May 11, 2020

Income Strategy Update for Week Ended 5/8/20

Chemours Jumps on Solid Results While Sculptor Capital Falls on Earnings Miss

Last week, the Income Strategy advanced 1.84%, outperforming the Merrill Lynch U.S. High Yield Master II Index’s 0.97% gain but underperforming the S&P 500’s 3.57% rise. (Exhibit 1). The strategy ended the week down -31.21% YTD, or 2,201 basis points behind the high yield index and 2,253 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 5/8/201

Time Period Income Strategy ML HY II S&P 500
Last Week (5/1 – 5/8) 1.84% 0.97% 3.57%
MTD -0.36% 0.69% 0.67%
QTD 11.69% 4.52% 13.58%
YTD -31.21% -9.20% -8.68%
Inception (annualized since 4/2/2009) 9.67% 9.73% 14.79%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors. Alternative asset managers Apollo Global Management (APO) and Carlyle Group (CG) rose in conjunction with the broad equity market. Further, Apollo rose above its 100 and 200-day moving averages while Carlyle moved above its 50-day moving average. Chemours (CC) rose after reporting Q1 EBITDA of $257M, topping consensus of $218M by 18% on margins of 19.7% (consensus of 16.5%). EPS of $0.71 topped estimates of $0.45 by 58% and nicely covered the quarterly dividend of $0.25/share (8.0% annualized yield). Free cash flow of $(62)M improved $115M Y/Y with total liquidity of $1.4Bn as of quarter end. Management withdrew FY20 guidance due to demand uncertainty in certain end markets. Debt of Diebold Nixdorf (DBD) gained as the company reported Q1 EBITDA of $89M (+38% Y/Y), beating analyst estimates of $62M by 43% with margin expansion of 350bps driven by DN Now initiatives. Net Debt/EBITDA of 4.4x was unchanged sequentially but down from 5.6x Y/Y. Management guided to FY20 cost savings of $130M and introduced an additional $80M-$100M of incremental savings. Abercrombie & Fitch (ANF) announced it has begun to reopen select stores globally in locations where regulations allow.

Exhibit 2: Significant Contributors to Performance, 5/1/20 – 5/8/20

Name Type Return
Apollo Global Management Equity 11.0%
The Chemours Co Equity 18.1%
Carlyle Group Equity 10.7%
Diebold Nixdorf 8.5% 4/24 Bond 2.5%
Abercrombie & Fitch Equity 4.9%

Source: Miller Value Partners

Four bonds and an equity comprised last week’s top five detractors. Sculptor Capital Management (SCU) reported distributable earnings of $0.06, missing consensus of $0.41. Net accrued carry fell 45% to $140M, driven by unrealized mark-to-market declines while incentive fees came in at $9.3M. AUM of $33.4Bn was flat sequentially but rose to $34Bn as of May 1st. Net flows of $501M imply an annualized organic growth rate of 6.3%. Bed Bath & Beyond (BBBY) announced it expects the majority of stores to remain closed until at least May 30th. The company, however, is expanding its approach to gradually re-opening stores, including the extension of both curbside pick-up to an additional 200 stores and fulfilment capabilities to support increased demand across digital channels. Alliance Resource Partners (ARLP) reported Q1 revenue of $350.7M and EBITDA of $98.3M, missing consensus of $409.5M and $108.7M, respectively driven by low natural gas prices and soft export demand. Management announced a handful of measures to improve liquidity, including a capex cut of 25% at the midpoint, a 20%-25% reduction in SG&A expense, and the suspension of the dividend. Lastly, the company successfully amended its revolving credit facility to extend the maturity date to 2024 while also increasing capacity to $538M. Debt of Curo Group (CURO) fell despite Stephens turning more optimistic on the story, stating the frequency of customer touchpoints and short portfolio duration should make investors confident that recession-related credit deterioration could be short lived. There was no price-changing news on the debt of Extraction Oil & Gas (XOG).

Exhibit 3: Significant Detractors from Performance, 5/1/20 – 5/8/20

Name Type Return
Sculptor Capital Management Equity -21.1%
Bed Bath & Beyond 5.165% 8/44 Bond -5.3%
Alliance Resource Partners 7.5% 5/25 Bond -5.2%
Curo Group Holdings 8.25% 9/25 Bond -2.7%
Extraction Oil & Gas 7.375% 5/24 Bond -23.9%

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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