November 4, 2019

Income Strategy Update for Week Ended 11/1/19

Alternative Asset Managers Rise on Strong Results While Quad Graphics Falls on Miss & Dividend Cut

Last week, the Income Strategy declined -1.28%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.15% fall and the S&P 500’s 1.49% rise. (Exhibit 1). The strategy ended the week up 14.39% YTD, or 248 basis points ahead of the high yield index and 997 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 11/1/191

Time Period Income Strategy ML HY II S&P 500
Last Week (10/25 – 11/1) -1.28% -0.15% 1.49%
MTD 1.44% 0.13% 0.98%
QTD 0.13% 0.37% 3.16%
YTD 14.39% 11.91% 24.36%
Inception (annualized since 4/2/2009) 13.19% 11.01% 15.95%

Source: Bloomberg, Miller Value Partners

Equities comprised last week’s top five contributors (Exhibit 2). Alternative asset managers Apollo Global (APO), Carlyle Group (CG), and Sculptor Capital Management (SCU) rose on earnings and with the broad equity market. Apollo reported distributable earnings of $0.54, below estimates of $0.61 on fee-related earnings of $213M. Gross realized performance fees of $67M beat by $8M while net carry receivable improved 25% sequentially to $1.93/share. Fundraising remained robust with $16B of gross inflows, bringing total AUM to $322.7B with permanent capital of $161B. The company maintained their $0.50/share dividend (4.6% annualized yield). Carlyle reported distributable earnings of $0.41, in-line with consensus on a slight beat in fee-related earnings of $109M, driven by lower compensation expense and driving 27% margins. Net realized performance revenues of $58M topped street estimates of $54M. Fundraising of $5.7B was in-line with estimates, bringing total AUM to $221B. The company declared a $0.31/share dividend (4.4% annualized yield). JP Morgan upgraded Alrosa (ALRS RX) to “Overweight” with a Rub 81 price target, 7% implied upside excluding the 10.5% dividend yield, citing the current macro backdrop is reminiscent of 2015 and increases the likelihood of the diamond market bottoming by 1Q20. BGC Partners (BGCP) announced an exchange offer of up to $300M of its 3.75% senior notes due 2024.

Exhibit 2: Significant Contributors to Performance, 10/25/19 – 11/1/19

Name Type Return
Apollo Global Management Equity 5.0%
Alrosa PJSC Equity 8.3%
Carlyle Group LP Equity 2.4%
Sculptor Capital Management Equity 9.5%
BGC Partners Equity 3.4%

Source: Miller Value Partners

Two equities and three bonds comprised last week’s top five detractors (Exhibit 3). Quad Graphics (QUAD) sank after reporting revenue of $944M and EBITDA of $80M, both missing consensus of $1.0B and $92M, respectively. The company announced plans to divest their book business as part of the ongoing portfolio optimization and expanded their cost reduction program to $50M in annual savings. The Board elected to cut the dividend by 50% to $0.15/share (13.1% annualized yield), generating $30M in annual savings. Management cut FY19 EBITDA guidance to $300M-$330M (from $360M-$400M) and sees free cash flow of $80M-$100M (from $145M-$185M). Debt of Diebold Nixdorf (DBD) fell despite posting strong free cash generation and improved leverage. Revenue of $1.08B and EBITDA of $98.2M came in below consensus of $1.10B and $110.3M. Free cash flow of $65M was a $190M improvement year-over-year while Net Debt/EBITDA ticked down to 4.7x (from 5.0x). Management guided to FY19 free cash flow of $70M-$100M, up significantly from their prior view of a modest positive. Debt of Extraction Oil & Gas (XOG) fell on regulatory concerns as the Colorado Oil & Gas Conservation announced it would increase scrutiny over current and future permits for locations within 1,500-2,000 feet from buildings. NGL Energy Partners (NGL) announced the completion of its $600M acquisition of Hillstone.

Exhibit 3: Significant Detractors from Performance, 10/25/19 – 11/1/19

Name Type Return
Quad Graphics Equity -54.6%
Diebold Nixdorf 8.5% 4/24 Bond -4.3%
*Recently Added Security* Bond -5.6%
Extraction Oil & Gas 7.375% 5/24 Bond -20.6%
NGL Energy Partners Equity -2.9%

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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