February 24, 2020

Income Strategy Update for Week Ended 2/21/20

Quad Graphics Advances on Strong Earnings, FY20 Guidance While Seaspan Falls Despite Beat

Last week, the Income Strategy advanced 0.24%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.06% gain and the S&P 500’s -1.22% decline. (Exhibit 1). The strategy ended the week up 0.60% YTD, or 59 basis points behind the high yield index and 299 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 2/21/201

Time Period Income Strategy ML HY II S&P 500
Last Week (2/14 – 2/21) 0.24% 0.06% -1.22%
MTD 2.83% 1.19% 3.63%
QTD 0.60% 1.19% 3.59%
YTD 0.60% 1.19% 3.59%
Inception (annualized since 4/2/2009) 13.78% 11.03% 16.44%

Source: Bloomberg, Miller Value Partners

Three equities and two bonds comprised last week’s top five contributors (Exhibit 2). Quad Graphics (QUAD) advanced after reporting strong results with Q4 revenue of $1.07B, 5% above consensus of $1.02B while EBITDA of $96M exceeded estimates of $73M by 31%. EPS of $0.38 nicely covered the quarterly dividend of $0.15/share (11.0% annualized yield). Management initiated FY20 guidance with revenue of $3.6B (3% above consensus of $3.5B), EBITDA of $300M (in-line), and free cash flow (FCF) of $110M (5% above consensus and a 37% FCF yield). Quad ended the period with 3.1x net leverage and doubled their cost savings plan to $100M (from $50M), all of which will be fully realized in 2020. Debt of Bed Bath & Beyond (BBBY) rose after the company announced their $1B capital allocation plan, including $600M of debt paydown and share buybacks. Further, the company announced the sale of PersonlizationMall.com for $252M in a step towards simplifying the product portfolio and deepening their focus on the core business. William Hill (WMH LN) appointed Adrian Marsh as its new CFO, replacing Ruth Prior. Marsh joins from DS Smith (SMDS LN) and has an extensive background in M&A and deal execution. Arlington Asset (AI) reported Q4 EPS of $0.18, missing consensus by a penny and the quarterly dividend of $0.225 (13.7% annualized yield). Book value, however, rose 6.9% to $7.896 (0.8x P/B), driven by gains in the hedge portfolio. There was no price-changing news on the debt of Diebold-Nixdorf (DBD).

Exhibit 2: Significant Contributors to Performance, 2/14/20 – 2/21/20

Name Type Return
Quad Graphics Equity 14.7%
Bed Bath & Beyond 5.165 08/44 Bond 4.3%
William Hill plc Equity 5.5%
Arlington Asset Investment Corp Equity 13.7%
Diebold Nixdorf 8.5 4/24 Bond 0.9%

Source: Miller Value Partners

Equities comprised last week’s top five detractors (Exhibit 3). Seaspan (SSW) reported Q4 revenue of $288M and EBITDA of $181M, both topping consensus of $284M and $179M, respectively. EPS of $0.24 exceeded consensus of $0.22 and the dividend of $0.125/share (4.6% annualized yield). Management initiated FY20 revenue guidance of $1.17B-$1.195B. Energy Transfer (ET) reported Q4 EBITDA of $2.8B, beating consensus of $2.7B while distributable cash flow of $1.5B provided coverage of 1.9x on the $0.305/unit distribution (10.5% annualized yield). Management sees FY20 EBITDA of $11.0B-$11.4B, updated their long-term capex range down to $2.0B-$2.5B (from $3.0B-$4.0B), and discussed the potential for a C-corp conversion. Carlyle Group (CG) and Abercrombie & Fitch (ANF) fell below closely watched technical levels. There was no price-changing news on Gannett (GCI).

Exhibit 3: Significant Detractors from Performance, 2/14/20 – 2/21/20

Name Type Return
Carlyle Group Inc Equity -2.7%
Abercrombie & Fitch Co. Equity -5.4%
Gannett Co Inc Equity -5.4%
Seaspan Corp Equity -7.4%
Energy Transfer LP Equity -4.6%

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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