June 18, 2018

Opportunity Equity Update for Week Ended 6/15/18

RH up on 1Q Earnings Beat While Pulte Down on Slower Industry Order Activity

Last week, the Opportunity Equity strategy gained 4.20%, outperforming the S&P 500’s 0.07% rise (Exhibit 1). The strategy ended the week up 15.86% YTD, or 1094 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Opportunity Equity Strategy Versus S&P 500, Through 6/15/181

Time Period Opportunity Equity S&P 500
Last Week (6/8 -6/15) 4.20% 0.07%
MTD 10.57% 2.84%
QTD 18.80% 5.73%
YTD 15.86% 4.92%
Inception (annualized since 6/26/00) 7.86% 5.72%

Source: Bloomberg, Miller Value Partners

RH (RH) gained 42% over the week after announcing first quarter results which beat expectations. The company announced EPS of $1.33 vs. consensus of $1.01 due to gross margins increasing 750bps to 38% leading to operating margins of 9.6% (above guidance of 7.6-8.1%). Sales came in at $557M vs. expectations of $563M. The company raised guidance for the year to gross margins of 39.3-39.6% up from 37.7-38.5% and operating margins of 10.4-11% from 9.2-10.2% leading to adjusted EPS of $6.34-6.83 from $5.45-6.20 while revenues were kept the same. The company has reiterated that it can achieve 8-12% topline growth along with 15-20% EPS growth annually starting in 2019. Genworth Financial Inc. (GNW) gained over the week after receiving approval for its acquisition by China Oceanwide from the Committee on Foreign Investment in the United States (CFIUS). State approval is still needed (Delaware and New York) along with several regulatory entities in China but analysts expected the deal to go through. Endo Pharmaceuticals Holding Inc. (ENDP) gained over the week after it announced it had resolved all known testosterone replacement therapy (TRT) product liability claims through a definitive master settlement agreement. The master settlement does not include any admission of wrongdoing or liability by Endo. Discovery Inc. (DISCA) crossed above the 100-day moving average after John Malone bought $33M of stock. The stock was also helped by the approval of the Time Warner Inc. acquisition by AT&T. There was minimal news on Valeant Pharmaceuticals International Inc. (VRX).

Exhibit 2: Significant Contributors to Performance, 6/8/18 – 6/15/18

Name Type Return
RH Equity 42.0%
Genworth Financial Inc. Equity 22.1%
Endo Pharmaceuticals Holdings Inc. Equity 15.8%
Discovery Inc. Equity 18.0%
Valeant Pharmaceuticals International Inc. Equity 4.2%

Source: Miller Value Partners

Pulte Group Inc. (PHM) declined over the week after a report by Zelman Associates came out revealing four consecutive months of slower-than-seasonal order activity for the builder group and suggested downside risk to near-term order estimates. JPMorgan Chase & Co. Warrants (JPM/WS) and Bank of America (BAC) crossed below the 50-day moving average after the Federal Reserve raised interest rates by a quarter-percentage point bringing the Fed’s benchmark rate to a range of 1.75-2% on Wednesday and signaled that two additional increases were on the way this year. There was minimal news on Intrexon Corp. (XON) and Foot Locker Inc. (FL).

 Exhibit 3: Significant Detractors from Performance, 6/8/18 – 6/15/18

Name Type Return
Pulte Group Inc. Equity -6.7%
JPMorgan Chase & Co. – Warrants Derivative -4.5%
Intrexon Corp. Equity -4.3%
Foot Locker Inc. Equity -3.5%
Bank of America Corp. Equity -2.4%

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.

©2018 Miller Value Partners, LLC

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