March 4, 2019

Income Strategy Update for Week Ended 3/1/19

General Electric Preferreds Rise on Biopharma Sale While Ashford Falls on Slight Q4 Miss

Last week, the Income Strategy declined -0.74%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.48% advance and the S&P 500’s 0.46% gain. (Exhibit 1). The strategy ended the week up 11.68% YTD, or 527 basis points ahead of the high yield index and 58 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 3/1/191

Time Period Income Strategy ML HY II S&P 500
Last Week (2/22 – 3/1) -0.74% 0.48% 0.46%
MTD -0.12% 0.04% 0.70%
QTD 11.68% 6.41% 12.26%
YTD 11.68% 6.41% 12.26%
Inception (annualized since 4/2/2009) 13.86% 11.23% 15.92%

Source: Bloomberg, Miller Value Partners

A smattering of asset types comprised last week’s top five contributors (Exhibit 2). Preferred shares of General Electric (GE) advanced after the company announced the sale of its Biopharma business to Danaher (DHR) for $21.4B (after-tax proceeds of $20.5B), implying an attractive multiple of ~7x P/S and ~17x EV/EBITDA. The deal significantly accelerates the monetization of non-core assets and helps further de-leverage GE’s balance sheet. Debt of Avon Products (AVP) rose on news the company is launching a new content studio to support digital growth initiatives. Danske Bank (DANSKE DC) rose after Citi recommended the stock, citing that the selloff in shares fails to acknowledge that the company is a more profitable bank than most of its peers. Further, the Norway Sovereign Wealth Fund stated it increased its stake in Danske to 3% (from 2%), which comes on the heels of Denmark’s two biggest pension funds significantly adding to their stakes in the lender. Debt of Endo International (ENDP) rose as the company reported Q4 revenue and EBITDA of $786M and $344M, beating consensus of $739M and $307M, respectively. Net leverage of 5.2x fell sequentially from 5.3x while FCF of $43M and total estimated liquidity of $2.15B came in higher than expected. Management provided FY19 EBITDA guidance of $1.24B-$1.3B, capturing consensus estimates of $1.3B at the top-end. Macquarie Infrastructure Corp (MIC) moved above its 50-day moving average.

Exhibit 2: Significant Contributors to Performance, 2/22/19 – 3/1/19

Name Type Return
General Electric 5.0 Preferred 6.5%
Avon Products 7.0 3/23 Bond 2.2%
Danske Bank Equity 8.0%
Endo International 6.0 7/23 Bond 2.0%
Macquarie Infrastructure Corp Equity 1.2%

Source: Miller Value Partners

Equities comprised last week’s top five detractors (Exhibit 3). Ashford Hospitality Trust (AHT) reported Q4 AFFO per share of $0.18, just missing estimates of $0.19 but nicely covering the dividend of $0.12/share (9.9% annualized yield). Comparable RevPAR decreased 0.6% for all hotels and was impacted by several markets with tough comps due to strong 2017 performance. The company continued to ramp its acquisitions, purchasing four hotels for $295M, none of which are expected to require significant capex. Tupperware Brands (TUP) named Cassandra Harris, formerly of VF Corporation, as Executive Vice President and CFO, effective April 1st. Washington Prime Group (WPG) fell below its 50-day moving average. New Media Investment Group (NEWM) reported Q4 revenues and EBITDA of $416M and $56.4M, both falling short of consensus estimates of $421M and $60.8M, respectively. The company maintained its $0.38/share dividend (11.7% annualized yield). Same-store revenues including tuck-ins grew 5.5% while excluding saw a decline of -6.6%, 180bps lower sequentially. Barings BDC (BBDC) reported Q4 net operating income of $0.16, beating estimates of $0.14 and covering the dividend of $0.12/share (4.9% annualized yield), a 20% increase from Q3. The NAV declined -8% sequentially to $10.98 and was primarily driven by net unrealized depreciation of the company’s current investment portfolio.

Exhibit 3: Significant Detractors from Performance, 2/22/2019 – 3/1/19

Name Type Return
Ashford Hospitality Trust Equity -14.1%
Tupperware Brands Corp Equity -5.2%
Washington Prime Group Inc Equity -7.8%
New Media Investment Group Equity -5.1%
Barings BDC Equity -3.9%

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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