IBM (IBM): IBM reported mixed 4Q22 results that were not good enough to support the stock in the near-term or bad enough to derail Northlake’s bullish long-term thesis.  Revenue came in above expectations, which for us is the key component in the bull case.  IBM has not shown consistent growth for a long time.  The company is growing under the new CEO thanks to the timely acquisition of Red Hat opening up a growth opportunity in cloud services.  Management also completed the divestiture of its lowest-growth businesses last year.  New guidance calls for mid-single-digit revenue growth and the last several quarters have been right on target, including the just announced 4Q22.  If IBM consistently grows at a mid-single-digit rate, the P-E multiple for the stock can expand from its current discounted level of 14X 2023 estimates.  The stock performed well in 2022, rising 5% against declines of 18% to 33% for major stock market averages as investors began to believe in the company’s return to growth.  IBM shares also pay a dividend yielding roughly 5%, so the total return in 2022 was nearly 10%.  One thing about success on Wall Street is that it raises the expectations bar.  In 4Q22, IBM fell short of expectations for free cash flow, lacked profit margin upside despite the incremental revenue growth, and guided 2023 revenue and cash flow to the low end of previously announced ranges.  These factors led to the stock declining about 8% since the report.  Pressure is on IBM to achieve the new guidance amid a softer macroeconomic environment that could limit enterprise spending on technology.  Northlake takes solace in strong revenue growth in recent quarters and expects 2023 results to support our bullish outlook. Our price target is now $155 based on 2024 estimates that assume two years of mid-single-digit earnings growth.  Including the dividend, this would provide a double-digit annual return in the shares.

T-Mobile USA (TMUS): TMUS preannounced subscriber metrics that were better than expected leaving quarterly financial results and an update to 2023 guidance for the 4Q22 earnings report.  As usual, the company reported good quarterly results.  Guidance was positive but could have been a little better.  TMUS has a long history of initiating conservative but positive annual guidance and then beating and raising guidance as the year goes on.  2023 guidance was introduced in 2021 when the company’s acquisition of Sprint closed.  Amazingly, despite stiff competition, slowing mobile phone subscriber growth, and a slowing economy, TMUS updated guidance for 2023 is unchanged.  When the 4Q22 report was released, the all-important free cash flow guidance looked a little light, but management explained some one-time items and guidance assumptions that reassured investors.  One issue that came up on the call was the fact that Softbank, a major backer of Sprint and TMUS over the years, receives additional TMUS shares if the stock crosses $150.  This fact is well known and it seems as though it has kept the stock from breaking through $150 despite all the good news over the past year.  TMUS indicated they talk regularly with Softbank and that while no transaction is currently close, it is possible that something will be done.  Softbank appears unwilling to sell at $150 which is supportive of our bullish view on the shares.  We are making no changes to our valuation model on TMUS after the latest earnings report.  We see upside to at least $170 based on EBITDA, free cash flow, and the company’s massive stock buyback.  The primary risk is an industry slowdown in new mobile phone subscribers that creates even more intense competition.  TMUS is best positioned to weather this potential headwind with the biggest and most advanced 5G network and lowest cost mobile phone plans.

Comcast (CMCSA): Nine years after Northlake’s initial purchase of CMCSA, we sold all the shares held for clients after the company reported 4Q22 results.  The earnings report was in line with expectations and not the direct cause of the decision to sell.  We have noted in previous blogs that we were growing impatient with Comcast as growth slowed in its broadband internet and TV networks business. The company faces stiff competition in broadband from fiber overbuilds and new fixed wireless services.  The cable industry has fought off competition before but the difference now is that broadband is fully penetrated in the United States with all homes that can afford it having a connection.  The TV networks business is much smaller but faces severe secular challenges from competing streaming services.  Comcast’s streaming service, Peacock, is struggling to compete against Netflix, Disney, and others.  We don’t hate Comcast stock.  Rather we just see better opportunities developing elsewhere and view the 40% pop in the shares in since the October lows as bringing the stock to almost fully valued and creating a selling opportunity.  Furthermore, we continue to focus on diversification efforts in Northlake’s individual stock holdings.  IBM, VICI Properties, Walmart, Home Depot, and T Mobile have all been added to the portfolio over the last couple of years.  Each has produced nice gains and, importantly, provided diversification from the media stock focus in place when Northlake was established in 2004.  We have a lot of knowledge in media stocks that can help produce winners such as Comcast, but we also realize secular changes in the media landscape have severely hurt long-term growth prospects, even for the best media companies.

IBM and TMUS 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.