February 20, 2018

Income Strategy Update for Week Ended 2/16/18

CenturyLink Advances on 2018 Outlook While EIG Investors Corp Falls on Revenue Guidance

Last week, the Income Strategy advanced 4.50%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.84% gain and the S&P 500’s 4.37% rise (Exhibit 1). The strategy ended the week up 1.54% YTD, or 194 basis points ahead of the high yield index and 92 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 2/16/181

Time Period Income Strategy ML HY II S&P 500
Last Week (2/9 – 2/16) 4.50% 0.84% 4.37%
MTD -0.81% -1.05% -3.09%
QTD 1.54% -0.40% 2.46%
YTD 1.54% -0.40% 2.46%
Inception (annualized since 4/2/2009) 15.17% 11.93% 16.61%

Source: Bloomberg, Miller Value Partners

Five equities comprised last week’s top five contributors (Exhibit 2). CenturyLink (CTL) reported Q4 pro forma results that were broadly in-line, with a key upside surprise in guidance. The company forecasted 2018 FCF of $3.15B-$3.35B, well above consensus estimates of $2.7B, and continues to expect $850M of targeted opex synergies from its Level 3 merger. Further, management remains committed to the dividend, as they explicitly guided to $2.3B of distributions in 2018. Hi-Crush Partners (HCLP) was initiated with a “New Buy” rating at R.F. Lafferty with price-target of $23, 83.3% above where it currently trades. The price-target is based off an 8.5x 2018E adjusted EBITDA multiple, which is currently 4.8x. Tiger Global boosted its stake in Apollo Global Management (APO) to 16.98% as of December 31st. Greenhill & Co (GHL) announced plans to launch a modified Dutch auction tender offer to purchase up to $100M of shares within a price range of $18.50-$20.50. The tender offer is part of the firm’s $285M share repurchase program, the remainder of which will be executed via open market purchases. There was no price-changing news on Arlington Asset Investment (AI).

Exhibit 2: Significant Contributors to Performance, 2/9/18 – 2/16/18

Name Type Return
CenturyLink Inc Equity 18.5%
Hi-Crush Partners LP Equity 10.2%
Apollo Global Management LLC Equity 5.2%
Greenhill & Co Inc Equity 12.0%
Arlington Asset Investment Corp Equity 8.1%

Source: Miller Value Partners

Four bonds and an equity comprised last week’s top five detractors (Exhibit 3). EIG Investors Corp (EIGI) reported Q4 results above consensus, but guided to declining revenues in 2018, providing little margin for error given the company’s leverage and interest coverage (5.4x Net Debt/TTM EBITDA and 1.9x 2018E interest coverage). JMP Group (JMP) fell last week despite posting a strong print that saw Q4 operating EPS of $0.16 and adjusted net revenues of $34.2M, both surpassing estimates of $0.08 and $30.2M, respectively. The beat was primarily driven by the pick-up in equity capital markets fees and a positive contribution from net corporate income. There was no price-changing news on Rent-A-Center (RCII) or Calumet Specialty Products (CLMT).

Exhibit 3: Significant Detractors from Performance, 2/9/18 – 2/16/18

Name Type Return
EIG Investors Corp 10.875% 2/24 Bond -1.1%
JMP Group LLC Equity -2.3%
Rent-A-Center Inc 4.75% 5/21 Bond -0.4%
Calumet Specialty Products Partners 6.5% 4/21 Bond -0.1%
Calumet Specialty Products Partners 7.625% 1/22 Bond 1.2%

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 deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) 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.

©2018 Miller Value Partners, LLC

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