Income Strategy Weekly Updates

May 3, 2021

Income Strategy Update for Week Ended 4/30/21

OneMain Holdings Jumps on Significant EPS Beat, Dividend Raise While Pitney Bowes Drops Despite Top and Bottom-Line Strength

Last week, the Income Strategy advanced 0.34%, outperforming both the ICE BofA Merrill Lynch High Yield Master II Index’s 0.20% gain and the S&P 500’s 0.04% rise. (Exhibit 1). The strategy ended the week up +18.98% YTD, or 1,697 basis points ahead of the high yield index and 714 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 4/30/211

Time Period Income Strategy ML HY II S&P 500
Last Week (4/23 – 4/30) 0.34% 0.20% 0.04%
MTD 1.38% 1.10% 5.34%
QTD 1.38% 1.10% 5.34%
YTD 18.98% 2.01% 11.84%
Inception (annualized since 4/2/2009) 13.52% 10.51% 17.07%

Source: Bloomberg, Miller Value Partners

A smattering of asset types comprised last week’s top five contributors. OneMain Holdings (OMF) reported Q1 EPS of $3.37, topping consensus of $2.15 by 57% driven by a lower than expected provision expense. The company increased its quarterly dividend by 56% to $0.70/share (4.9% annualized yield), maintained their commitment to evaluate special dividends every Q1 and Q3, and announced a $150M share repurchase program. End of period receivables dropped 4% to $17.6Bn while originations of $2.3Bn fell 12%, both driven by stimulus programs combined with normal seasonality. Credit quality remained strong with net charge-offs of 4.67% and early-state delinquencies of 1.57%, declining 179bps and 69bps Y/Y, respectively. Management guided to FY21 net charge-offs of 5%, net leverage of 4x-6x, and stable yields relative to 2019 and 2020 at ~24.1%. Debt of Endo International (ENDP) bounced off lows as the Orange County, CA opioid case progressed. Additionally, Endo announced that Mark Barberio, who currently serves as an independent Director, has been appointed Chairman of the Board. The appointment is part of Endo’s Board succession plan, which also includes the appointment of two new Board members in conjunction with the retirement of Paul Campanelli and Roger Kimmel. Convertible debt of MicroStrategy (MSTR) jumped in sympathy with Bitcoin’s 12.5% rise, as well as strong Q1 results driven by core software strength. Total revenue of $122.9M beat consensus by 9.7% and rose +10% Y/Y, driven by subscription services revenue +26%, product license growth of +69%, and subscription billings +19%. Operating income increased over 500% on cost efficiencies from digitalization with a shift to a virtual sales and marketing model. There was no price-changing news on Apollo Global (APO) or Chimera Investment Corp (CIM).

Exhibit 2: Significant Contributors to Performance, 4/23/21 – 4/30/21

Name Type Return
Apollo Global Management Equity 4.1%
OneMain Holdings Equity 4.2%
Endo International 6% 6/28 Bond 4.0%
Chimera Investment Corp Equity 3.3%
MicroStrategy 0.75% 12/25 Convertible 5.0%

Source: Miller Value Partners

Four equities and a bond comprised last week’s top five detractors. Pitney Bowes (PBI) dropped despite reporting solid Q1 results, including EPS of $0.07 beating consensus of $0.04 and covering the quarterly dividend of $0.05/share (2.7% annualized yield). Total revenue of $915.2M beat by 5% and rose +14.9% y/y, driven by E-Commerce sales +41% and continued momentum in Presort and SendTech. Management stated their expectations for the E-Commerce segment to be EBITDA positive for the entire year in 2021 with positive EBIT in 2022. The company reiterated FY21 guidance, including annual revenue growth in the low-to-mid single digits with EPS expected to increase Y/Y. Lazard (LAZ) reported Q1 revenue of $648M, 3% below consensus with EPS of $0.88 in-line on lower expenses. Advisory revenue of $317M was a touch weak though was timing-driven given the company’s exposure to Europe, which has lagged the US in M&A and restructuring volumes but is starting to ramp. Asset management revenue of $328M beat by 8% on better than expected management fees and $33M in incentive fees. Lazard maintained their quarterly dividend of $0.47/share (4.2% annualized yield) and announced an incremental buyback authorization of $300M, taking their total available authorization to $439M. Teva Pharmaceuticals (TEVA) reported Q1 revenue of $3.98Bn, just below consensus of $4.025Bn. Gross margin improved 150bps Q/Q to 53.8% and driving EBITDA of $1.206Bn, 4% above street estimates of $1.16Bn. Free cash flow of $59M decreased Y/Y due to working capital timing, though management expects FCF to improve in the coming quarters. Teva exited the quarter with gross debt of $24.986Bn (down $933M sequentially) and cash of $1.743Bn, implying net leverage of 4.9x. Management reiterated FY21 guidance, including revenue of $16.4Bn-$16.8Bn, EBITDA of $4.8Bn-$5.1Bn, EPS of $2.50-$2.70, and free cash flow of $2.0Bn-$2.3Bn. Atlas Corp (ATCO) fell below its 50-day moving average. There was no price-changing news on GEO Group (GEO).

Exhibit 3: Significant Detractors from Performance, 4/23/21 – 4/30/21

Name Type Return
Pitney Bowes Equity -12.2%
GEO Group Equity -6.8%
Lazard Equity -3.1%
Teva Pharmaceuticals 4.1% 10/46 Bond -2.2%
Atlas Corp Equity -2.4%

Source: Miller Value Partners

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1The performance figures reflect the results of a representative account net of management fees and certain other expenses. For important additional information about Income Strategy performance, please click on the Income Strategy Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued. Content may not be reprinted, republished or used in any manner without written consent from Miller Value Partners.

©2020 Miller Value Partners, LLC

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