Income Strategy Weekly Updates

August 2, 2021

Income Strategy Update for Week Ended 7/30/21

MicroStrategy Gains in Sympathy with Bitcoin, Strong Q2 Results While Vale Drops Despite Robust Free Cash Flow

Last week, the Income Strategy advanced 0.75%, outperforming both the ICE BofA Merrill Lynch High Yield Master II Index’s 0.07% rise and the S&P 500’s -0.35% decline. (Exhibit 1). The strategy ended the week up +28.38% YTD, or 2,431 basis points ahead of the high yield index and 1,039 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 7/30/211

Time Period Income Strategy ML HY II S&P 500
Last Week (7/23 – 7/30) 0.75% 0.07% -0.35%
MTD -0.74% 0.35% 2.38%
QTD -0.74% 0.35% 2.38%
YTD 28.38% 4.07% 17.99%
Inception (annualized since 4/2/2009) 13.92% 10.47% 17.20%

Source: Bloomberg, Miller Value Partners

A smattering of asset types comprised last week’s top five contributors. Convertible debt of MicroStrategy (MSTR) rose in sympathy with Bitcoin’s 25% rise over the week. Additionally, the company reported Q2 sales of $125.4M, topping consensus of $120.5M and rising +13% Y/Y driven by 59% growth in product license revenues and a 29% rise in subscription services. Management cited they have yet to use their $1Bn at-the-market equity program, though anticipates doing so opportunistically moving forward to purchase additional Bitcoin. The Chemours Co (CC) reported Q2 revenue of $1.7Bn, topping consensus of $1.54Bn and rising +51% Y/Y driven by +46% volume growth while price and FX added +6%. EBITDA of $366M beat by 11% on increased volumes while FCF of $189M (+278% Y/Y) drove $13M of stock buybacks and $20M of debt paydown. Management expected FY21 EBITDA and EPS to come in at the high-end of prior guidance, or $1.25Bn and $3.56, respectively with FCF exceeding $450M. Lazard (LAZ) reported Q2 revenue of $821M and EPS of $1.28, both topping consensus of $655.6M and $0.88, respectively, driven by record financial advisory revenue and all-time high AUM of $276Bn. The company returned $161M to shareholders over the period, including $50M in dividends ($0.47/share) and $111M in buybacks (2.4M shares). Management noted the firm is experiencing unprecedented activity levels within the advisory business, and expects advisory revenues in 2H21 to rise sequentially. Carlyle Group (CG) reported distributable earnings of $0.88, well ahead of consensus of $0.61 on strong net realization activity of $237M. Pre-tax fee-related earnings of $143M, or $0.40/share, also beat estimates of $132M on stronger management fees and lower costs. Net accrued carry rose +27% sequentially to $4Bn, or $11.30/share while fundraising remains robust at $10.4Bn. There was no price-changing news on the debt of Bed Bath & Beyond (BBBY).

Exhibit 2: Significant Contributors to Performance, 7/23/21 – 7/30/21

Name Type Return
MicroStrategy 0.75% 12/25 Convert 13.0%
The Chemours Co Equity 4.2%
Lazard Ltd Equity 7.0%
Carlyle Group Equity 7.8%
Bed Bath & Beyond 5.165% 8/44 Bond 1.9%

Source: Miller Value Partners

Four equities and a bond comprised last week’s top five detractors. Vale (VALE) reported Q2 EBITDA of $11.24Bn, slightly below consensus of $11.47Bn on higher than expected iron ore cash costs. Free cash flow of $6.5Bn (22% annualized yield) came in well ahead of expectations, driving $2.6Bn of stock buybacks in addition to the previously announced $2.2Bn special dividend ($8.7Bn returned to shareholders in 1H). Vale announced a minimum dividend of $5.3Bn for the remainder of the year, which is likely to be exceeded as the commodity pricing environment remains supportive. Endo International (ENDP) announced the $35M agreement in principle to settle the $2.4Bn Tennessee opioid case won approval by all plaintiffs. The full amount will be paid as a lump sum and be allocated among all 28 plaintiffs at their discretion. Quad Graphics (QUAD) fell below its 50-day moving average. British American Tobacco (BATS LN) reported 1H21 revenue of £12.175Bn, ahead of consensus by 1.3% on organic revenue growth of +8.1% while EBIT of £5.235Bn was in-line. EPS of 154.2p beat by 2% and well covered the quarterly dividend of 53.90p/share (8.0% annualized yield). Underlying guidance remains unchanged, including >5% organic revenue growth and mid-single digit EPS growth. There was no price-changing news on Pitney Bowes (PBI).

Exhibit 3: Significant Detractors from Performance, 7/23/21 – 7/30/21

Name Type Return
Vale S.A. Equity -4.2%
Endo International 6% 6/28 Bond -3.6%
Pitney Bowes Equity -4.4%
Quad Graphics Equity -7.9%
British American Tobacco Equity -2.1%

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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