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Aug 02, 2022

Opportunity Equity Update for Week Ended 7/29/22

Christina Siegel Malbon

Teva Rises on Opioid Litigation Settlement While Bausch Falls on Unfavorable Xifaxan Ruling

Last week, the Opportunity Equity strategy gained 3.67%, underperforming the S&P 500’s 4.28% rise. (Exhibit 1). The strategy ended the week down -27.34% YTD, 1,476 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Opportunity Equity Strategy Versus S&P 500, Through 7/29/221

Time Period Opportunity Equity S&P 500
Last Week (7/22 - 7/29 3.67% 4.28%
MTD 10.72% 9.22%
QTD 10.72% 9.22%
YTD -27.34% -12.58%
Inception (annualized since 6/26/00) 6.47% 6.87%

Source: Bloomberg, Miller Value Partners

Teva Pharmaceutical (TEVA) rose above the 50, 100, and 200-day moving averages after the company announced a $4.25B proposed nationwide opioid litigation settlement. The company reported Q2 earnings, where revenue and EBITDA were roughly in-line with consensus at $3.8B vs. $3.8B expected and $1.13B vs $1.15B expected. The company lowered full year guidance to revenue of $15.0-15.6B from $15.4-16.0B previously, with EBITDA, EPS and FCF remaining unchanged at $4.7-5.0B, $2.40-2.60 and $1.9-2.2B, respectively. The company provided 2027 guidance with expectations for topline growth in the mid-single-digits, operating margins reaching 30%, Net Debt/EBITDA hitting 2x and FCF conversion from Net Income of 80%. Piper Sandler raised its price target to $8 from $7 (15% downside) while maintaining its underweight rating. Inc (AMZN) rose above the 100-day moving average after the company reported better than expected Q2 results. Revenue came in at $121.2B vs. $119.0B expected with EBIT of $3.3B beat consensus of $1.8B. The company guided for 3Q revenue slightly ahead of consensus at $125-130B vs $126.5B expected (13-17% YoY growth) while EBIT guidance came in below consensus at $0.0-3.5B vs $4.3B expected. Amazon received a number of price target increases with Jefferies raising its price target to $165 from $150 (22% upside), while Deutsche Bank raised its price target to $175 from $155 (30% upside). Our energy investments in Ovintiv Inc (OVV), Energy Transfer Inc (ET), and Diamondback Energy Inc (FANG) rose throughout the week in sympathy with energy prices. Energy Transfer and Ovintiv rose through the 50 and 100-day moving averages, while Diamondback Energy rose through the 200-day. Goldman Sachs called out Diamondback and Ovintiv as stocks with solid risk/reward around earnings while Raymond James lowered its price target on Diamondback to $190 from $215 (48% upside), and Piper Sandler lowered its price target on Diamondback to $191 from $196 (49% upside) while both maintained their overweight ratings. Energy transfer raised its quarterly dividend by 15% to $0.23 (8% yield) ahead of earnings this week.

Exhibit 2: Significant Contributors to Performance, 7/22/22 - 7/29/22

Name Type Return
Teva Pharmaceutical Equity 33.8%
Ovintiv Inc Equity 14.9% Inc Equity 10.2%
Energy Transfer LP Equity 10.3%
Diamondback Energy Inc Equity 12.9%

Source: Miller Value Partners

Bausch Health Companies (BHC) fell -41% after the company lost their Xifaxan patent litigation in IBS-D calling into question the company’s ability to pay its outstanding liabilities if they were to continue to pursue the spin-out of BLCO. As a result, RBC cut its price target to $5 (8% upside), down from $12 while both JP Morgan and Truist cut their ratings to neutral from overweight. Alibaba Group Holdings Ltd. (BABA) announced its plan to pursue a primary listing on the Main Board of the Hong Kong Stock Exchange (HKEX) by the end of 2022. This was followed by the SEC adding Alibaba to their delisting watchlist under the Holding Foreign Companies Accountable Act (HFCAA), intended to address a long-running dispute over auditing compliance. One Main Financial (OMF) fell though the 50-day moving average after reporting Q2 results that were behind consensus expectations: Net interest income (NII) came in at $886M vs. $891M expected, while provisions increased to $338M ahead of $319M expected, leading to adjusted EPS of $1.87 missing consensus of $1.98. The company continued to move up in credit quality as we continue to see a normalization in net charge-offs (NCOs) to 5.96% from 4.41% a year earlier. The company updated full year guidance with managed receivables growth expected at the “lower end” of the original +5-10% guidance, NCOs of 6.1-6.5% up from 5.6-6.0% previously and capital generation of $1,012-1,056M from $1,150-1,200M previously. The company maintained their quarterly dividend of $0.95/share (9.6% yield) and repurchased 2.1M shares for $94M (~1.7% of shares outstanding). Janney Montgomery Scott lowered its price target to $67 from $74 (80% upside), while Piper Sandler lowered its price target to $46 from $63 (24% upside), and Deutsche Bank lowered its price target to $53 from $75 (42% upside) while maintaining their overweight ratings. Meta Platforms Inc (META) fell after the company reported disappointing Q2 results. Revenue and monthly active users (MAUs) came in roughly in-line with consensus at $28.8B vs. $28.9B expected, and 2.93B vs 2.94B expected, while ARPU slightly disappointed at $9.82 vs. $9.89 expected. EBITDA beat expectations at $13.7B vs. $13.1B expected while adjusted EPS came in well-behind expectations at $2.46 vs. $2.54 expected. The company guided for 3Q revenue of $26-28.5B vs expectations of $30B, reflecting weaker advertising demand as well as a 6% headwind from foreign currency. The company lowered their full year expense guidance to $85-88B from $87-92b previously while narrowing their CAPEX guidance to $30-34B from $29-34B previously. The company repurchased 25.7M shares in the quarter for $5.1B (~1.0% of shares outstanding). RBC lowered its price target from $200 to $190 (19% upside), along with Oppenheimer which lowered its price target from $305 to $190 (19% upside), while Keybanc raised its price target to $196 from $190 (23% upside) all while maintaining their overweight weightings. Green Thumb Industries Inc (GTBIF) crossed below the 50-day moving average. Seaport Global initiated on the name with a buy rating and a price target of $15 (63% upside) while Needham cut their price target to $21 from $26 (129% upside) while maintaining its buy rating.

Exhibit 3: Significant Detractors from Performance, 7/22/22 - 7/29/22

Name Type Return
Bausch Health Companies Inc Equity -47.3%
Alibaba Group Holdings Ltd Equity -11.1%
OneMain Holdings Inc Equity -9.9%
Green Thumb Industries Inc Equity -10.8%
Meta Platforms Inc Equity -6.0%

Source: Miller Value Partners

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1 The performance figures reflect the deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) and certain other expenses. For important information about Opportunity Equity Strategy performance, please click on the Opportunity Equity 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 based on the representative account 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. Portfolio composition is shown as of a point in time and is subject to change without notice.

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