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Nov 01, 2022

Opportunity Equity Update for Week Ended 10/28/22

Christina Siegel Malbon

OneMain Rises on Strong Earnings while Meta Falls on Earnings and Higher-than-Expected Expense Outlook

Last week, the Opportunity Equity Strategy's representative account gained 2.05%, underperforming the S&P 500’s 3.97% rise. (Exhibit 1). The strategy ended the week down -30.08% YTD, 1,299 basis points behind the S&P 500.

Exhibit 1: Performance of Opportunity Equity Representative Account Net of Fees, Versus S&P 500, Through 10/28/221

Time Period Opportunity Equity Representative Account S&P 500
Last Week (10/21 - 10/28) 2.05% 3.97%
MTD 11.35% 8.90%
QTD 11.35% 8.90%
YTD -30.08% -17.09%
1 Year -36.60% -13.80%
5 Year 3.74% 10.56%
10 Year 11.50% 12.87%
Inception (annualized since 6/26/00) 6.21% 6.53%

Source: Bloomberg, Miller Value Partners. Visit the Strategy page for Opportunity Equity performance through the most current month end period.

One Main Holdings, Inc. (OMF) rose as the company reported Q3 EPS of $1.51, +15% ahead of consensus driven by lower-than-expected provision ($420M vs street at $430M) and a +4% beat on other revenue. Importantly, credit is showing early signs of stabilization with net charge-offs of 5.89% handily beating estimates of 6.53% while 30–89-day delinquencies of 2.81% showed significant sequential improvement and performed better than normal seasonality. Capital allocation remains shareholder friendly as the company maintained the quarterly dividend of $0.95/share (9.9% annualized yield) and repurchased 1.2M shares for $42M. Further, 2022 guidance now sees net charge-offs at the low-end of the prior 6.1%-6.5% range with capital generation at the high-end of the prior $1.01Bn-$1.06Bn range.

Norwegian Cruise Line Holdings Ltd. (NCLH) rose above the 200-day moving average.

Morgan Stanley lowered its price target on Farfetch Ltd. (FTCH) to $26 from $32 (210% upside).

General Motors Co (GM) rose after reporting record Q3 revenue of $41.9Bn, driven by continued strength in price and an +80% jump in volumes. Continued cost discipline and mix-benefits yielded EBIT of $4.3Bn, +23% ahead of consensus, with EBIT margins of 10.2% beating by 200bps. EPS of $2.25 rose +48% Y/Y and came in +19% ahead of the street while FCF of $4.6Bn saw a dramatic improvement relative to the -$4.4Bn posted in the year ago period. As part of the previously announced capital returns program, the company declared a $0.09/share quarterly dividend (0.9% annualized yield) and repurchased $1.5Bn of stock. GM maintained 2022 guidance, including wholesale volume growth of +25%-30%, EBIT of $13Bn-$15Bn, EPS of $6.50-$7.50, and FCF of $7Bn-$9Bn (implies FCF/share of $5.50 and a FCF yield of 14%).

Taylor Morrison Home Corporation (TMHC) rose above the 50 and 100-day moving averages after reporting Q3 earnings that exceeded expectations. Revenues came in slightly behind consensus estimates at $2.0Bn vs. $2.2Bn expected, while EBITDA came in at $443.7M vs $438.8M for consensus. EPS of $2.72 and book value per share of $40.05 beat consensus of $2.51 and $38.83, respectively. During the quarter, the company repurchased 4.2M shares for $105M (~4% of shares outstanding) and paid down $265M in debt.

Exhibit 2: Significant2 Contributors to Opportunity Equity Representative Account Performance, 10/21/22 - 10/28/22

Name Type Return
OneMain Holdings, Inc. Equity 23.6%
Norwegian Cruise Line Holdings Ltd. Equity 10.6%
Farfetch Ltd Equity 12.6%
General Motors Co Equity 11.0%
Taylor Morrison Home Corporation Equity 8.4%

Source: Miller Value Partners. See below for additional information., Inc. (AMZN) fell after the company reported worse than expected Q3 results. Revenue of $127.1Bn and EBIT of $2.5Bn fell short of consensus of $127.6Bn and $3.1Bn, respectively. The company guided for 4Q revenue behind consensus at $140-148Bn, 6%-7% below consensus expectations driven by macroeconomic factors with operating income of flat to +$4Bn versus consensus of $4.6Bn.

Meta Platforms, Inc. (META) fell after reporting in-line Q3 results and a higher-than-expected 2023 guide for expenses and capital spend. While revenue and monthly active users (MAUs) of $27.7Bn and 2.96Bn were in-line, average revenue per user (ARPU) at $9.41 came in below estimates of $9.53. EPS of $1.64 came in well below consensus of $2.27 driven by higher operating expenses. Meta repurchased 41M shares over the period for $6.4Bn (1.5% of shares outstanding). The company guided for Q4 revenue of $30Bn-$32.5Bn, below the street of $32Bn reflecting weaker advertising demand and a 7% FX headwind while narrowing expense guidance to $85Bn-$87Bn (from $85Bn-$98Bn) and capex guidance to $30Bn-$34Bn (from $29Bn-$34Bn). For FY23, the company sees expenses of $96Bn-$101Bn, well above consensus of $91Bn.

Cleveland-Cliffs Inc. (CLF) reported Q3 steelmaking revenue of $5.5Bn, +2% ahead of consensus as shipments and average selling prices were largely in-line with estimates. EBITDA of $452M missed estimates of $668M as the company worked through higher cost inventory built in the prior quarter. FCF of $288M helped drive a $200M net debt reduction ($1Bn reduction YTD) while also repurchasing 2M shares at $16.97. Looking to Q4, the company expects repair and maintenance expenses to rapidly decline following planned outages while increased production volumes, particularly to auto end markets, should further dilute fixed costs.

Alibaba Group Holdings Limited (BABA) fell in sympathy with the broader Chinese Technology sector as Chinese General Secretary Xi Jinping gained a third term at the 20th National Congress of the Chinese Communist Party (CCP), cementing his grip on power through 2027. Barclays lowered its price target to $114 from $135 (79% upside).

Mattel, Inc. (MAT) reported Q3 net sales of $1.76Bn, missing consensus of 1% though beating ex-FX (+3%), marking the ninth consecutive quarter of growth. Operating income of $398M beat by 3% with margins of 22.7% +90bps ahead of expectations on continued cost savings initiatives and sales leverage. Management maintained FY22 net sales growth in the +8%-10% range, though lifted the FX impact to 3%-4% (from 2%-3%). Continued inflationary headwinds drove a slight reduction to gross margin guidance of 47% (from 47%-48%) and EBITDA of $1.05Bn-$1.1Bn (from $1.1Bn-$1.125Bn). Given the full year reset and a volatile macroeconomic environment, the company withdrew FY23 targets, though still expects to grow both the top and bottom-line.

Exhibit 3: Significant2 Detractors from Opportunity Equity Representative Account Performance, 10/21/22 - 10/28/22

Name Type Return, Inc. Equity -13.3%
Meta Platforms, Inc. Equity -23.7%
Cleveland-Cliffs Inc. Equity -17.7%
Alibaba Group Holding Limited Equity -11.7%
Mattel, Inc. Equity -5.8%

Source: Miller Value Partners. See below for additional information.

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As of prior week's market close unless otherwise stated.

1The performance figures for the representative Opportunity Equity account reflect the deduction investment management fees and certain other expenses. Returns greater than 1 year are annualized.

For additional information about Opportunity Equity Strategy performance, please click on the Opportunity Equity Strategy Composite Performance Disclosure. Past performance is no guarantee of future results.

2Significant Contributors and Detractors are based on holdings that had the greatest effect on representative account performance for the week. Holdings that have been in the portfolio since the end of the most recent calendar quarter are identified by name. Returns listed above represent the market performance of the individual security during the week, or for the partial period held in the portfolio during the week.  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. There is no guarantee that market trends discussed herein will continue. 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. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice. Content may not be reprinted, republished or used in any manner without written consent from Miller Value Partners. 

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