Digesting A Cautious Outlook From Home Depot & Walmart With 3 Stock Ideas

Blue Line Capital president Bill Baruch and analyst Jannis Meindl lay out the landscape across macro markets post-CPI and strong retail sales data last week. With economic activity remaining sticky despite higher rates, markets are growing worried about a more aggressive Fed. We also talk about 3 stocks: AT&T as a value play in telecommunications, Lowe’s profiting from housing tailwinds while challenged by wage trends, and AMD as a chip turnaround story.

• AT&T With 5G Spending Expected To Settle In

As spending on 5G moderates, AT&T’s T free cash flow generation is set to increase while the company continues to reduce debt. At an 8x forward-P/E and persistently low churn rates, the company is set to benefit from a value-oriented macro environment. Between 2017 and 2021 alone, US telecommunications providers spent $115bn on spectrum auctions with 19.2% annual wireless licensing spend growth from AT&T. $115bn compare to $43.3bn during the prior five year period. AT&T added 4.8% new postpaid and 2.9% prepaid customers from 2020-2022 each year; comparatively, T-Mobile’s growth rate for postpaid customers comes in at 6.5% with prepaid at 1.6% over the same period. After divesting its Warner asset in a merger with Discover, AT&T should be more focused on its core competency while deploying 5G spectrum across the country.

• Can Lowe's Compete With Home Depot?

Lowe’s LOW is one of the two main home improvement stores, generating close to $100bn in annual sales. Compared to it’s “big brother”, Home Depot, the company has not only lagged on sales growth but also on the net income side. Generating 5.8% revenue CAGR (vs. 7.2% of Home Depot) and 10.5% net income CAGR (vs. 14.6% of Home Depot) since 2010, the company's margin of 7% lags Home Depot’s at 11%. Judging the quality of the business, the market awards Home Depot with a 19x multiple compared to Lowe’s at 15x. While both companies profit from the same trends, it is said that only 25% of Lowe’s customers are professionals compared to Home Depot at 50%; as a result, Lowe’s revenue is less specialized to high value-add goods with pricing power. Luckily, though, Lowe’s new CEO learned the ropes for 12 years at Home Depot as home vacancy rates hit new record lows in the U.S. With the average age of America’s home having increased to 42 years, spending will become ever less discretionary (currently 1/3 of spend is discretionary.)  

• The AMD Turnaround Story

AMD AMD has gradually eaten away Intel’s market share in CPUs as the company disposed its foundry asset in 2009 while grappling with 5 years of negative net income from 2012 – 2016. After revenues troughed in 2015, the company has compounded revenues by 29% annually while bringing debt levels down before acquiring Xilinx in 2022, a semiconductor design operator. While the company’s revenue was up 16% during Q4, operating income went negative by 149 million during the quarter. The company saw strong performance in datacenter sales (up 42%) while client computing and gaming were weak. After turning the brand around from 2012 onward, the question is whether Lisa Su can keep the growth going.

Blue Line Capital maintains a long position in AT&T. Blue Line Capital does not hold Lowe's or AMD.