So far, we have found using Bard GAI to help analyze earnings report to be insightful and fun.  Insightful to discover more about the capabilities and shortfalls of GAI and fun to try something different.  Several more companies have reported since our last update, and we decided to stick with the same format for Part Two of the 1Q23 Earnings recap.

Disney (DIS)

Query: Analyze the most recent quarterly results from DIS from a fundamental perspective.

Bard Answer: The Walt Disney Company (DIS) reported its fiscal second quarter 2023 results on May 10, 2023. The company missed analyst expectations on earnings per share (EPS) by 1 cent, but beat on revenue by $16.24 million. DIS’s revenue was $21.82 billion, up 23% year-over-year. This growth was driven by strong performance in the company’s Media and Entertainment Distribution segment, which includes Disney+, Hulu, ESPN+, and other streaming services. This segment’s revenue grew 33% year-over-year to $4.8 billion. DIS’s operating income was $3.8 billion, up 22% year-over-year. This growth was driven by the same factors that drove revenue growth. DIS’s EPS was $0.93, down 1 cent year-over-year. This decline was due to a number of factors, including increased costs related to the launch of Disney+ and other streaming services, as well as higher interest expense. Despite the decline in EPS, DIS’s results were generally positive. The company’s revenue and operating income grew significantly year-over-year, driven by strong performance in its streaming business. DIS also continued to generate strong cash flow, with free cash flow of $1.6 billion in the quarter. Looking forward, DIS is well-positioned for continued growth. The company has a strong portfolio of brands and content, and it is investing heavily in its streaming business. DIS is also benefiting from the reopening of its theme parks, which were closed for a significant portion of 2020 and 2021. Overall, DIS’s most recent quarterly results were positive. The company’s revenue and operating income grew significantly year-over-year, and it continued to generate strong cash flow. DIS is well-positioned for continued growth in the future. Here are some key takeaways from DIS’s most recent quarterly results:

• Revenue grew 23% year-over-year to $21.82 billion.
• Operating income grew 22% year-over-year to $3.8 billion.
• EPS was $0.93, down 1 cent year-over-year.
• Free cash flow was $1.6 billion.
• The company is well-positioned for continued growth in the future.

Northlake Comments:  As often appears to be the case, Bard gets the general sense of the earnings and the tone of the press release correct but makes factual errors and seems unable to provide context.  Interestingly, Bard notes the correct revenue figure but then misses the year-over-year growth which was 13% not 23%.  EPS is correct as is the one penny miss of expectations.  However, operating income fell 14% from a year ago.  Free cash flow is quoted at $1.6 billion when it was actually -$150 million.  Growth in streaming revenue is also misquoted.  It seems odd that parts of Bard analysis quotes facts lifted directly from the earnings report but miss completely on other facts in the report.  This seems to be a recurring problem but one that should get better with time as AI capabilities advance.  These errors lead Bard to the incorrect conclusion that DIS’s Latest earnings were positive.  Certainly, the market does not agree as the shares dropped 10% in response to the report.  Much of the stock price decline is related to the conference call that followed the earnings report.  We asked Bard to analyze the conference call and despite the fact the transcript is publicly available we did not get a worthy answer.  On the call, CEO Iger made news when he disclosed plans for Hulu’s streaming service to be folded into Disney+.  This is a reversal from Iger’s comments three months ago that general entertainment was not necessarily a good business.  Adding Hulu to Disney+ also means the DIS will have to buy out Comcast’s 33% stake in the service, adding $9 billion plus to Disney’s debt load.  We do not view Disney as heavily indebted after this but presently investors are avoiding more heavily indebted companies.  The call also amplified the press release noting weakness in linear TV (EPSN, ABC, and other cable channels).  These businesses underperformed low expectations creating additional concern that streaming profits will never replace linear thus limiting long-term growth potential of the corporation.  On the positive side, unmentioned by Bard, is the continued fantastic performance by the company’s theme parks and renewed momentum in film as more blockbuster releases hit theaters.  Northlake still like DIS.  We feel the decline since the earnings report is overdone and ignored notable profit improvement in streaming.  The path over the next year is less clear with the Hulu news and ongoing pressure in linear, so a decline in the stock is warranted.  We believe the company’s unique asset base and strong management will ultimately win investor admiration and believe this quarter may act as the proverbial “kitchen sink” with expectations having now bottomed out with easy comparisons ahead.  More patience than we expected may be required but growth in FY24 can drive the shares back to $120, providing over 30% from current trading levels.

Nexstar Media Group (NXST)

Query:  Please analyze the latest earnings report and conference call from Nexstar Media Group.

Bard Answer: Nexstar Media Group (NXST) reported earnings of $2.97 per share on revenue of $1.26 billion for the first quarter of 2023. This beat analyst expectations of $2.56 per share on revenue of $1.24 billion.

The company’s results were driven by strong advertising revenue growth, which increased 12% year-over-year. Nexstar’s digital advertising revenue was particularly strong, growing 20% year-over-year.

The company also benefited from its acquisition of The Hill, a political news website, in the third quarter of 2021. The Hill contributed $10 million in revenue in the first quarter.

Nexstar’s management team is optimistic about the company’s future prospects. They believe that the strong advertising market will continue, and they are investing in new content and technology to drive growth.

The company’s conference call with analysts was positive. Management discussed the strong advertising market, the growth of its digital business, and its plans for investing in new content and technology.

Overall, Nexstar’s earnings report and conference call were positive. The company is well-positioned for continued growth in the years to come.

Here are some key takeaways from the earnings report and conference call:

• Nexstar’s earnings beat analyst expectations.
• The company’s advertising revenue grew 12% year-over-year.
• Nexstar’s digital advertising revenue grew 20% year-over-year.
• The company’s acquisition of The Hill contributed $10 million in revenue in the first quarter.
• Nexstar’s management team is optimistic about the company’s future prospects.
• The company is investing in new content and technology to drive growth.

Northlake Comments:  In what we now see is a common occurrence, Bard gets some facts incorrect.  NXST did report $2.97 in EPS and $1.25 billion in revenue, both which slightly exceeded consensus expectations.  However, advertising revenue fell 3% rather than rise 12% and digital advertising only rose 17% rather than 20%.  Bard failed to address distribution revenues which are the fees NXST is paid by cable, satellite and streaming services for the rights to carry the feed of the local TV stations the company owns.  These fees are growing nicely currently despite a high level of cord cutting thanks to the timing of NXST’s renewals, the fact that local stations are underpriced relative to their importance to viewers due to local news, and NXST’s massive nationwide scale which gives the company leverage in negotiations with distributors.  Despite a positive outlook for distribution revenues in 2023 and 2024, investors are concerned that cord cutting and a shift to streaming services that lack local stations are secular headwinds to growth.  Advertising remains cyclical so uncertainty about the economic outlook is also weighing on investor sentiment.  NXST is well-positioned with its nationwide reach, low level of debt, high free cash flow, and the content investments Bard picked up.  However, in the near-term the stock is under pressure due to questions about the economy and cord cutting.  The outlook for 2024 is much better when these questions should be answered, and political revenues will surge.  Northlake anticipated the headwinds for NXST and made partial sales of the shares in the second half of 2022. Our current bias is to further reduce or completely sell NXST as the shares rebound when the focus shifts to 2024.  In the meantime, we will be patient since NXST has one of the best management teams of any company we closely follow in terms of operational and financial excellent and shareholder friendly capital allocation (dividend and buybacks).

VICI Properties (VICI)

Query: Please discuss recent trends in AFFO per share at VICI Properties.

Bard Answer:  VICI Properties’ AFFO per share has been trending upwards in recent quarters. In the fourth quarter of 2022, AFFO per share was $0.51, up 2% from the third quarter of 2022 and up 6.1% from the fourth quarter of 2021. For the full year 2022, AFFO per share was $1.93, up 6.1% from 2021.

There are a few factors that have contributed to the recent increase in AFFO per share. First, VICI Properties has been able to increase its occupancy rates. In the fourth quarter of 2022, occupancy was 98.2%, up from 97.7% in the third quarter of 2022 and 96.7% in the fourth quarter of 2021. Second, VICI Properties has been able to increase its average rent per square foot. In the fourth quarter of 2022, average rent was $43.22 per square foot, up from $42.52 per square foot in the third quarter of 2022 and $40.72 per square foot in the fourth quarter of 2021. Third, VICI Properties has been able to reduce its expenses. In the fourth quarter of 2022, expenses were $681.1 million, down from $691.8 million in the third quarter of 2022 and $727.6 million in the fourth quarter of 2021.

The recent increase in AFFO per share is a positive sign for VICI Properties. It indicates that the company is well-positioned to continue growing its earnings in the future.

Here are some additional details about VICI Properties’ recent financial performance:

• Total revenues increased 72.3% year-over-year to $2.6 billion in 2022.
• Net income attributable to common stockholders increased 10.2% year-over-year to $1.1 billion in 2022.
• AFFO increased 61.7% year-over-year to $1.7 billion in 2022.

VICI Properties’ strong financial performance is due to a number of factors, including:

• The continued recovery of the Las Vegas Strip, which is VICI Properties’ primary asset.
• The company’s focus on acquiring high-quality assets in attractive markets.
• VICI Properties’ strong balance sheet, which provides the company with financial flexibility to pursue growth opportunities.

Overall, VICI Properties is a well-managed company with a strong financial performance. The company is well-positioned to continue growing its earnings in the future.

Northlake Comments:  We had a hard time getting any relevant reply when asking about VICI earnings, so we decided to try asking about AFFO (available funds from operations), the relevant measure by which REITs are analyzed. In reply we got one of the best answers yet from Bard even though it did not cover the just reported first quarter 2023 results.  Those results supported the bullish tone and outlook provided by Bard.  AFFO per share grew to 53 cents, up 19% vs. 1Q22.  Large property acquisitions played a big part in the growth with revenues more than doubling.  Core growth remained firm in the low to mid-single-digits thanks to rent increases hedged to inflation and tight cost controls.  VICI continues to expand its asset ownership, venturing into Canada for the first time, and starting relationships with two Native American tribes that operate casinos.  VICI has plenty more U.S-based casinos to acquire and continues to add experiential, non-casino, entertainment assets.  AFFO in 2023 should grow to over $2 per share, enough to support a stock price in the upper $30s, for 25% total return including the company’s generous dividend.

Home Depot (HD)

Query: Please review Home Depot’s earnings reported yesterday including the updated guidance.

Bard Answer:  Home Depot reported earnings of $3.82 per share on revenue of $37.26 billion for the first quarter of fiscal 2023, which ended April 30, 2023. This was below analyst expectations of $3.80 per share on revenue of $38.28 billion.

Comparable sales decreased 4.5%, and comparable sales in the U.S. decreased 4.6%. The company attributed the decline in sales to a number of factors, including:

• Rising interest rates, which could make it more expensive for consumers to borrow money and finance home improvement projects.
• Inflation, which is eroding consumer purchasing power.
• The ongoing war in Ukraine, which is causing economic uncertainty and could lead to a slowdown in global growth.

In addition to reporting earnings, Home Depot also updated its guidance for fiscal 2023. The company now expects sales and comparable sales to decline between 2% and 5% compared to fiscal 2022. Home Depot also expects its operating margin rate to be between 14.3% and 14.0% in fiscal 2023, slightly lower than the 14.5% previously expected.

The decline in Home Depot’s earnings and guidance is a sign that the home improvement market is starting to cool off. However, the company is still a leader in the industry and is well positioned to benefit from continued demand for home improvement products and services.

Northlake Comments: Only revenue came in below expectations.  EPS was a couple pennies ahead of consensus.  The big disappointment was comp stores sales growth in the first quarter and the lowered comp guidance for the balance of the year.  Comps are below what we were expecting but an encouraging offset was profit margin in the quarter and the forecast.  Despite slower sales, margins are holding up better than expected.  We attribute this to our long-held view that HD management is excellent.  Bard also attributes to comp issues to generic items including inflation, interest rates, and the war in Ukraine.  These items have definitely colored sales trends but investors are more interested in the impact of weather, lumber prices, and home improvement spending as a percent of household budgets.  This last item is key to the outlook for HD shares.  Management is assuming that home improvement spending share will recede to pre-pandemic levels over the balance of 2023 after surging during the pandemic.  Bearish investors believe that the pull forward will take several years to digest and that market share must fall below pre-pandemic levels.  The outcome of this debate is critical to earnings growth since management has shown that it can manage profit margins in the current weak spending environment.  Northlake continues to believe that the pandemic has provided a secular boost to home improvement spending thanks to work from home trends and more focus on home activities.  Higher, though below peak, home prices also support home improvement spending.  We also believe many homeowners are locked into their current residence with mortgage rates of 3% vs. current rates of 6% if they were to move.  Thus, the secular story for home improvement remains solid and HD is proven to be a superior company.  The debate over home improvement demand is unlikely to be resolved in the next few quarters, so HD shares are likely to stay in a trading range. Northlake is a long-term investor and we are willing to wait.  As an aside, HD shares initially dropped 5% when the results were reported.  The loss on the day ended up less than 2% and the day following the report the stock popped 4% and trades above pre-earnings levels.  This is a good example of how expectations often govern immediate stock reactions.  HD’s weak comp sales and forecast were widely anticipated by investors with the shares down 9% this year heading into the report.

Walmart (WMT)

Query:  Please review Walmart’s earnings reported yesterday and updated guidance for both the current quarter and the current fiscal year.

Bard:  Walmart reported earnings yesterday that beat analysts’ expectations. The company reported adjusted earnings of $1.47 per share on revenue of $152.3 billion. Analysts had been expecting earnings of $1.32 per share on revenue of $148.9 billion.

Walmart’s U.S. same-store sales climbed 7.4%, ahead of analysts’ estimates of 5.5%. The company’s international sales were also strong, up 26%.

Walmart raised its financial forecasts for fiscal 2024. The company now expects adjusted earnings of between $6.10 to $6.20 per share, while analysts had been expecting $6.14. Revenue for the year is now expected to increase about 3.5%.

Walmart’s guidance for the current quarter was below consensus. The company expects second-quarter earnings of between $1.63 and $1.68 per share. Analysts had been expecting earnings of $1.71.

Walmart’s earnings beat and raised guidance is a positive sign for the retail sector. The company is well-positioned to benefit from strong consumer spending and rising inflation.

Here is a more detailed breakdown of Walmart’s earnings:

• U.S. same-store sales: 7.4%
• International sales: 26%
• Adjusted earnings per share: $1.47
• Revenue: $152.3 billion

Here is Walmart’s updated guidance for fiscal 2024:

• Adjusted earnings per share: $6.10 to $6.20
• Revenue: 3.5% increase

Here is Walmart’s guidance for the current quarter:

• Earnings per share: $1.63 to $1.68

Northlake Comments:  This the best Bard answer so far.  The information is accurate, and the answer is a direct response to our query.  The only point we would quibble with is that WMT’s earnings are a positive sign for the retail sector.  WMT’s sales strength came from the grocery side of the business, while general merchandise sales remained weak.  In addition, WMT digital sales grew 27% as the company is gaining share with its revived and refocused ecommerce efforts.  Success within ecommerce is allowing WMT to develop a rapidly growing advertising business.  Many retailers primarily offer general merchandise, where demand is weak as inflation and post-pandemic demand trends is hurting spending.  Ecommerce is a struggle for many retailers as large platforms dominate market share and smaller platforms or websites do not have scale to ramp up digital advertising.  This mistaken analysis from Bard highlights Northlake’s bull case for WMT.  The company remains a good defensive play as household balance sheets are pressured by inflation making WMT’s pricing attractive, including some trade down from higher income households.  WMT has completely revamped its ecommerce efforts with success in membership, volume, and advertising, leading to market share gains across all income cohorts.  Successful operational execution also extends to profitability.  WMT has lowered the comparable sales point that triggers operating leverage (profit margin expansion) and is forecasting significant growth in profits above the rate of sales growth.  To Northlake, this is a sign that management has successfully positioned the company and now has an offensive aspect to its historical defensive investment thesis.  Given the challenging macro environment, the combination of offense and defensive is especially valuable.  We see further upside in the shares that still trade at a reasonable 21 times next year’s highly predictable earnings estimate.

DIS, NXST, VICI, 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.