publicly-traded real estate investment trust (REIT). Based on a preliminary valuation exercise, SRC can be fairly valued, on a sum-of-the-parts basis, at $8.65 per share. Given the current share price of $8.25, and the concerns about future revenue streams, the shares appear fairly valued for the transaction. For further details, please see the full report via the link above.

WYN announces plan to become two publicly-traded companies via the tax free spin-off of its Hotel Group; the transaction is expected to be completed in 1H 2018

• On August 2, 2017, after the market close, WYN announced plans to separate into two publically-traded entities via the tax free spin-off of its Hotel Group. WYN’s Vacation Ownership and Destination Network businesses will remain paired although the company will explore strategic options for its European rental business.

• The two post-spin companies, whose names have not yet been decided, will enter long-term license agreements to retain their loyalty program affiliations as well as continue to collaborate on inventory sharing and cross-selling initiatives.

• Management expects the split, which should be completed in 1H 2018, to improve strategic focus as well as capital allocation at each business.

• Additionally, we expect the transaction to drive multiple expansion at WYN, which at less than 9.5x 2018E EV/EBITDA trades at a discount to both the ~11.5x and ~10x multiples awarded standalone Hotel and Timeshare businesses.

• Separately, the company posted solid 2Q 2017 results and increased its full-year adjusted EPS guidance to $6.04-$6.24 (from $5.98-$6.18). The increase was due to a lower expected diluted share count as revenue and adjusted EBITDA guidance were maintained at $5.8-$5.95 billion and $1.41-$1.44 billion, respectively.

• Given this announcement and considering the shares look to be opening near our fair value estimate, we will close coverage of Wyndham Worldwide Corp. (WYN) as well as withdraw our recommendation, as of today’s close. That said, in-depth coverage of the impending transaction will be continued by our colleagues at The Spin-Off Report.

• For context, WYN returned ~41.5% since our initial recommendation in January 2017 (versus gains of ~10% and ~3.5% in the S&P 500 and Russell 2000 Indexes, respectively.)

On August 2, 2017, Wyndham Worldwide Corp. (NYSE: WYN) announced its intention to spin off its hotels business from its timeshare and exchange rental businesses, Wyndham Vacation Ownership and Wyndham Destination Network, resulting in two separately traded public companies. The separation is to be conducted via tax-free spin-off to WYN shareholders and is expected to be completed in the first half of 2018. The Company also announced it will explore strategic alternatives for its European rental brands.

Based on preliminary valuation exercises, WYN can be fairly valued, on a sum-of-the-parts basis, at $114 per share (based on balance sheet information as of June 30, 2017). Given the current share price ($106 per share in pre-market trading), the shares appear to be fully valued for the transaction. The full valuation is not surprising as this transaction was fairly well telegraphed. It should be noted that shares of WYN are up almost 35% year to date, while the S&P 500 is up approximately 11% and the S&P 500 Hotels, Resorts and Cruise Lines index is up approximately 30% over the same time period.

NC posts adjusted EBITDA growth of 61.5% to $28 million in 1H 2017 while trailing 12-month EBITDA increased 56% to $87 million; fair value revised to $101 per share

• In 1H 2017, NC’s consolidated sales fell slightly to $350 million, as a decline at KC offset gains at NA Coal and HBB. Adjusted EPS advanced almost 29% to $1.70 while adjusted EBITDA improved 61.5% to $27.6 million in 1H 2017.

• On a trailing 12-month basis, NC’s adjusted EBITDA increased 56% to $87.2 million.

• The company ended 2Q 2017 with net debt of $63 million (compared with $102 million at the end of 1Q 2017 and $54 million at the end of 2016).

• NC’s anecdotal guidance for 2017 remains substantively unchanged; to that end, the company continues to expect “substantial” growth in income before taxes at NA Coal and HBB is still projected to post “modest” increases in revenue and net income. At KC, store closures are still expected to drive a “modest” decline in annual sales but overall results are now expected to be below 2016 levels (versus prior guide of flat). KC is expected to breakeven from a cash flow perspective in 2017.

• In terms of the likely closure of NC’s Liberty Mine, which serves Southern Co.’s (NYSE: SO) troubled Kemper project, management indicated that while SO would be responsible for any potential closing costs (and NC would be the contractor of any related work) the scuttling of the project, which was expected to ramp production gradually to 4.5 million tons in 2023, would unfavorably impact NA Coal’s long-term earnings power. As such, we think NC is likely to re-evaluate its projection of a 50% increase in earnings from unconsolidated mines (over 2012 levels) by 2020-2021 in the likely event of the mine’s closure.

• Our revised fair value estimate of $101 per share reflects a slightly lower blended multiple of 7.7x (previously 8x) on 2018E EBITDA of $94 million (previously $96.5 million).