IBM (IBM): IBM reported mostly solid 2Q22 results, but the stock fell victim to its strong performance from earlier this year.  Ahead of the report, the shares were nearly unchanged against a 20-30% decline for major stock market averages.  This strong performance raised expectations for IBM, and a good report with a few small flaws led to a sell-off of nearly 10% in the following days.  We still find the story attractive, underlined by another quarter of mid-single-digit constant-currency revenue growth and a forecast for more of the same in the second half of the year.  This sales strength is occurring against a weakening economic backdrop, including concerns about enterprise spending on technology – a key sector for IBM.  The flaws in the quarter were related to disappointing guidance from the impact of the strong U.S. dollar on revenue, free cash flow, and margins.  We expect similar guidance from other leading technology and internet stocks reporting earnings over the next two weeks.  The fact that IBM traded down on macro issues out of management’s control that are also impacting the company’s peers is why we think the shares are a victim of their year-to-date success.  Northlake’s bull thesis on IBM is built upon a return to growth that eventually flows through consistently to profit margins and free cash flow.  2Q22 might not have been good enough for short-term traders, but we are sticking with our long-term thesis and enjoying a 5% dividend yield and significantly discounted P-E ratio while we wait for the return to growth story to play out.

Walmart (WMT): WMT updated its guidance for 2022 ahead of its formal earnings report on August 16^th.  As is usually the case when companies preannounce, the news was not good.  Management lowered the earnings outlook for 2022 by more than 10% due to the impact of shifting consumer spending habits.  The shares fell about 10% in response, giving up the gains since Northlake purchased the shares for clients with individual stocks.  The stock has rebounded somewhat and now sits about 7% lower.  Interestingly, WMT raised its sales forecast even as it slashed the earnings outlook.  Customers continue to spend but the basket is now filled with inflation-elevated groceries with little contribution from general merchandise.  General merchandise has higher margins, so the shift is dilutive to earnings.  Furthermore, to help clear unsold merchandise, particularly in apparel, management is aggressively marking down prices.  The combination of these factors is why the earnings hit is so steep despite rising sales.  Assuming WMT gets back on track in the next 6 to 12 months, the new guidance essentially costs the company one year of earnings growth against our investment thesis.  We do not believe our investment thesis has been delayed by a full year, however.  Management took strong action with markdowns and indicated that other than apparel, inventories were in good shape.  We think the shares can start working well again once there is a signal that demand trends are stabilizing.  Given our outlook that any recession will not be severe, this could occur later this year.  While we wait, the initial rebound off the post guidance lows supports our idea that WMT shares offer both defensive and offensive characteristics, a good combination in an uncertain economic and stock market climate.  We stand by our target of $150 for WMT shares.

Alphabet (GOOG/GOOGL): GOOG reported mixed results for 2Q22, but the shares rallied significantly.  Revenues were in line with expectations, while operating income and EPS fell slightly short.  Investor reaction was notably positive after major earnings misses from Snap and Walmart raised the prospect that GOOG might suffer similarly.  Instead, results indicated stability beyond the macroeconomic concerns that are impacting almost all companies.  Management cautioned investors about a continued deceleration in growth over the balance of 2022.  However, these comments were not notably different from the 1Q22 report three months ago when the shares were about 20% higher.  In other words, the stock reflected a worse report and outlook.  Search and Cloud continue to hold up well, while YouTube and the Play Store have seen a greater slowdown.  Analysts believe that Search is less impacted by Apple’s privacy initiatives.  Search is also further down the buying funnel and has more exposure to still-rebounding services like travel.  YouTube advertising is an early-cycle business and more sensitive to initial advertiser cutbacks in response to changing consumer buying habits.  The Play Store has exposure to discretionary consumer purchases that might be losing share to higher inflation-driven spending on staples like gas and food.  The Play Store also reduced fees, which management noted had a material impact.  GOOG still faces challenges from the uncertain macro environment that could hurt revenue and profit margins.  However, we believe the shares already reflect a conservative outlook trading at less than 20X forward earnings and less than 11X EBITDA.  Both metrics are below historical averages for GOOG shares.  At the long run average of 12X 2023 EBITDA, we see the shares worth nearly $140.  Using a conservative 10X multiple still provides 6% upside to $120.  Notably, management spent the most ever in a quarter on share buybacks in 2Q22 suggesting confidence in the outlook and supporting Northlake’s view that the stock is undervalued.

T-Mobile USA (TMUS): TMUS continues to reward our decision to swap from AT&T earlier this year.  The company reported another strong quarter and increased guidance for all important metrics including subscriber additions, revenue, EBITDA, and free cash flow.  The stock has performed very well, up from $121 when we purchased at the end of February to the current $140.  This is great performance in a very difficult market environment, even more so when considering poor performance at wireless and cable peers.  TMUS is not only executing on its merger with Sprint, but it continues to gain market share in wireless and now has a multiyear growth driver with fixed wireless broadband which at a minimum can reduce churn with current customers.  TMUS has been a share gainer for years.  The Sprint acquisition is key to sustaining the growth profile for the next several years.  TMUS gained a massive amount of mid-band spectrum from Sprint.  In fact, the value of that spectrum is probably as important as the former Sprint subscribers.  TMUS is able today to offer 5G speeds at capacity across most of the US at very competitive prices versus AT&T and Verizon.  With Sprint synergies kicking in and cost to capture falling off, TMUS is poised to see already high free cash flow nearly double in 2023.  Growth in EBTIDA plus debt reduction has the balance sheet at investment grade status.  This sets up one more big catalyst: commencement of a massive share buyback.  Depending on how TMUS majority owner Deutsche Telecom participates in the buyback, TMUS will either repurchase a material portion or virtually all its public float in the next several years.  We expect the buyback to be announced by year end.  Near-term, TMUS shares have additional upside to about $150, but we expect the benefit of the buyback can dramatically accelerate upside as the share count shrinks looking out to 2024 and beyond.  We try to keep our price targets based on the year ahead and show patience based on our long-term investment thesis.

Meta Platforms (META): META, formerly known as Facebook, reported roughly in line 2Q results against the dramatically lower guidance the company issued three months ago.  Unfortunately, despite many indications from anecdotal evidence that revenue trends improved over the last couple of months, the company again lowered top line guidance.  The new guidance is about 10% below consensus expectations.  The hit to earnings is not nearly so severe as the company also announced another $3 billion cut to its operating expense guidance.  This is the second pullback in in the 2022 expense budget this year, so management is at least being responsive to unexpectedly weak revenue trends.  Key to the near and long-term outlook for META shares is how much of the revenue disappointments are secular versus transient.  Encouragingly, management noted that engagement with the company’s apps, including Facebook and Instagram, continues to grow, albeit at very modest levels.  Nonetheless, with all the controversy the company has faced, sustaining engagement is a good sign and increases the potential that revenue growth will again emerge late this year and in 2023.  Beyond macroeconomic challenges from a weaker economy and advertising market and the stronger dollar, the company faces two primary issues: ongoing impacts from Apple’s (and soon Google’s) decision to offer opt-out tracking on mobile devices, and the rise of Tik Tok as competitor in social media.  The privacy initiatives have been hurting growth for several quarters, and despite lapping the initial impacts, the headwind remains significant.  META lost much of its ability to individually target users, which in turn lowered the effectiveness of its advertising.  In response, advertisers are either spending less overall or paying lower prices to reach META’s users.  Tik Tok appears to have broken the barrier with advertisers and is taking an increasing share of a smaller pool of economic and privacy-impacted advertising dollars.  META shares are very inexpensive, but the company needs to reassert topline growth to get the stock moving upward.  In order to be as conservative as possible, we looked at META valuation on a GAAP basis which ignores material non-cash charges based on stock-based compensation.  We also lowered our target EBITDA multiple to 10X, a level at which traditional media companies traded at in the years before the pandemic.  This conservative approach leads to a target of $190, up 21% from current levels.  Should revenue growth resume in the next six to nine months, less conservative valuation approaches could easily justify a stock well above $200.  We believe META still is one of the most effective and cost-efficient places for advertisers to spend money.  This should eventually lead to resumed growth, so we are sticking with the stock despite the hurricane force headwinds.  Simply put, the shares are valued as though META is going the way of MySpace and AOL, a much too drastic scenario.

Comcast (CMCSA): CMCSA posted another quarter of good financial performance and deteriorating cable fundamentals.  Entertainment properties at NBCU performed well with the exception of continuing losses for the company’s Peacock streaming service.  Overall, Comcast reported 5% revenue growth, 10% EBITDA growth, and 20% EPS growth.  On their own, these would be considered great results.  However, the slowdown in cable broadband subscribers stole the show even though the segment showed 4% growth in revenue and 5% growth in EBITDA.  This pattern of strong financial results amid slowing broadband subscriber growth has been in place for the past year.  The difference this quarter is that for the first time ever Comcast had no growth in broadband subscribers.  Historically low household moving activity continues to have a big impact as the pool of potential subscribers remains small.  Churn among broadband subscribers for cable or fiber connections is typically quite low.  For several quarters, investors have been concerned about increasing competition as AT&T, Verizon, and other telcos are aggressively expanding their fiber networks.  In addition, T-Mobile and Verizon are aggressively promoting fixed wireless broadband that runs on their LTE and 5G networks.  There remains debate about the speed and capacity of these networks but for the time being T-Mobile is adding over 500,000 subscribers a quarter with Verizon adding another 200,000.  It does not seem these subscribers are leaving cable broadband but there is little doubt they are further reducing the pool of potential subscribers.  Comcast shares are down about 10% in response to the earnings report, giving up recent gains.  We have been extremely patient with Comcast shares based on their low valuation and strong financial results.  With risk rising that financial growth will slow as Comcast has to compete harder to add and maintain subscribers, a recovery in valuation seems less likely.  The stock trades at a premium to AT&T and a small discount to T-Mobile.  We believe the 10% sell off is overdone against the positive financial results and strong balance sheet.  We are leaning toward selling Comcast but think a modest recovery could occur and offer a better exit point.

VICI Properties (VICI): VICI reported a typically boring quarter in line with analyst estimates other than some timing differences.  Boring is exactly why we like VICI!  The company is a REIT offering triple net leases to casino owners.  VICI owns most of the properties operated by MGM and Caesars, and is paid rent under long-term leases with inflation escalators.  Results for MGM, Caesars, and other casino owners can be sensitive to economic activity but are rarely if ever weak enough to warrant concern that VICI will not be paid.  2020 was a great test for VICI’s business model as most casinos were closed for extended periods due to pandemic restrictions.  VICI never missed receiving a rent check.  This proof of concept has contributed to the strong performance for VICI shares.  Investors are now willing to pay a higher multiple of earnings given credit concerns have been laid to rest.  This is important currently given the impact a recession could have on casino visitation.  VICI completed several large acquisitions in the last few years and is now one of the largest REITs of any type.  Looking ahead, management expects to complete more smaller deals and expand to “experiential” properties such as golf course developments, professional sport training facilities, or other real estate intensive leisure businesses.  Between rent escalators, expansions of current properties by their operators, and modest-sized acquisition activity, VICI can grow by 7-9% per year.  The current dividend provides a yield of 4.3% and should grow in line with earnings.  In a world full of uncertainty on economics, politics, and war, VICI’s consistent, predictable results and double-digit annual total return potential are especially attractive.

Apple (AAPL): AAPL reported mixed 3Q22 results that showed resilience against the macroeconomic factors that have tripped up many other companies.  Guidance for the September quarter was a little soft with management calling out the potential for reduced consumer spending.  The primary area of concern on the conference call related to slowing growth in the company’s services business.  Growth in the June quarter was 12%, the lowest since before the pandemic.  Management noted that further deceleration should be expected in the September quarter.  Services represent about 20% of company revenues and carry a gross margin over 70% compared to mid-30s for products.  iPhone is still the most important product at around 50% of revenues, and trends remain solid even with low to mid-single-digit growth.  Offsetting macroeconomic concerns, Apple seems to be past the headwind from supply chain constraints.  The impact in the June quarter was below the low end of management guidance and there was not a specific call out for the current quarter.  Apple shares remain near fully valued but as we have explained, we are willing to hold on given the overall quality of company.  The June quarter and guidance commentary were excellent examples of Apple’s quality.  Apple continues to gain share in iPhones and Services and build a larger installed base that can drive future earnings growth and share price upside.  As long-term investors, that is worth showing patience.

Sony Corporation (SONY): SONY reported better than expected 1Q22 earnings but guided down full-year operating income and operating cash flow forecasts.  Two factors are at work on the guidance.  On an operating basis, the company lowered its forecast for the Gaming segment due to weak first-party software, slowing engagement with live services, and continued investment in software development.  A smaller operating impact was noted for Image Sensors where the company noted weakness in Chinese smartphone sales.  Interestingly, Apple reported better than expected sales of iPhones in China.  Operating cash flow is more severely impacted based on working capital and non-operating foreign exchange accounting.  More generally, SONY adopted a more cautious forecast due to management’s weak outlook for the economy.  Games and Image Sensors were again the focus, while Pictures, Music, and Financial Services are expected to be less impacted.  Along with these cautious economic comments, management noted that they are prepared to move into a recessionary mindset if necessary.  All these comments should take into account that the company has a very conservative mindset consistent with Japanese culture.  We like SONY’s conservative nature, especially in such uncertain times.  We also like their willingness to continue to invest in their growth businesses where we see substantial long-term upside.  It may take a better quarter to get the stock moving upward again.  We are willing to wait given a history of strong management operating and strategic execution and a well thought out strategy for the company’s global leadership in video games, music, filmed entertainment, and image sensors.  Long-term upside to $120 or more remains our forecast.

IBM, WMT, GOOG/GOOGL, TMUS, META, CMCSA, VICI, AAPL, and SONY are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.