December 10, 2018
Opportunity Equity Update for Week Ended 12/7/18
RH Gains on Strong 3Q Results While AAL and UAL Feel Pressure from OPEC Deal
Last week, the Opportunity Equity strategy lost 5.63%, underperforming the S&P 500’s 4.55% decline (Exhibit 1). The strategy ended the week up 4.86% YTD, or 454 basis points ahead of the S&P 500.
Exhibit 1: Preliminary Performance of Opportunity Equity Strategy Versus S&P 500, Through 12/7/181
|Time Period||Opportunity Equity||S&P 500|
|Last Week (11/30 – 12/7)||-5.63%||-4.55%|
|Inception (annualized since 6/26/00)||7.06%||5.31%|
Source: Bloomberg, Miller Value Partners
RH (RH) crossed above the 50, 100, and 200-day moving average after reporting 3Q earnings which beat expectations and raising full year and long-term guidance. The company reported total sales of $639M above consensus of $632M with gross margins of 40.7% and adjusted operating margins of 10.3% resulting in adjusted EPS of $1.73 ahead of $1.27 expected. The company increased its 2018 EPS guidance to $8.33-8.47 from $7.35-7.75 and outlined 2019 guidance with revenues of $2.75-2.82M, adjusted operating margins of 13-14% and EPS of $9.30-10.70 far ahead of consensus of $8.38. The company once again moved forward its long-term targets and expects to reach them in FY19 instead of FY21. The company also announced its intention to explore a $300m convertible note offering that would be due 2023. There was minimal news on the other top contributors.
Exhibit 2: Significant Contributors to Performance, 11/30/18 – 12/7/18
|Pandora Media Inc.||Equity||0.4%|
|GTY Technology Holdings Inc.||Equity||-0.1%|
|Endurance International Group Holdings||Equity||-1.3%|
Source: Miller Value Partners
American Airlines Group Inc. (AAL) crossed below the 50 and 100-day moving average while United Continental Holdings (UAL) crossed below the 50-day moving average after oil prices increased following an OPEC deal. United’s board member, Edward Shapiro, purchased $2.78m of shares during the week. Brighthouse Financial Inc. (BHF) declined over the week after hosting an outlook call where they provided new guidance and targets out to 2021. The company is targeting 11% adjusted ROE and 8% net ROE by 2021, EPS growth in the low double-digits annually and capital return of $1.5B. Mallinckrodt (MNK) crossed below the 200-day moving average over the week. The company announced a plan to spin-off of its specialty generics business to shareholders in 2H19. The current CFO, Matthew Harbaugh, will become CEO of the specialty generics business which will maintain the Mallinckrodt name and ticker. Bank of America (BAC) declined over the week as the 10-year yield moved lower. Credit Suisse cut BAC’s price target to $35 from $36, upside of 38%, maintaining a neutral rating. CEO Brian Moynihan presented at the GS 2018 Financial Conference where he spoke optimistically about the 2019 outlook with an expectation for loan-growth driven net interest income (NII) growth, strong expense management and better than expected credit guidance.
Exhibit 3: Significant Detractors from Performance, 11/30/18 – 12/7/18
|American Airlines Group Inc.||Equity||-16.4%|
|Brighthouse Financial Inc.||Equity||-14.4%|
|United Continental Holdings||Equity||-8.8%|
|Bank of America Corp.||Equity||-10.0%|
Source: Miller Value Partners
1The performance figures reflect the results of a representative account net of management fee and certain other expenses. For important additional information about Opportunity Equity performance, please click on the Opportunity Equity 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.
©2018 Miller Value Partners, LLC