July 29, 2019

Income Strategy Update for Week Ended 7/26/19

Alternative Asset Managers Rise While Just Energy Falls on Receivables Impairment Charge

Last week, the Income Strategy advanced 1.16%, outperforming the Merrill Lynch U.S. High Yield Master II Index’s 0.50% gain but underperforming the S&P 500’s 1.66% rise. (Exhibit 1). The strategy ended the week up 14.13% YTD, or 343 basis points ahead of the high yield index and 793 basis points behind the S&P 500

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 7/26/191

Time Period Income Strategy ML HY II S&P 500
Last Week (7/19 – 7/26) 1.16% 0.50% 1.66%
MTD 2.61% 0.49% 2.97%
QTD 2.61% 0.49% 2.97%
YTD 14.13% 10.70% 22.06%
Inception (annualized since 4/2/2009) 13.53% 11.19% 16.19%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Alternative asset managers Carlyle Group (CG), Apollo Global Management (APO), and Blackstone (BX) rose with the broad equity market and on sell-side optimism. JP Morgan maintained an “Overweight” rating on Apollo and increased their price target from $39 to $42, 19% implied upside excluding the 5.2% dividend yield, citing expectations for a pick-up in realizations and continued strength in fundraising. Jefferies reiterated their “Buy” rating on Blackstone and increased their price target from $51 to $54, 11% implied upside excluding the 4% dividend yield. The analyst expects further upside on the backs of robust fundraising, multiple expansion, and a larger investor base post C-corp conversion. Debt of Diebold Nixdorf (DBD) advanced on strong results, where EBITDA of $107M and EPS $0.06 topped consensus of $79M and $(0.14), respectively. The beat was driven by 14% product volume gains in Americas Banking and solid performance in both Eurasia Banking and Retail, rising 3.5% and 6.5%, respectively. Management raised FY19 guidance where they see revenue of $4.5B (up from $4.4B-$4.5B), EBITDA of $400M-$420M (up from $380M-$420M), and modestly positive free cash flow (up from breakeven). Quad Graphics (QUAD) rose after announcing they have mutually agreed to terminate their merger with LSC Communications (LKSD), stating added delay and legal cost uncertainty would have likely eroded a considerable amount of the expected synergies from the deal.

Exhibit 2: Significant Contributors to Performance, 7/19/19 – 7/26/19

Name Type Return
Carlyle Group LP Equity 8.4%
Diebold Nixdorf 8.5% 4/24 Bond 6.3%
Apollo Global Management LLC Equity 5.6%
Blackstone Group Inc Equity 9.0%
Quad Graphics Equity 9.9%

Source: Miller Value Partners

Four equities and a bond also comprised last week’s top five detractors (Exhibit 3). Just Energy Group (JE CN) fell after announcing they have identified customer enrollment and non-payment issues that occurred over the past twelve months which have since been remediated through more robust operational controls. Management expects to recognize a receivables impairment charge of ~$45M-$50M as of June 30th and noted the issue will not have a continuing effect on future cash flows. BGC Partners (BGCP) reported revenue of $551M, beating estimates of $546M while EPS of $0.17 just missed consensus of $0.18, but covered the $0.14/share dividend (10.2% annualized yield). Management initiated Q3 guidance, where they see revenue of $490M-$530M and pre-tax adjusted earnings of $80M-$95M, both in-line with analyst estimates. British American Tobacco (BATS LN) fell on a Citi note outlining their belief the US FDA is getting closer to taking regulatory action to remove certain e-vapor flavors from retail as early as 4Q19. The analyst sees this as a negative for British American Tobacco, who generates a quarter of their US e-vapor sales from flavors they expect to be removed. There was no price-changing news on the debt of Endo International (ENDP) or Abercrombie & Fitch (ANF).

Exhibit 3: Significant Detractors from Performance, 7/19/19 – 7/26/19

Name Type Return
Just Energy Group Inc Equity -18.0%
Endo International 6.0% 7/23 Bond -6.7%
BGC Partners Equity -4.2%
British American Tobacco Equity -3.3%
Abercrombie & Fitch Co Equity -2.5%

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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