August 5, 2019

Income Strategy Update for Week Ended 8/2/19

Quad Graphics Soars on Strong Earnings While Alternative Asset Managers Fall Despite Solid Results

Last week, the Income Strategy declined -2.16%, underperforming the Merrill Lynch U.S. High Yield Master II Index’s -0.36% fall but outperforming the S&P 500’s -3.07% loss. (Exhibit 1). The strategy ended the week up 11.66% YTD, or 136 basis points ahead of the high yield index and 666 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 8/2/191

Time Period Income Strategy ML HY II S&P 500
Last Week (7/26 – 8/2) -2.16% -0.36% -3.07%
MTD -2.04% -0.38% -1.60%
QTD 0.39% 0.13% -0.19%
YTD 11.66% 10.30% 18.32%
Inception (annualized since 4/2/2009) 13.26% 11.13% 15.81%

Source: Bloomberg, Miller Value Partners

Three equities and two bonds comprised last week’s top five contributors (Exhibit 2). Quad Graphics (QUAD) soared after posting Q2 EPS of $(0.09), beating estimates of $(0.17) on better-than-expected revenues of $1.0B against estimates of $975M. The company maintained their $0.30/share quarterly dividend (11.4% annualized yield). Management reaffirmed FY19 guidance where they see revenues of $4.05B-$4.25B, EBITDA of $360M-$400M, and free cash flow of $145M-$185M. Debt of Endo International (ENDP) advanced on news Mylan (MYL) is planning to merge with Pfizer’s (PFE) off-patent unit and is seen as a positive read-through for the generic sector and the potential for similar deals. B Riley reiterated their Buy rating on National CineMedia (NCMI) with a $9.75 price target, 43% implied upside excluding the 10.0% dividend yield, citing attractive valuation and expectations for a strong film slate in the back half of the year. New Media Investment Group (NEWM) continued to rise on speculation of a merger with Gannett (GCI).

Exhibit 2: Significant Contributors to Performance, 7/26/19 – 8/2/19

Name Type Return
Quad Graphics Equity 37.4%
Endo International PLC 6.0 7/23 Bond 4.6%
National CineMedia Equity 1.1%
***RECENTLY ADDED SECURITY*** Bond 2.4%
New Media Investment Group Equity 3.5%

Source: Miller Value Partners

Equities comprised last week’s top five detractors (Exhibit 3). Alternative asset managers Apollo Global (APO) and Carlyle Group (CG) fell with the broad equity market despite solid Q2 results. Apollo reported distributable earnings of $0.56, shy of consensus of $0.58 on lower-than-expected realization activity. Management fees of $366M were slightly below estimates while fee-related earnings of $239M beat forecasts of $222M. Total AUM of $311.9B grew 3% sequentially with permanent capital coming in at $154B, 49% of total AUM. Management declared a $0.50/share dividend (6.4% annualized yield). Carlyle reported core distributable earnings of $0.35, just below consensus of $0.37. Fee-related earnings of $133M topped estimated while net realized performance revenues were lower than expected at $21M. Management announced plans to convert to a C-corp effective January 1st, 2020 and move to a single share class structure that will pay $1.00/share in fixed annual dividends (4.6% annualized yield). Sberbank (SBER LI) reported net income of Rub 246B (+16% Y/Y), 8% above consensus and implying a 25% ROE, driven by lower-than-expected provision charges, 5% sequential growth in net interest income and 20bps of improvement in net interest margins. Macquarie Infrastrucutre (MIC) reported EBITDA of $134M, just missing consensus of $135M while free cash flow of $88M provided dividend coverage of 1.02x on the $1.00/share quarterly dividend (10.3% annualized yield). Management lowered FY19 EBITDA to $600M-$625M (from $610M-$635M) due to higher corporate expenses, but reaffirmed EBITDA guidance for each operating segment. There was no price-changing news on Alrosa (ALRS RX).

Exhibit 3: Significant Detractors from Performance, 7/26/19 – 8/2/19

Name Type Return
Apollo Global Management LLC Equity -12.8%
Carlyle Group LP Equity -8.1%
Sberbank Equity -7.9%
Macquarie Infrastructure Equity -3.7%
Alrosa Equity -6.2%

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.

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