September 10, 2018

Opportunity Equity Update for Week Ended 9/7/18

United Rises on Updated 3Q Guidance While RH Declines on Disappointing 2H18 Sales Guidance

Last week, the Opportunity Equity strategy lost 4.16%, underperforming the S&P 500’s -0.98% loss (Exhibit 1). The strategy ended the week up 20.92% YTD, or 1206 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Opportunity Equity Strategy Versus S&P 500, Through 9/7/181

Time Period Opportunity Equity S&P 500
Last Week (8/31 – 9/7) -4.16% -0.98%
MTD -4.16% -0.98%
QTD 8.75% 6.05%
YTD 20.92% 8.86%
Inception (annualized since 6/26/00) 8.01% 5.86%

Source: Bloomberg, Miller Value Partners

United Continental Holdings (UAL) was up over the week after providing updated 3Q guidance. The company increased 3Q RASM guidance to the high end of its prior range of 4-6% and pre-tax margin to the high end of its 8-10% range. The company also guided for fuel costs to come in at the high end of its $2.27-2.32 range. There was minimal news on the other top contributors.

Exhibit 2: Significant Contributors to Performance, 8/31/18 – 9/7/18

Name Type Return
Stitch Fix Inc. Equity 10.3%
CenturyLink Inc. Equity 2.7%
Quotient Technology Inc. Equity 1.3%
Discovery Inc. Equity 0.4%
United Continental Holdings Equity 0.3%

Source: Miller Value Partners

RH (RH) crossed below the 50 and 100-day moving average after announcing 2Q earnings. The company reported 2Q adjusted EPS of $2.49 vs. $1.75 consensus driven by better than expected gross margins of 42% (vs. consensus of 40.6%) but missed on the topline with revenues of $642.7M below guidance of $655-662M with comparable sales growth coming in at 5% versus guidance of 8-9% and consensus of 8%. The company disappointed by lowering top-line guidance for 2H18 by 2% to $1,305M in 2H18 down from $1,335M previously but raised EPS guidance to $7.35-$7.75 (up from $6.34-$6.83) versus consensus of $6.71. The company also updated their long-term targets, with adjusted operating margins in the low-to-mid-teens and ROIC in excess of 30% by 2021. They reiterated their long-term revenue guidance of $4-5B in North America and added the potential for an additional $3-5B in revenue from international expansion opportunities for total revenue of $7-10B. Their long-term revenue growth guidance remains 8-12% and earnings growth of 15-20% annually. Bausch Health Companies (BHC) crossed below the 50 and 100-day moving average while Intrexon Corp. (XON) crossed below the 50 and 200-day moving average. Facebook Inc. (FB) was downgraded to neutral at MoffettNathanson with a price target of $175 (upside 7%), citing revenue slowdown combined with regulatory scrutiny. There was minimal news on Endo International Inc. (ENDP).

Exhibit 3: Significant Detractors from Performance, 8/31/18 – 9/7/18

Name Type Return
RH Equity -20.7%
Bausch Health Companies Equity -10.7%
Endo International Inc. Equity -6.7%
Intrexon Corp. Equity -11.3%
Facebook Inc. Equity -7.2%

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

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