Income Strategy Weekly Updates

March 1, 2021

Income Strategy Update for Week Ended 2/26/21

Debt of Macy’s Gains Following Strong Q4 Results While MicroStrategy Boosts Bitcoin Holdings by 19,452 BTC

Last week, the Income Strategy declined -3.01%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.66% fall and the S&P 500’s -2.41% loss. (Exhibit 1). The strategy ended the week up +11.75% YTD, or 1,108 basis points ahead of the high yield index and 1,003 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 2/26/211

Time Period Income Strategy ML HY II S&P 500
Last Week (2/19 – 2/26) -3.01% -0.66% -2.41%
MTD 4.49% 0.29% 2.76%
QTD 11.75% 0.67% 1.72%
YTD 11.75% 0.67% 1.72%
Inception (annualized since 4/2/2009) 13.17% 10.55% 16.41%

Source: Bloomberg, Miller Value Partners

Three bonds and two equities comprised last week’s top five contributors. Macy’s (M) reported Q4 net sales of $6.78Bn and store comps of -17%, both topping consensus of $6.50Bn and -23%, respectively. Digital sales rose +21% Y/Y and expanded sequentially to 44% of total sales. EBITDA of $789M was well ahead of estimates of $368M on better than expected gross margin of 33.7%. Macy’s generated $325M of FCF over the period, driving a cash balance of $1.7Bn and total liquidity of $4.7Bn. The company paid down $530M of debt in January and remains committed to reducing total leverage to below 3x. Management initiated 2021 guidance, including net sales between $19.75Bn-$20.75Bn (+14%-20% Y/Y), digital penetration of 35%, credit revenue at 3% of total sales, 37% gross margin, and EBITDA between 7%-7.5% of sales. Additionally, a director purchased $510.6K of stock at $15.42. Debt of NGL Energy Partners (NGL) rose in sympathy with oil prices, which extended gains last week to close at $61.50. There was no price-changing news on securities of Alliance Resource Partners (ARLP), Alrosa (ALRS RX), or Atlas Corp (ATCO).

Exhibit 2: Significant Contributors to Performance, 2/19/21 – 2/26/21

Name Type Return
Alliance Resource Partners 7.5% 5/25 Bond 1.3%
Alrosa PJSC Equity 2.2%
Macy’s 6.375% 3/37 Bond 1.2%
NGL Energy Partners 7.5% 4/26 Bond 1.4%
Atlas Corp Equity 0.1%

Source: Miller Value Partners

Four equities and a convert comprised last week’s top five detractors. MicroStrategy (MSTR) announced the purchase of an additional 19,452 Bitcoin with net proceeds from their recent convertible offering. Total Bitcoin holdings now sit at 90,531 for an aggregate purchase price of $2.17Bn and market value of $4.14Bn, an unrealized gain of $1.97Bn. The Chemours Co (CC) fell below its 100-day moving average despite positive read-throughs from peer earnings, showing a continuation of TiO2 market share gains. Alternative asset manager Apollo Global Management (APO) fell with the broad equity market, though Credit Suisse maintained as its “top pick”, citing attractive valuation and expectations for a strong rebound in performance fees. Quad Graphics (QUAD) reported Q4 results with sequential improvement across the board for a second consecutive quarter. Net sales of $843.3M and EBITDA of $64.4M rose +24% Q/Q and +6% Q/Q, respectively. The company generated an impressive $190M of operating cash flow in FY20 (+22% Y/Y), driving FCF of $129M (+22% Y/Y), a 53% FCF yield. Quad divested non-core assets for net proceeds of $69M, which coupled with cash flow generation drove $184M of debt paydown. Management did not provide formal 2021 guidance, though expects continued improvement in quarterly net sales trends in 1H21.

Exhibit 3: Significant Detractors from Performance, 2/19/21 – 2/26/21

Name Type Return
MicroStrategy 0.75% 12/25 Convertible -18.9%
The Chemours Co Equity -8.4%
Apollo Global Management Equity -4.6%
Quad Graphics Equity -16.6%

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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