VICI Properties (VICI): VICI reported its usual highly predictable, steady growth quarter.  All guidance for 2024 was reiterated and analysts made only minor changes to their estimates.  The company did announce a significant new deal whereby it will finance up to $700 million in capital improvements to The Venetian in Las Vegas.  VICI already owns the property in conjunction with private equity and REIT giant, Apollo.  This deal should be slightly accretive as the financing is drawn and VICI receives correspondingly larger rent payments.  Management spent much of the call defending the stock which has been stuck in the high $20s.  The stock faces macro headwinds that are beyond management control, primarily higher interest rates for a longer time.  Higher rates impact the total return investment thesis by making the almost 5% dividend less attractive.  Higher rates also impact VICI’s cost of capital as the business model is to raise capital through debt and equity issuance and then buy properties and receive rent from whoever operates the property.  Simply put, there is a squeeze on the net margin between VICI’s cost of capital and rent yields.  Higher rates also mean that M&A in the casino industry is less prevalent since the cost of financing acquisitions is higher.  Many of VICI’s best deals have been the result of financing casino industry M&A.  A final issue the company faces is concerns about the credit quality of its casino tenants.  We find this argument ridiculous given that during the pandemic, when most casinos were closed, no VICI tenants ever missed a rent payment. Despite these headwinds, VICI continues to find a way to produce modest growth and increase its dividend.  We are more than willing to wait for the macro environment to improve, especially since our forecast is that interest rates peaked last year.  VICI shares trade at less than 15 times the company’s 2024 estimated cash flow (cash flow is the primary metric for REITs since that is what pays the dividend).  Comparable REITS trade around 20 times.  We think VICI valuation will improve to 18 times when headwinds ease, which equates to $40 on this year’s earnings, up almost 40%.  While we wait, the shares pay a dividend of almost 5% and management continues its outstanding record of completing profitable financing transactions.

Apple (AAPL): AAPL has been under a lot of pressure recently from slowing growth, regulatory actions, and lack of AI exposure.  The stock performed poorly this year, dropping from $192 at year end to as low as $165 a few weeks before a modest recovery to $173 just ahead of the company’s earnings report.  Most of the other stocks in the so-called “Magnificent 7” are up sharply this year.  One potential benefit of a struggling stock price is that the expectations are lower ahead earnings.  AAPL’s report slightly beat lowered expectations and the company forecast a return to revenue growth in the June quarter.  It might surprise people that AAPL revenues have declined on a year-over-year basis for five of the last six quarters.  Not exactly characteristic of a growth stock.  The shares are responding well to the “beat and raise,” climbing over 7%.  However, they still remain down this year.  We have been willing to wait out AAPL’s stagnant growth thanks to two factors.  First, the company’s financial strength is unrivaled, and management happily uses it to support shareholders.  Another dividend increase and a record-breaking $110 billion share buyback announcement accompanied the earnings report.  The buyback shows management confidence that growth will resume.  Second, management made clear that it has a large effort in AI and will be making announcements in “the weeks ahead.”  Presumably, this refers to the company’s annual June developer conference.  CEO Tim Cook made a good argument that AAPL is a unique position to monetize AI through on device applications without having to make the massive infrastructure investment seen at Microsoft, Google, and Meta.  AAPL is still spending a lot on AI but not at the risk of profit margins. This is important because AAPL’s steadily increasing profit margins from manufacturing and supply chain efficiencies and a mix shift in favor of services has been key to supporting earnings while revenue growth has declined.  The next big move up in AAPL appears closer than we expected prior to the latest earnings report driven by renewed top line growth and an explicit AI strategy that triggers an iPhone upgrade cycle.  There are no guarantees, but the company’s track record suggests that we should have confidence.  With renewed growth, AAPL shares could trade to 30 times next year’s earnings, which equates to a target of $215.

Disney (DIS): The turnaround at DIS hit a speedbump with the company’s 2Q24 earnings report and guidance.  The results in the March quarter were pretty good with initial profitability in the streaming business a positive surprise, theme parks continuing the strong growth trend, linear in steady but expected decline, and the film studio waiting on promising upcoming movie releases.  Guidance is what triggered the 10% stock decline after the report.  Specifically, management gave an outlook for flat year-over-year growth in Experiences (theme parks and cruises) in the June quarter, a sharp decline from recent consistent double-digit growth that was expected to continue.  Adjusting for one-time items such as the launch of two new cruise ships and technology investments, the picture is better with mid-single-digit growth forecast.  Nonetheless, investors are rightfully concerned about a slowdown in visitation to Orlando and higher labor expenses.  Theme parks have provided most of the value in DIS shares because it is a great, highly valued business and has been the only growth engine as the company invested in streaming (i.e. absorbed losses) while linear TV melts like an ice cube.  We accept management’s outlook that the weak guidance is temporary, and growth will pick up later this year back to double-digit rates.  This should happen as streaming moves to sustained, growing profits that more than compensate for continuing declines in linear TV.  Earnings estimates barely came down and the stock looks reasonably valued at 20X 2025 earnings consensus.  Turnarounds are not easy and the situation at DIS is compounded by secular headwinds in the changing TV and film landscape.  We were not expecting the current set back but we believe the long-term story and value is intact.  Better news later this year should get the stock moving up again, with a target of $130 plausible over the next 12 months.

Nexstar Media Group (NXST): NXST shares are responding positively to the company’s 1Q24 earnings report.  The company reported in-line to better-than-expected results in all key financial metrics.  When we last wrote about NXST, we indicated that the company had differentiated itself from other much smaller local TV station owners.  This quarter was another example where management spent much of the call explaining the benefits of the company’s scale, strong balance sheet, and business strategy.  NXST clearly believes its stock is undervalued and made a pitch that it should be valued more like major media companies like Fox that get much more credit for their free cash flow.  Management puts its money behind its view with a steady share buyback that has reduced the shares outstanding by about 25% since we first bought the stock for clients in 2017 at 1/3^rd of the current price.  We noted last quarter that we thought NXST shares could trade toward $200, a level that could be a good exit point given the secular challenges facing all media companies due to streaming and cord cutting.  The latest quarter reinforced our upside target and made an argument that it might be worth hanging around a little longer.

Sony (SONY): SONY wrapped up its fiscal year with decent results and the announcement of a new three-year plan.  After the shares had been punished in recent weeks, the news was well received by investors with the shares rallying 7% immediately after the report.  SONY shares remain down this year, leaving us hopeful that there is plenty more upside now that growth is forecasted to pick up.  SONY also provided a positive update on capital allocation by announcing a 5-for-1 split, a meaningful share buyback, and the first step in the full spinoff of the company’s financial services business.  SONY has great assets, management, and financial strength.  The stock has been frustrating for us.  What we missed was that SONY used the last few years to invest in their businesses putting pressure on profit margins.  SONY’s new three-year plan clearly focuses on harvesting the recent investments, improving margins, and using the winnings to support shareholder value by allocating a greater share of free cash flow to stock buybacks. In the all-important Games business, the company went so far as replacing top management, a clear signal that better profits are a priority.  Wall Street has recently looked favorably on companies with expanding margins supporting the return of cash to shareholders.  This capital allocation strategy also puts SONY firmly in line with the Japanese government’s desire for more shareholder-friendly corporate strategies. The new three-year plan forecasts operating income growth averaging 10% annually, accelerating through the period.  Growth will be led by semiconductors (mostly for smartphone cameras and self-driving), video games, and music.  These three businesses provide most of the value in SONY shares.  The film studio is also important as a source of intellectual property with an arms dealer strategy of providing content to all the streaming services worldwide.  The film studio strategy has recently pressured the shares with SONY potentially interested in participating in the acquisition of Paramount.  Management did not comment on the rumors, but new press reports indicate that the company has cooled on the idea or would only need to commit a small amount of capital to any deal.  The shares remain deeply undervalued compared to the valuation of peers in each of the company’s four major business lines.  The new three-year plan appears to be clearing the skies, which should allow the shares to fulfill their potential.  We see the shares comfortably north of $100 in the next 12 months.

Home Depot (HD): Against a widely understood challenging macroeconomic backdrop, HD reported a muted 1Q24 slightly below Wall Street expectations.  Nonetheless, management reiterated all guidance for 2024 that assumes a pickup in sales later this year.  Total sales and comparable sales were each lower than a year ago and below Wall Street estimates.  A late spring contributed to the decline, but sales of seasonal items should pick up as the weather warms up.  Profit margins were also under pressure due to the impact of lower sales against relatively fixed operating expenses.  EPS exceeded estimates but only because of a lower-than-expected tax rate.  This weakness in operating performance was expected by investors.  As a result, the reiteration of guidance and management’s generally good tone on the conference call has led to a minimal immediate reaction in the shares.  Given results and guidance closely matching investor expectations, management was able to use the conference call to talk about the company’s strategies to capture the massive total addressable market the company sees in residential housing serving both homeowners and professional contractors.  There is little management can do to spur short-term growth until interest rates come down and housing turnover increases.  When that happens, recent increased investment to serve contractors on larger projects will drive investment in larger projects as DIY homeowners continue to invest their homes with smaller projects.  Ultimately, HD’s business is most sensitive to home prices.  If prices rise, people invest in their homes.  Even against the near doubling of mortgage rates, home prices have risen, leaving HD very well positioned when borrowing costs decline enabling an acceleration in home improvement projects.  Housing’s contribution to GDP has fallen by almost 1%, providing further support for an inevitable rebound.  Short of a recession, it is a waiting game for HD shares to resume their long-term upward trend.  Northlake’s long-term approach, focused on investing in high-quality, financially strong companies with a clear path to multiyear earnings and cash flow growth, makes waiting for the next leg up for HD shares an easy decision.  Lesser macro headwinds should lead to multiple expansion on accelerating EPS growth and drive the shares well above the all-time high of $416 in the years ahead.

Walmart (WMT):WMT’s latest earnings report fully synced with Northlake’s bullish investment thesis – the stock offers defense through its value positioning in a tricky environment for consumers and offense as ecommerce grows, supply chain efficiencies continue, and store remodels and operating execution positively impact sales and margins.  The company reported across-the-board upside to consensus estimates.  EPS were 60 cents against 52 cents expected.  Same store sales gained just shy of 4% compared to consensus of 3.5%.  Revenue grew 6% against 5% expected.  Gross margins came in 30 basis points ahead of the street.  The only shortfall was SG&A coming in a little above estimates.  However, management had cautioned the street that SG&A was going to rise more than revenue this quarter due to the timing of investment expenses. Sales were better than expected at stores, ecommerce, advertising, and international. Momentum continues in store remodels, Walmart+, and omnichannel.  On the conference call, management noted that sales are split evenly between customers with income under $50,000, between $50,000 and $100,000, and over $100,000. We normally do not recap data points in our quarterly updates.  We felt it was important to do so for WMT this quarter because the results so closely aligned with our investment thesis.  WMT is accelerating growth, improving profitability, expanding its addressable markets, improving cash flow, and increasing capital allocation in favor of shareholders, all while continuing to invest in the business.  We are especially pleased with the technology investments the company has made in its supply chain and ecommerce and advertising businesses.  Many clients have probably heard of Ben Thompson, who writes the widely read Stratechery blog about technology.  Ben regularly interviews important corporate and strategic technology leaders.  We thought it was interesting that earlier this month he interviewed WMT’s CEO.  WMT has growing similarities to the technology growth leaders as it invests to increase its addressable markets, improve its profitability, and accelerate growth.  This is the core of Northlake’s long-term bull case for WMT, leading to expanding on accelerating growth.  WMT will never be a member of the Magnificent 7, but it is evolving into a consistent winner much like Apple.  We think the shares can work to $70 this year as the stock sustains its current 25X P-E on 2025 earnings estimates.  From there, steady growth and enhanced return of capital to shareholders should drive double-digit annualized returns.

VICI, AAPL, DIS, NXST, SONY, HD, and WMT 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.