December 16, 2019

Income Strategy Update for Week Ended 12/13/19

Debt of Diebold Nixdorf Gains on Strong Guidance While CenturyLink Falls on Evercore Initiation

Last week, the Income Strategy advanced 3.41%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.82% gain and the S&P 500’s 0.77% rise. (Exhibit 1). The strategy ended the week up 20.89% YTD, or 744 basis points ahead of the high yield index and 800 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 12/13/191

Time Period Income Strategy ML HY II S&P 500
Last Week (12/6 – 12/13) 3.41% 0.82% 0.77%
MTD 4.07% 1.23% 0.98%
QTD 5.82% 1.75% 6.91%
YTD 20.89% 13.45% 28.89%
Inception (annualized since 4/2/2009) 13.63% 11.03% 16.16%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Debt of Diebold Nixdorf (DBD) gained after the company reaffirmed its 2019 outlook (revenue of $4.4B, EBITDA of $400M-$410M, and FCF of $70M-$100M) and provided strong initial 2020 guidance (revenue of $4.2B-$4.3B, EBITDA of $430M-$470M, FCF of $100M-$130M, and leverage in the mid-3x range). Management also provided solid 2021 targets with revenue growth of 2%-4%, EBITDA margins north of 12%, FCF greater than $200M, leverage of less than 3x, and return on invested capital in the mid-teens. NGL Energy Partners (NGL) presented at the Wells Fargo Midstream Symposium, where they announced that the sale of the TransMontaigne business and the further winding down of the refining segment is expected to result in a meaningful leverage reduction below 4.0x. Danske Bank (DANSKE DC) rose above its 100-day moving average and in sympathy with UK Banks as pro-growth Boris Johnson won the general election. Goldman Sachs upgraded Alrosa (ALRS RX) to “Buy” with a RUB 100 price-target, 24% implied upside excluding the 9.8% dividend yield, citing increased conviction the diamond market is improving as seen by sequential growth in monthly sales since August. The analyst is forecasting a 20% year-over-year increase in EBITDA on the backs of 20% revenue growth with free cash flow of RUB 70B. William Hill (WMH LN) gained on strong New Jersey sports betting data, which grew 15% sequentially in November driven by online, where William Hill gained 5.7% market share.

Exhibit 2: Significant Contributors to Performance, 12/6/19 – 12/13/19

Name Type Return
Diebold Nixdorf 8.5% 4/24 Bond 13.2%
NGL Energy Partners LP Equity 9.9%
Danske Bank Equity 9.6%
Alrosa PJSC Equity 6.3%
William Hill plc Equity 9.1%

Source: Miller Value Partners

Equities comprised last week’s top five detractors (Exhibit 3). Evercore initiated CenturyLink (CTL) at “Underperform” with a $14 price target, 2% implied upside excluding the 7.3% dividend yield, citing concerns about the company’s revenue trajectory given a challenging competitive environment. UBS cut Apollo Global Management (APO) to “Neutral” and lowered their price target from $46 to $44, 6% implied downside partially offset by the 4.5% dividend yield. The analyst noted expectations for easing earnings momentum, but cited acceleration of performance fee realizations remains a potential upside. Abercrombie & Fitch (ANF) fell in sympathy with American Eagle Outfitters (AEO), who sank after reporting weak gross margins and Q4 guidance. Arlington Asset (AI) maintained their $0.225/share quarterly dividend (16.3% annualized yield). There was no price-changing news on Quad Graphics (QUAD).

Exhibit 3: Significant Detractors from Performance, 12/6/19 – 12/13/19

Name Type Return
CenturyLink Inc Equity -4.0%
Quad Graphics Equity -1.3%
Apollo Global Management Inc Equity -0.5%
Abercrombie & Fitch Co Equity -0.8%
Arlington Asset Investment Corp Equity -1.4%

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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