Home Depot (HD): HD reported better than expected earnings despite worse than expected sales in the core business.  The shares rebounded from an initial sell-off and continued higher throughout the day and are up nearly 2% since just before the report.  The company’s conference call was reassuring to investors even though management further lowered the sales outlook for 2024.  Profit margins are holding up well and inventory is being kept low, reducing the risk of markdowns if sales remain weak.  The rally in HD shares is a good example of how Wall Street works in the short term.  Investors already expected the sales forecast to be lowered.  Management lowered the forecast to below the level that sales have been coming in over the past few weeks.  In Wall Street parlance, HD reset the earnings to a level investors now think can be beaten.  Management also noted that last year when mortgage rates fell, there was an immediate improvement in sales.  Mortgage rates are now at their lowest point in a year and seem poised to fall further as the Fed begins easing monetary policy in September.  Northlake still believes HD is an excellent long-term investment.  Repair and remodeling is a long-term growth business tied to the value of homes.  Home prices are at all-time highs, meaning the trigger of lower mortgage rates should unleash improved sales.  Furthermore, we still believe the pandemic increased homeowners’ willingness to invest in their properties.  This article in the Wall Street Journal provides further insight into HD’s earnings and outlook and closely mirrors Northlake’s investment thesis:  https://www.wsj.com/business/retail/home-depots-patient-investors-wait-out-high-rates-54cd1310

Disney (DIS): DIS reported better than expected earnings in the company’s 3Q24.  However, the strength came from the wrong places from an investor perspective.  Most of the upside was from the movie studio as DIS has returned to form with blockbuster releases including Inside Out 2 and the post 3Q release of Deadpool and Wolverine.  Investors had been concerned about weaker performance from the company’s Pixar, Star Wars, and Marvel films, so this is welcome news.  However, Wall Street has never paid a big valuation multiple for studio results given the unpredictability of the box office.  There was also upside in the company’s streaming business, which reached profitability a quarter ahead of schedule.  The outlook for steady growth from here looks excellent and should drive growth in 2025 earnings.  Unfortunately, the shortfall in the quarter was in the theme parks.  This is DIS’s largest profit center and has been a key store of value during a box office slump and the secular decline of cable TV.  Management first alerted investors to weakness in theme park attendance and spending last quarter.  The results this quarter were worse than warned for and the outlook for the September quarter are for larger revenue declines.  Management does not expect a turn up until sometime in 2025.  It is worth noting that all theme park companies and most hotel and travel companies have warned investors of slowing growth.  Northlake has been patient with DIS but this latest setback comes as a surprise to us.  Nonetheless, we think it is the wrong time to give up on the shares that are trading at just 17 times 2025 estimated earnings.  Earnings should grow 5-10% next year thanks to the return to profits in streaming and the follow-on effects of record-grossing films.  We see theme parks as fundamentally sound long-term and believe the turn in streaming and renewed content success at the film studio validates the promises made by Bob Iger when he returned to the CEO role.  When theme parks stabilize and resume growth, the shares offer attractive upside potential now that the film studio is back, and streaming is a profitable growth business.

Nexstar Media Group (NXST): NXST reported inline results for 2Q24.  The company did not update 2024 guidance.  Analyst estimates moved very slightly lower but there was no change to fundamental trends or Northlake’s positive view of NXST shares.  There was not much new information to take away from NXST’s results.  2024 still looks like a record year for political advertising, producing cash flow that management will use to buy back shares, support healthy dividend growth, and continue to pay down debt.  NXST faces similar secular challenges to other media companies due to the shift of viewership to streaming.  The company also participates in an industry sensitive to economic trends given high levels of advertising revenue.  Management has maintained a healthy balance sheet that reduces financial pressure and allows the company to develop new growth businesses.  Importantly, the CW Network is beginning to significantly lower losses and is poised to shift to profits late in 2025.  NXST also has built NewsNation into a legitimate cable news network, even hosting Presidential debates.  News and sports remain the pillars of local and national TV networks. Core trends in advertising are strong at the local level and weak at the national level.  Trends in retransmission revenue received from cable, satellite, and streaming services and paid to networks remain positive even against falling subscribers as NXST uses its scale (about 170 stations reaching 70% of the country).  As long as the overall business remains healthy, NXST shares have upside built on the large and consistent free cash flow generated by the business.  When we first bought NXST over 7 years ago, the company had 45 million shares outstanding and debt equaled 5 times operating cash flow.  Today, NXST has 32 million shares outstanding and debt leverage is just over 3 times.  We think the shares have the potential to reach new all-time highs over $200 in the next 12 months.  The primary risk is a recession which is not presently in Northlake’s forecast.

Walmart (WMT): WMT reported another beat and raise quarter.  The company continues to validate our investment thesis in all respects.  WMT shares are up almost 80% since our initial purchase just over two years ago.  WMT sales continue to outpace retail in general and peers that sell groceries and general merchandise.  Same store sales show no signs of weakness despite widespread commentary about weakness from lower income consumers from companies like McDonald’s and Marriott.  WMT is benefiting from good strategic decisions and top-notch execution.  Store remodels, everyday low pricing, and smart assortments are helping the company gain share among its traditional customer base and attract higher income consumers.  Walmart+ ecommerce is growing around 20%, moving toward profits, and further helping attract higher income shoppers.  Ecommerce has opened high-margin advertising as a material revenue stream.  Walmart also continues to improve its supply chain, providing another boost to profit margins and supporting same store sales with better stock shelves.  Strength in the core stores plus emerging higher margin businesses in ecommerce and advertising is allowing the company to grow operating income faster than sales.  Many other retailers are struggling with margins as consumers cut back on spending and the companies are absorbing higher employee wages and store operating expenses.  We see all these business fundamentals continuing.  WMT is subject to macroeconomic pressures should recently softening in employment and slower GDP growth continue.  However, the company will remain a relative winner compared to other consumer-facing companies.  WMT’s operating execution, strong financial performance, and leading competitive position have not gone unnoticed.  The two-year surge in the shares leaves that stock trading at a premium P-E to history.  We think the company has earned the new higher relative valuation.  The shares have upside potential to 30 times next year’s earnings estimates, which equates to $81.  WMT has emerged as a steady growth compounder comparable to other leaders like Apple that maintain high valuations.

Sony (SONY): SONY reported earnings slightly better than expectations for the company’s 1Q25 ending June 30^th.  Revenue and operating income strength was broad with each of SONY’s four major segments (Games, Music, Imaging Sensors, and Filmed Entertainment) reporting ahead of consensus.  Management passed through the outperformance and raised full year guidance.  The shares have responded well and moved back into the $90s from the low $80s.  SONY has been a frustrating stock for Northlake since we first purchased it for clients in January 2021.  The shares have been stuck in a wide range from $90-100 with only brief periods above or below the range.  Something we missed and did not expect was that SONY would take an investment year across most of its divisions in 2023.  The most encouraging aspect of the latest results was expanding profit margins in each major segment, indicating that the payoff from the investment may have arrived.  Our investment thesis remains intact.  SONY has excellent management, leadership in each industry where it participates, and has taken to heart the Japanese government to be more shareholder friendly in capital allocation.  SONY shares trade at valuation levels below the levels of pure play competitors in video games, music, and semiconductors and the company has no exposure to the troubled TV network and streaming business at its film and TV studio.  As a conglomerate, we expect SONY to trade with a complexity discount.  The current discount is too large and is posed to narrow now that positive financial momentum has resumed.

Apple (AAPL): Since announcing uneventful quarterly results, AAPL shares initially traded lower but have since recovered and sit just below the all-time high reached in mid-July.  Earnings were slightly ahead of expectations with each major product category (iPhone, Services, iPad, and Mac) showing strength.  Management issued confident guidance for the September quarter that forecast the top line a little ahead of the street.  This is a good sign since Apple will only have the new iPhone16 available for a few days in the quarter following the early September launch announcement.  Looking ahead, the stock will be heavily influenced by the iPhone 16 and next year’s iPhone 17.  The new phones will integrate AI functions that the company and investors believe will ignite a large upgrade cycle.  There is a large group of customers with iPhones that are over three years old, dating back to the major 5G upgrade cycle.  Given potential pent-up demand and the excitement surrounding AI, this cycle could be AAPL’s largest yet.  We are confident that the new iPhones will sell very well.  The major uncertainties relate to the mix of demand between iPhone 16 and 17 and the slower economic growth that many consumer companies have highlighted with their latest earnings reports.  Timing is less important for Northlake given our long holding periods for individual stocks, but we believe that AAPL can buck the trend of cautious consumer spending this coming holiday season.  AAPL has a pretty full valuation but we believe earnings estimates could rise for the next couple of years which would sustain momentum for the stock as earnings power greater than $8 comes into view.  This should be enough to drive the shares modestly higher.

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