Boring Apple Quarter Good Enough For Now

/0 Comments/in /by

Northlake clients have owned Apple (AAPL) since early 2005, a period now covering over 40 quarterly earnings reports and conference calls.  The most recent report and quarter ahead guidance issued earlier this week was the closest match to Wall Street estimates so far.  Granted when Tim Cook took over as CEO, the company changed its methodology to more accurately provide guidance and stop the game of guiding conservatively and producing upside “surprises.”  What makes this quarter interesting is that typically AAPL needs to “beat and raise” when it reports to cause an immediate upward move in the stock.  This quarter a merely inline report and guidance has allowed the stock to move up 5% in two days.

The reaction to this quarter shows just how poor the sentiment has gotten toward AAPL over the past few months as the company faces the formidable challenge of growing revenue and earnings against the monster success of the iPhone 6 cycle.  iPhone 6 introduced larger screen phones, kicking off an upgrade cycle among current iPhone users and new users switching from Android phones.  iPhone 6 set very difficult comparisons for AAPL and many investors fear it represented that last major growth phase for the company.  Recent product introductions like Apple Pay, Apple TV, and Apple Watch have proven moderately successful but not nearly large enough to drive growth for the company.  Macs chug along but in a mobile world traditional PC and laptop forms are mature products.  iPads and tablets in general have fallen off much more rapidly than expected not yet shown signs of stabilization.

Thus, iPhones remain the key driver of AAPL growth and stock price.  Recent datapoints from suppliers to AAPL suggested that iPhone 6s was producing disappointing unit sales and the company could see its first ever year over year decline in iPhone unit volumes this quarter against the huge holiday season last year.  However, AAPL’s guidance implied higher unit volumes, albeit only low single digit growth.  Against the cautious sentiment dominating AAPL since the stock peaked at $135 earlier, that was good enough for a relief rally.

Northlake sees the current outlook for AAPL as fairly balanced.  We share some of the growth concerns.  In particular, we have a hard time seeing the company grow net income beyond the upper single digits over the next year or two.  This is mostly just a law of large numbers challenge.  We do not share the bearish view of declining iPhone volumes in FY16.  Only about 30% of the installed base of iPhone users has upgraded to the iPhone 6 series and growth in emerging markets, China especially, appears to be sustainable.

A modest growth outlook is well reflected in AAPL shares which trade at just 12X 2016 earnings estimates ignoring about $25 per share in net cash on the balance sheet.  We see valuation providing good downside support and still negative sentiment giving way over the next three months as expectations for iPhone unit volumes firm.  While we are less enthusiastic about big upside in the stock in the near future, we see a move to the 2015 highs as likely.  That is enough for us to continue to hold the shares for Northlake clients and be patient for non-iPhone growth drivers to kick in.

AAPL is 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.  AAPL is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Holding Hilton, Selling La Quinta Amid Lodging Challenges

/0 Comments/in , , /by

Hilton Worldwide (HLT) and La Quinta Holdings (LQ) reported 3Q earnings in line with current expectations.  HLT expectations had come in slightly as concerns about the health of the lodging industry grew over the summer and early fall.  HLT’s results were fairly good against the lowered expectations and the company’s growth profile appears to be at the higher end of lodging industry peers.  HLT guidance for 4Q15 matched street expectations but seem likely to be near the low end of the range provided given commentary on the conference call about weak transient business in October.

LQ reported in line with the significantly reduced guidance the company provided when it announced disappointing 2Q15 results in July.  LQ maintained the lowered full year 2015 guidance from July.  This indicates stabilization in operating fundamentals, albeit at a materially lower level than previously expected.  On the 3Q15 conference call, the interim CEO indicated that the company is likely to undertake actions to improve perception of the brand.  These could include hotel renovations advertising, increased customer service and digital investments.  Against what appears to be still weak demand for LQ properties, these investments seem likely to pressure 2016 earnings estimates.  Management is showing confidence in the business by accelerating share repurchases and is exploring alternatives to realize value from the asset base of owned hotels.  One group of 24 hotels is being sold already.  However, on the call, management appeared cautious about opportunities for a larger scale financial restructuring.  Short of an outright sale of the company, Northlake no longer sees financial engineering as providing as much support to the stock as previously thought.  Given this view and the likelihood that 2016 is a transitional year of investment in the brand under a new, as yet unidentified CEO, we have decided to sell LQ for Northlake clients.

It makes sense to hang onto HLT even against challenges faced by the hotel industry including rising room supply, the growing impact of Airbnb, and reduced international travel to gateway U.S. cities.  HLT has very strong management, a shareholder friendly approach to capital allocation and potential financial engineering, and most importantly, a great set of brands that is well positioning to navigate near-term challenges to the lodging industry.  3Q15 results and 4Q15 guidance show HLT’s top of the industry performance that merits patience given long-term value potential.

HLT is 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. 

Despite Worries, Comcast Remains on Solid Ground

/0 Comments/in /by

Comcast (CMCSK) reported results right in line with Wall Street expectations for 3Q15.  Revenues grew 11% and Operating Cash Flow gained 8.4%.  CMCSK is really two entities, the core Comcast Cable business now operated under the Xfinity brand, and the entertainment businesses operated at NBC Universal.  NBCU consists of the NBC TV Network, cable TV networks, Universal theme parks, and the Universal Film and TV studio.  Both sides of CMCSK’s business performed well in 3Q but it was outstanding success in films and theme parks that led growth.

Investors are most interested in Xfinity, however, which makes sense given it represents 2/3rds of revenue and 75% of operating cash flow.  Thankfully, once again, despite lots of concerns about the cable business (net neutrality, cord cutting, cord shaving).  Revenue and EBITDA each grew 6.4% and while the company lost 48,000 subscribers, this was the best subscriber performance in a third quarter in 9 years!  Xfinity added 320,000 high speed internet customers and saw revenues from broadband grow by over 10%.  There is no denying that how consumers TV is changing and there is some risk to the TV side of the cable business but at Comcast, and the cable industry in general,  the changes are impacting fundamentals very slowly. Furthermore, Xfinity should not really be called a cable company anymore but rather a broadband company.

NBCU was led by a 64% gain in revenue at the film studio that translated to a gain of 150% in operating cash flow.  Minions, Fast and Furious, and Jurassic World led the way in a record breaking year for the studio.  Theme Parks saw 14% growth in revenue and operating cash flow, driven by the Harry Potter attractions in Orlando and Fast and Furious ride in Hollywood.  The TV networks, also facing challenges from declining sub growth and lower ratings due to Netflix and cord cutting, reported modest growth.  Once again, the story is likely one where sentiment toward the TV networks is a lot worse than the reality of the impact on the business in the near-term.

CMCSK shares are up about 8% this year despite the concerns about the changing TV business.  Since August, when ESPN lowered its growth forecast and media stocks fell a quick 20%, Comcast is down just 5%.  Northlake thinks this shows the strength of Comcast’s business and expects continued solid quarterly results to eventually get CMCSK shares moving higher again.  Trading at less than 8 times operating cash flow while producing high free cash flow that is being reinvested in the business and returned to shareholders through dividends and share repurchases, CMCSK continue to look attractive.  We maintain our target for CMCSK to trade in the $70s over the next 6 to 12 months.

 

CMCSK is 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.  CMCSK is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

 

Strong Results from Alphabet: G is for Growth, Google

/0 Comments/in /by

Alphabet (formerly known as Google and still trading as GOOG/GOOGL) reported good results in 3Q15.  This marks the second consecutive quarter that the company has beaten Wall Street expectations after a string of slightly disappointing results.  The shares responded, rising from $500-550 for much of the first half of the year to over $700 today.

Results the last two quarters have dented the bear case that Google is facing rapidly decelerating growth in revenues and profits as the world shifts to using apps within mobile internet.  This reduces the value of search and should hurt the volume of searches and pricing for searches.  The last six months have instead seen acceleration in the number of searches with pricing per search falling but not at an accelerating rate.

Stabilizing or improving fundamentals are not the sole reason for the surge in GOOG shares.   The company has brought in in a new CFO and promoted a new CEO.  The founders of the company have taken a step back and restructured the corporation.  Alphabet is the holding company with basically two divisions:  Google as we know it for search and YouTube and all the other things Google invests in outside the core such Google Glass, self-driving cars, weather balloon delivered internet, etc.  The management and operational restructuring has dramatically improved the corporate culture from an investor perspective.  Disclosure and transparency has improved, capital and operational expenses are more tightly managed, and the company initiated a share buyback.

Put all this together, and Google investors are enjoying the favorable combination of rising earnings estimates and higher valuation of those earnings.  Northlake thinks more is yet to come with upcoming catalysts including the seasonally strong holiday season, greater detail on the “other bets” outside core Google, and possibly some improvement in mobile search pricing.    Core Google can probably earn close to $40 in 2016.  Even if you ascribe zero or negative value to the other bets, conservative in Northlake’s view especially if you also consider the company holds over $100 per share in cash, a target of $800+ seems plausible, or 20x core earnings.  There are very few really large companies in the world with organic growth in the range of 20%.  Google is one of them and deserving of a premium valuation.

GOOG/GOOGL is 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.  GOOG/GOOGL is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

ClubCorp Remains On Par Despite a Few Missed Putts

/0 Comments/in /by

ClubCorp (MYCC) reported earnings largely in line with management forecasts although a bit below more optimistic analyst estimates.  Revenues are tracking perfectly for 2015 but operating margins are a bit light as improved profitability at the large Sequoia golf acquisition is bit behind schedule.  Nothing in the story has changed at all.  MYCC is on track to meet its 2018 EBITDA goal of $300 million assuming no further acquisitions.  Consensus estimates for 2015 call for $235 million, growing to $255 million in 2016.  Management strongly reiterated its 2018 guidance on its earnings call and also announced accelerated capital spending for reinvention at the Sequoia clubs in 2015.  This should set the stage for a very strong 2015 when a normal weather would also provide a boost given the massive rainfall in Texas during the second quarter of 2015 that clearly held back golf and food and beverage operations.

Management also seemed a little more optimistic about closing on new club acquisitions.  Only 8 clubs have been purchased this year but after the big Sequoia deal in 2014 a slower year probably had benefits for integration.  MYCC is the dominant club operator in the U.S. and the rollup strategy is integral to the growth plan.  That said, there are reasons for optimism on the core organic growth front as golf seems to be growing in popularity again after a multiyear lull.  Thanks to the emergence of several great young players including Jordan Spieth (learned to play at an MYCC club), Rory McIlroy, Jason Day, and Rickie Flower, TV ratings are up, round played are up, and sporting goods stores are seeing a cessation of declines in spending on golf equipment.  At its own clubs, MYCC is seeing higher spending on lesson activity, especially among junior players.  In the latest quarter, MYCC also saw positive revenue trends form golf operations after several quarters where it ran slightly negative.

MYCC shares have pulled back from their highs early in the year due in part to another secondary offering from insiders.  The private equity firm that funded MYCC throughout its history has now sold all its shares, something we believe eliminates an overhang on the stock.  With 4Q likely to benefit from spending on holiday parties and private events and 2016 setting up well with an easy comp, less renovation disruption during golf season, and renewed acquisition activity, MYCC shares are looking very attractive.  A strong balance sheet and 2.5% dividend yield makes waiting in MYCC an easy call.  Northlake still sees upside to $25-30 over the next 12 months, a gain of 25-50% from current trading levels.

MYCC is 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.  MYCC is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

 

No Change to Model Signals Despite Market Volatility

/0 Comments/in /by

There are no changes to the signals from Northlake’s Market Cap and Style models for October.  For the third consecutive month, the Market Cap model continues to favor Mid Cap.  As it has since November 2014, the Style model is recommending Large Cap Growth.  With no changes to the model recommendations for October, Northlake client assets invested in the model strategy will continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) for at least another month.

The data underlying the models was quite stable this month.  Within the Market Cap model, no individual factors shifted their recommendation.  The internal factors focused on stock market technical indicators continue to unanimously favor large cap, while the external factors focused on the economy and interest rates decisively favor small cap.  The spilt decision leads to the Mid Cap recommendation for the entire model.  This month’s readings are consistent with recent stock market activity.  Small cap took a hard hit in August and September and investor sentiment is bearish so market technicals favor large cap.  However, the worries triggering the decline are mostly based abroad where small cap companies have a lot less exposure, especially in emerging markets which are the epicenter for current investor angst.

There was movement in two internal indicators in the Style model with one flipping from growth to value and other from value to growth.  Internal indicators are beginning to look more balanced between growth and value, possibly a sign that the long run favoring growth is nearing an end.  However, external indicators remain overwhelming in favor of growth, reflecting the benefit of growth stocks when economic data is mixed.

Performance for the models has been good this year although little value added was gained during the third quarter.  The Market Cap model lost -7% in the third quarter, the same as the decline in the S&P 500.  The model did do well to avoid small caps all quarter, as the Russell 2000 fell by over 12%.  Year to date the Market Cap model is down less than -5% on a price only basis, better than the almost -7% decline for the S&P 500.  The Style model fell -6% during the third quarter, a bit better than the market.  Year to date, the Style model has done quite well sitting on a growth signal, with a decline of less than 3%.  Negative returns are never good but limiting losses in bearish market periods is very helpful toward meeting long-term goals.

MDY and IWF 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.