January 21, 2020

Income Strategy Update for Week Ended 1/17/20

Alternative Asset Managers Advance While Bombardier Falls on Disappointing Preliminary Results

Last week, the Income Strategy advanced 1.54%, outperforming the Merrill Lynch U.S. High Yield Master II Index’s 0.29% gain but underperforming the S&P 500’s 1.99% rise. (Exhibit 1). The strategy ended the week up 3.01% YTD, or 225 basis points ahead of the high yield index and 13 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 1/17/201

Time Period Income Strategy ML HY II S&P 500
Last Week (1/10 – 1/17) 1.54% 0.29% 1.99%
MTD 3.01% 0.76% 3.14%
QTD 3.01% 0.76% 3.14%
YTD 3.01% 0.76% 3.14%
Inception (annualized since 4/2/2009) 14.16% 11.09% 16.55%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Alternative asset managers Carlyle Group (CG) and Sculptor Capital (SCU) rose in conjunction with the broad equity market. Further, Citi opened a 90-day positive catalyst watchlist on Sculptor, their top overall pick in the sector while maintaining Carlyle Group as another preferable way to play the space. Chemours (CC) moved above its 50-day moving average as Goldman Sachs expects a shift in sentiment for cyclical chemical names as we approach the end of an extended downward revision cycle and a stabilizing macro outlook. Debt of Endo International (ENDP) advanced on renewed hopes of a global opioid settlement, as well as in sympathy with peer Perrigo (PRGO), who reported better-than-expected preliminary sales. Raymond James maintained their “Strong Buy” rating on BGC Partners (BGCP), noting EPS has the potential to exceed $1.00/share if management can execute on medium-term growth and margin targets, as well as with the potential divestiture of the insurance brokerage business.

Exhibit 2: Significant Contributors to Performance, 1/10/20 – 1/17/20

Name Type Return
Carlyle Group Inc Equity 5.5%
The Chemours Co Equity 6.3%
Endo International 6.0% 7/23 Bond 5.2%
Sculptor Capital Management Equity 6.3%
BGC Partners Equity 4.2%

Source: Miller Value Partners

Three bonds and two equities comprised last week’s top five detractors (Exhibit 3). Debt of Bombardier (BBD/B CN) fell as the company pre-released disappointing Q4 results, driven by further delays in the transportation segment turnaround. Management now sees Q4 revenue of $4.2B (from $5.0B-$5.5B), EBIT of -$130M (from +$164M-$264M), EBITDA of flat (from $367M-$467M), and FCF of $1B (from $1.6B). The company also indicated their intention to accelerate balance sheet deleveraging through proactively pursuing strategic alternatives. Kindred Group (KINDSDB SS) traded lower after announcing preliminary Q4 results where revenue of GBP 235M and EBITDA of GBP 27M-32M both fell short of consensus of GBP 256M and GBP 58M, respectively. The miss was driven by temporary weakness in sports betting margins, as well as heightened costs from the US expansion. William Hill (WMH LN) fell as the UK Gambling Commission announced a ban on the use of credit cards on all online and offline gambling products, effective April 2020. The company did, however, report solid FY19 preliminary results with EBIT in the range of £143-148M (12% ahead of consensus at the midpoint), driven by favorable sports gross win margins in Retail and Online as well as with the US business now expected to break-even in 2019 (vs guidance of £0M-£20M loss). There was no price-changing news on the debt of GTT Communications, Inc. (GTT) or Alliance Resource Partners (ARLP).

Exhibit 3: Significant Detractors from Performance, 1/10/20 – 1/17/20

Name Type Return
Bombardier 7.875% 4/27 Bond -8.6%
GTT Communications 7.875% 12/24 Bond -4.0%
Kindred Group Equity -15.9%
William Hill Equity -1.5%
Alliance Resource Partners 7.5% 5/25 Bond -1.0%

Source: Miller Value Partners

Did you know that we write this piece for Opportunity Equity as well? Check it out.

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.

©2019 Miller Value Partners, LLC

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