February 18, 2020

Income Strategy Update for Week Ended 2/14/20

Chemours Jumps on Strong Q4, 2020 Guide While Debt of Diebold Nixdorf Falls Despite Solid Results

Last week, the Income Strategy advanced 1.21%, outperforming the Merrill Lynch U.S. High Yield Master II Index’s 0.49% gain but underperforming the S&P 500’s 1.65% rise. (Exhibit 1). The strategy ended the week up 0.36% YTD, or 77 basis points behind the high yield index and 451 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 2/14/201

Time Period Income Strategy ML HY II S&P 500
Last Week (2/7 – 2/14) 1.21% 0.49% 1.65%
MTD 2.58% 1.13% 4.91%
QTD 0.36% 1.13% 4.87%
YTD 0.36% 1.13% 4.87%
Inception (annualized since 4/2/2009) 13.78% 11.04% 16.60%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Chemours (CC) surged after reporting strong Q4 results and initiating 2020 guidance, with revenue of $1.4B in-line while EBITDA of $227M beat consensus of $216M by 5%. Free cash flow (FCF) of $304M also came in above expectations, bringing FY19 FCF to $169M (vs guidance of $100M). Management guided to FY20 EBITDA of $1.15B (+13% Y/Y), EPS of $3.08 (+23% Y/Y, 5.9x), and FCF of greater than $350M (more than double FY19 FCF of $169M), implying a FCF yield of 11.6%. Debt of Endo International (ENDP) gained in sympathy with peer Teva (TEVA) who reported better-than-expected Q4 results and a strong 2020 outlook. William Hill (WMH LN) advanced after announcing a media partnership with CBS Sports whereby they will receive exclusive rights to promote their brand across the CBS Sports digital platform, including CBS Sports Fantasy. The deal is expected to result in highly efficient customer acquisition as CBS Sports is the second-largest sports property in the US with an estimated 80M users per month. Sculptor Capital Management (SCU) reported Q4 distributable earnings of $1.19, beating consensus of $1.15 and driving a quarterly dividend of $0.53/share (7.8% annualized yield). Assets under management (AUM) came in at $34.5B (+8% Q/Q) with hedge fund AUM of $9.3B. The company paid down $5M of their term loan over the period and management noted an additional $20M of paydown in early 2020. Abercrombie & Fitch (ANF) rose above closely watched technical levels.

Exhibit 2: Significant Contributors to Performance, 2/7/20 – 2/14/20

Name Type Return
The Chemours Co Equity 38.0%
Endo International PLC 6.0 7/23 Bond 6.3%
William Hill Equity 5.8%
Abercrombie & Fitch Co. Equity 4.4%
Sculptor Capital Management Equity 4.8%

Source: Miller Value Partners

Three bonds and two equities comprised last week’s top five detractors (Exhibit 3). Debt of Diebold Nixdorf (DBD) fell despite posting solid results, with Q4 EPS of $0.47 a bit under consensus of $0.50 on in-line revenues of $1.15B. EBITDA of $131M was +5% Y/Y while gross profit of $270.4M saw gross margin expansion to 26.3% (+320bps Y/Y). Net leverage improved to 4.4x, down 0.3x turns sequentially and down from 5.5x as of year-end 2018. Management reaffirmed their 2020 guidance, where they see revenue of $4.2B-$4.3B, EBITDA of $430M-$470M, cash from operations of $170M-$200M, capex of $70M, and FCF of $100M-$130M (17.6% FCF yield at the midpoint). Further, management raised their DN Now cost savings target to $440M (from $400M) through 2021. Debt of Bed Bath & Beyond (BBBY) fell after management released financial data for December and January, including comp declines of 5.4%, gross margin declines of 300bps on heightened promotional activity, and SG&A as a percentage of revenues +190bps on fixed cost deleveraging. NGL Energy Partners (NGL) CEO Mike Krimbill purchased $968K worth of shares at $9.68. There was no price-changing news on the debt of Chaparral Energy (CHAP) or Carlyle Group (CG).

Exhibit 3: Significant Detractors from Performance, 2/7/20 – 2/14/20

Name Type Return
Diebold Nixdorf 8.5 4/24 Bond -2.0%
Bed Bath & Beyond 5.165 08/44 Bond -3.7%
Chaparral Energy 8.75 7/23 Bond -9.3%
NGL Energy Partners LP Equity -3.9%
Carlyle Group Inc Equity -1.5%

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.

©2019 Miller Value Partners, LLC

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