Apple (AAPL): AAPL 4Q23 earnings and 1Q24 guidance were mixed.  The shares are down 1% in a very strong market following the report.  4Q23 results were in line on revenue and ahead on EPS with iPhone sales holding up and Services coming in ahead.  Other hardware including Macs, iPads, and Wearables were weak.  Good cost control and the mix shift toward Services revenue led to record-high profit margins and better-than-expected EPS.  Guidance for the all-important quarter called for flat iPhones, continued similar growth in Services, and ongoing weakness in the other hardware businesses.  AAPL has now gone four straight quarters with small year-over-year declines in revenue.  Cost controls, increased services mix, and consistent stock buybacks have allowed EPS to grow.  However, with concerns about the economy amid many headwinds and uncertainty on the company’s large business in China (geopolitics, a new competitor, weak recovery), investors want to see top line drive growth to reward AAPL shares.  The outlook is hardly dire but given the stock’s mid 20s P-E more balanced growth drivers are needed.  Given the company’s history and elevated R&D spending, it is likely that revenue growth will resume and lead to the balanced growth investors desire.  In the meantime, the shares are likely to lag strong upward stock market trends.  Short of a major negative change in the company’s outlook, the downside is protected as AAPL is almost a staple for consumers in the Apple ecosystem.  Northlake plans to sit tight with AAPL other than trades that have to do with unique client circumstances.  A strong holiday season that leads to 1Q24 results ahead of guidance is the next major catalyst for renewed upward momentum for the stock.

Nexstar Media Group (NXST): NXST shares are currently in a tough spot as the proverbial “best house in a bad neighborhood.”  NXST has been one of the few big winners in media with the shares up about 10X since we started buying it for Northlake clients in 2017.  Over this same time, almost all media stocks have lost value. NXST has done well thanks to timely accretive acquisitions, operational excellence, superior financial management, and shareholder friendly capital allocation. We raised a couple of issues after 2Q23 regarding the possibility of a guidance cut and a shift of the company’s strategy.  3Q23 results saw these issues at the forefront again.  Free cash flow guidance was cut after the company settled with DirecTV after a multi-month blackout.  Lower guidance also likely reflects more investment and a longer path to profitability for the company’s new national broadcast strategy.  Management struck a positive tone on both issues on its conference call noting that the return on the lost revenue from the blackout would have a high return based on the new multiyear deal that went into effect immediately and the investments in new sports content for the CW Network would have a much larger payoff than originally planned for a small delay in achieving profitability.  We trust management based on their long record of successfully navigating the secular headwinds that are buffeting the media industry.  However, those winds are likely too strong for NXST shares to sustain an uptrend in the near term.  2024 does offer relief when political ad spending will lead to a surge of profits and free cash flow.  Given NXST’s strong, low-debt balance sheet, this should control the downside in the shares. For NXST to become another multiyear winner will require several things.  First, uncertainty about the economy that is slowing advertising sales must recede.  Second, the recent settlement between Charter Communications and Disney must slow the rate of cable TV cord cutting and firm up affiliate fees paid to NXST’s local TV stations.  Finally, the company must make clear progress toward profitability goals at the CW without further large-scale acquisitions.  NXST shares are inexpensive at just 6 times EBITDA.  Any positive momentum on investment fundamentals could easily bring the shares back to recent highs around $200 next year.  This upside against a strong balance sheet that protects downside warrants showing patience.  The secular challenges are steep, and our confidence is lower than usual, but management has earned our trust, so we will sit tight on our long positions for now.

Disney (DIS): DIS shares have had a rough stretch since peaking at $200 in March 2021.  A lot has gone wrong.  Much was beyond management control – Wall Street bearishness on streaming, a decline in traditional cable TV and broadcast networks, higher interest rates, uncertain economic outlook.  Management also made errors – poor quality control on accelerated output in movies and television, political fights in Florida, corporate restructuring that negatively impacted content control and profitability.  A year ago, DIS brought Bob Iger back to the CEO role to reset corporate strategy, rebuild investor confidence, and improve profit growth.  Iger enjoyed a brief honeymoon only for the stock downtrend to continue as secular challenges grew and the company was unable to articulate or show evidence of a successful corporate and financial strategy.  We have been wrong to hold through such a devastating stock price decline, but it appears that the company’s 4Q23 ending in September represents a pivot point to better performance.  Earnings came in ahead of expectations with beats at the segment level across the board.  Parks, Sports, and streaming all came through.  DIS earnings are notably lumpy even in the good old days but this is the first quarter in a while that progress was broad.  More importantly, Iger articulated a clear strategy moving forward focused on making streaming profitable, rolling out ESPN as a streaming service, investing in Parks for growth, and getting back to producing the highest quality films.  Confidence in the pivot from fixing and restructuring to growth was supported by a big boost to 2024 free cash flow guidance and reinstatement of a dividend.  The shares responded well.  However, progress is not guaranteed and is likely to be volatile on a quarterly basis.  Nonetheless, we like the shift in tone, the clear articulation of strategy, and improved free cash flow.  Trading at less than 20 times still depressed 2024 EPS estimates, DIS shares offer a lot of upside if upcoming news and earnings support the four pillars of the new strategy.  Downside seems better protected by the much higher than expected free cash flow.  Most clients own DIS.  Those who don’t might in the weeks ahead.

Sony (SONY): We were surprised by the sharp, negative initial reaction (-7%) to SONY’s 2Q23 earnings report.  The initial trading after the report took place in the U.S. market.  Our view that the shares overreacted proved accurate when the stock rebounded nicely in Japanese trading with the gains holding when U.S. markets opened again.  SONY shares are still down a little following the report.  A small decline is justified after the company missed earnings estimates and talked about risks to their imaging semiconductor business in 2024.  Most of the 2Q23 miss was due to mark-to-market accounting at its finance subsidiary, a business that is not core to our bullish investment thesis, and a business that will be spun out in the next year or two.  The most important businesses are video games, TV and film production, music, and imaging semiconductors.  Other than semis, these business segments were at least in line with expectations with forward guidance maintained.  The payoff in SONY shares looks more likely in 2024 than 2023 as growth is expected to accelerate next year in the growth businesses.  We plan to wait as the shares look undervalued relative to peer companies in music, video games, and entertainment even after assigning a conglomerate discount.  SONY management is leader in Japan where more shareholder friendly actions are being supported by the government.  Given the company’s growth fundamentals, it is only a matter of time before the shares move back above $100.

Home Depot (HD): HD reported results slightly ahead of low expectations as the company grapples with higher interest rates, low housing turnover, stressed consumers, and the aftermath of heavy spending on homes during the pandemic.  The company is doing a great job managing what is under their control – expenses, profit margins, growing the Pro business.  Looking ahead, management narrowed guidance ranges for the year which came as a major relief against investor sentiment thinking there was a downside risk to sales and earnings.  Visibility is low into 2024 but recent monthly trends have been linear with no apparent incremental slowing in the business (same stores sales have been running down 3-4%).  HD shares rebounded strongly following the report, moving up from yearly lows below $280 to almost $310, which is just about unchanged for the year.  At Northlake, we will stick with quality stocks even if cyclical trends are a headwind if the long-term growth opportunity remains, and management is executing at a consistently superior level.  HD fits the profile perfectly.  Via aggressive expansion of the Pro business and secular changes due to work-from-home, we think HD’s long-term growth opportunity is as good as ever.  The last few quarters’ earnings have held up against negative same store sales, revealing how well HD is managing the business.  The current 2024 consensus EPS implies growth of about 4% and flattish same store sales that return to positive in the second half of the year.  In a higher-for-longer interest rate scenario, there is downside risk to the growth outlook.  We are willing to wait given our high regard for HD’s growth profile and management, the possibility that the Fed is cutting interest rates late next year, and our continued view that the economy will avoid a severe downturn.  A return to all-time highs around $400 offers attractive upside against what appears to be limited downside based on how the company has handled the weak home improvement environment in 2023.

Walmart (WMT): For the first time since we purchased WMT in June 2022, the company reported a quarter and offered guidance that creates turbulence for our near-term outlook.  Long-term, the latest news further cements our thesis that WMT is gaining market share and improving profit growth.  3Q23 earnings were a little ahead of expectations in terms of revenue and EPS but only inline on operating income.  Looking to the fourth quarter, management offered an outlook for a similar result.  The lack of upside to operating income is important because the financial side of the investment thesis for WMT is based on management’s promise that operating profit margins would steadily expand, leading to operating income growing at twice the rate of sales.  Management did not back down from this promise but indicated that progress might not be linear every quarter.  For 2H 2023, management noted a slowdown in sales in late October, one-time legal costs, timing of remodels, the Cat 5 hurricane that hit Mexico City, and a few other items that are liming margin expansion.  Most concerning to analysts was the choppiness in sales.  There is pressure on consumers, especially lower income consumers that are the core of WMT sales.  The question being asked is whether a slower pace of same store sales gains due to weaker consumer spending and a lower rate of inflation can continue to produce operating leverage.  We believe that it can and point to WMT showing mid-single-digit traffic growth vs. declining traffic at most retailers.  This is evidence of market share gains that are driven by improved execution, especially in ecommerce and fulfillment efforts.  WMT is expanding its addressable market by appealing to a broader base of consumers, including higher-income households, and increasing revenue from higher-margin activities like advertising and third-party fulfillment.  The expanded revenue opportunity is coupled with more efficient management of its supply chain at warehouses and in the back of the stores.  The shares could struggle to regain their footing until sales trends are clear and/or margin expansion is shown on lower top line growth.  Based on the history of success over the last few years, Northlake is giving WMT the benefit of the doubt.  We will continue to hold the shares.

AAPL, NXST, DIS, 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.