Company Notes Digest 4.24.15

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

The Macro Outlook:

There’s no question that the manufacturing side of the economy softened in Q1

“There’s no question that the manufacturing side of the economy has softened during the quarter.” ($MAN)

Honeywell said that GDP growth rates were weaker than most had expected

“GDP growth rates globally are weaker than most had expected for the first quarter.” ($HON)

Union Pacific saw volumes decline

“Total first quarter volumes were down 2%, with particular softness in coal, industrial products and intermodal…By the end of 2014, we had seen full-year volume growth of 7% and we were fully resourced to meet this demand. Over the last few months, however, volume has shifted negative. As a result, our operation is in catch-up mode and not as efficient as it should be.” ($UNP)

Pentair saw declines in all of its businesses

“this broad-based decline was across virtually every business, every geography and every market.” ($PNR)

And yet, a lot of companies shared Caterpillar’s sentiment: good performance in a tough environment

“Given the environment we are in we were pleased with our first quarter results.” ($CAT)

Companies have been aggressive about managing to headwinds

Where currencies are concerned, many companies were naturally hedged by a local cost structure

“although our revenue was significantly impacted by the fall in value of many currencies, this phenomenon does not have a significant impact on our pretax operating income. This reflects the benefit of our local cost structure which largely serves as the natural hedge against currency movements on our bottom line” ($SLB)

“while the weaker euro impacts our top line, movements in the euro have a minimal impact on our bottom line due to our euro denominated cost base.” ($ABT)

Others have been aggressive with financial hedges

“In 2015 we’ve hedged approximately 85% of our euro P&L exposure in an average rate of about $1.24. For 2016 we have again hedged approximately 85% of our euro P&L exposure at a plan rate of $1.10.” ($HON)

Energy companies have also acted aggressively to cut spending and hedge their exposure to low oil prices

“I think our borrowers are reacting very quickly; they are cutting back on CapEx aggressively; they are cutting back on operating expenses aggressively. And what I see is they are positioning their companies to be profitable in a lower priced environment. And then the last thing I think that’s little bit different this time around is I think the hedging is stronger than it was the last time as well. And hedging gives these companies runway, gives them runway to right-size their companies to make sure that they can be profitable in a lower price environment.” ($CMA)

And they are operating with the assumption that prices are going to stay low

“I think we’re encouraged by the fact that our borrowers are not operating their companies assuming oil prices are going to increase; they’re operating their companies assuming that prices are going to remain low” ($CMA)

Seagate is managing its manufacturing capacity “really really” tight in response to weakness in PC markets

“we’re going to try to manage the supply tightly this quarter and with that, we’re going to run the factories probably not the optimal way. So we’re planning some downside there…we’re just going to manage supply really tight this quarter. That manifests itself in a short term margin compression, but long term economic benefit by maintaining that supply. So it could be a little better, but we’re managing the business really, really tight this quarter.” ($STX)

These actions have protected bottom lines

“our hedging approach for foreign currency provided a big benefit…The hedge strategy is in place to protect our operating results, but not necessarily at top line, thus the margin lift.” ($HON)

“[International sourcing] results in lower costs when translated to U.S. dollars. That’s exactly what happened this quarter. Sales translated into fewer dollars, as I mentioned a little bit ago, $342 million fewer. However, the impact on costs was favorable $419 million and the net to operating profit was positive $77 million.” ($CAT)

Have aggressive actions just pushed the profit impact of the slowdown out to 2Q though?

“we see [a dropoff in EPS] beginning in the second quarter — the second quarter we would expect to be lower than the first quarter on sales. And to your point that, that almost — that doesn’t happen very often…the drop-off will be more oil” ($CAT)

On the other hand, there may not be a slowdown at all. There were plenty of manufacturing companies who saw no problems with the economy whatsoever.

Paccar said that the economy was pretty strong

“Yes, the economy is good. And as long as the economy continues at good growth pace, I think there will be the need for the movement of goods and that will create demand for freight, and the freight numbers continue to be at or near record levels. ” ($PCAR)

Boeing also said that it remains good times for the aerospace industry

“conversations with our airline customers continue to center on new purchases or accelerating delivery slots. Deferral requests are still running well below to historical average, these remain very good times for our industry.” ($BA)

DR Horton said that housing’s spring selling season is in full swing

“the spring selling season is in full swing at D.R. Horton. During the second quarter housing market conditions were healthy and relatively stable with new home demand growing moderately across all our markets.” ($DHR)

Commercial construction, especially office, is strong too

“office construction is the strongest part of the commercial recovery. That is a double-digit growth, 10%, 11% opportunity improvement in office. Education is the next area, is followed by retail, so those are really the three top areas that are the subsets in the commercial recovery, which, again, it’s coming from a very low base, but we’re starting to see some nice green shoots in that segment.” ($USG)

Even Union Pacific said that it saw underlying strength in the economy despite the lower volumes

“We think that all of those trends indicate the strengthening North American economy. We feel pretty good about some of the underlying strength of the economy.’ ($UNP)

Most banks have not even seen meaningful credit impairment in the energy space

“With respect to our energy portfolio, we have not seen any meaningful delinquencies or defaults. ” ($STI)

You would think the Texas economy would at least be slowing down, but it isn’t

“I have spent the last month and a half driving our Texas markets…You would think the market would be slowing down but we are seeing consistent performance pretty much across the Board and our April sales are a continuation of what we saw in the first quarter.” ($DHR)

Beware of capital markets though

After six and a half years, there isn’t any cash left on the sidelines

“we’re at six-and-a-half years of an up market. You’re seeing margin balances at record levels. You’re seeing lots of net buying activity. You’re seeing client cash as a percentage of assets down…we’ve never had seven years of up markets…everybody’s in right now…Everybody is in the equity markets…we’re at low points on both retail and institutional in terms cash as a percentage of clients assets…They’re at lows we haven’t seen for a long time…we’re at the end of a six-and-a-half year up market…I think you’re in the latter stages of a very strong bull market…I think most investors don’t know where to go right now, but they’re going into U.S. equities, viewed as the best risk/reward right now. One day that’ll change. Anybody that can predict that when that is, let me know.” ($AMTD)

Just because the economy is strong doesn’t mean that prices are fair

“Prices [of potential acquisitions] are just high…you haven’t heard me say that much in the past, but this time they are.” ($HON)

And the summer doldrums approach

“we are now entering the time of year where historically trading has tended to slow. So, we will see how this year shapes up.” ($AMTD)


We are seeing signs that Europe is improving

“Based on what we saw in the first quarter, I believe we are in fact seeing the early signs of improving market conditions in Europe as a whole” ($MAN)

The European real economy is getting a boost from QE

“[The Italian Prime Minister] said, we’re an export economy. This is going to get our factories working again. It’s going to increase our people’s income because we’re going to start exporting these goods that we make, not only automobiles textiles etc. and over time it’s going to be a better consumer environment. I happen to think he’s right.” ($TUP)

Devalued currencies mean that foreign competitors can be aggressive on pricing

“Some of our key competition like Komatsu probably has more of a yen cost based than we do and they are being aggressive. So it’s a tough industry.’ ($CAT)

Spain has come back very-very strongly. They “internally devalued” by readjusting salaries

“we’ve really seen Spain come back very-very strongly…Spain has seen a very nice evolution in terms of country. They bounced back from the recession. They conducted a lot of the structural labor market reforms essentially devalued the euro within their country by readjusting salaries to labor union contracts.” ($MAN)

Emerging markets are still weak though

“There continues to be softness in Latin America, particularly Brazil. China growth is concerning” ($CAT)


Eventually regulators may end up easing capital requirements that they have put in place for banks

“I would hope that over the course of the medium term, that the regulators would allow the industry to be able to shrink capital level overall. If I think about where we could end up in that type of environment, I think that we would likely end up as some kind of ratio below nine; something that starts with an eight probably seems like it would be certainly adequate for the need that we have as a company to support our client needs, and be able to withstand the rigorous CCAR stress test.” ($STI)

Liquidity is more important than capital in a crisis

“when financial institutions have issues, usually if you have capital shortage you can get through it provided you can get through the short-term liquidity is the important thing.” ($AMTD)

Important to watch: Travelers mentioned that some of its private equity investments didn’t perform so well last quarter

“In private equity, the decline over the last two quarters was pronounced…for what is worth real estate this quarter performed very well at levels equal to first quarter 2014. Hedge funds performed better; the shortfall was in private equity and 50% of it came from 15% of the portfolio. So, that’s the story.” ($TRV)

Travelers also noted that weather patterns have changed quite a bit in the last six or seven years

“we note that weather patterns do seem to be different…patterns continue to be unpredictable…our expectations for cat losses are significantly higher today than they were just six or seven years ago…it has now become all too common for us to have significant cat losses from what we traditionally thought were the lower severity frequency events like tornado, hail and winter storms…the Washington Post cited a meteorologist who calculated that Boston should not expect to see another 30 days with that much snow for another “approximately 26,315 years.” Now, I’m not sure what they meant by approximately but suffice it to say was an extremely unusual event.” ($TRV)


Chipotle will have to raise prices again as beef inflation has stayed high

“Beef prices remain at historically high levels…We currently believe that the pricing for beef will remain at these elevated levels well into 2016 and perhaps even into 2017. As a result of this increased inflation we expect to raise prices on steak…we undershot [with price increases last year] in hindsight as beef costs continue to rise.” ($CMG)

McDonalds will stop using antibiotics that are “important to human medicines.” I’m not sure if this means that other antibiotics are still ok…

“we will stop using antibiotics that are important to human medicines” ($MCD)

We are moving to a world of more personalized marketing

“We are moving, without a doubt, from a world of mass marketing to one I describe as mass personalization. And clearly, technology allows us to do that now, which allows us to build a much more meaningful relationship with our customers, to shift from a transactional relationship into a far more engaging and meaningful, purposeful relationship where we can understand their needs on individual basis rather than a generic basis.” ($MCD)

Consumers are more similar across the globe than they ever have been

“you take a urban young millennial woman of 30 years old in Beijing, she is more similar to the same woman in Boston than you would ever would’ve thought in the past. 75% of our product line is uniform all across the world, the same kind of promotions work generally all over the world.” ($TUP)


Chipotle will be making an app for the Apple watch and rolling out ApplePay to its restaurants

“Our near-term priorities with regard to mobile include the launch of an ordering app for Apple watch which will be available April 24th and the exploration of new systems for mobile payment, including the use of ApplePay in our restaurants” ($CMG)

Software is a bigger hurdle to ApplePay adoption than hardware

“with ApplePay in particular the investment on the hardware side is relatively minimal. So that’s not a significant barrier. The main challenge there is making the POS software compliant with ApplePay.” ($CMG)

Facebook will be on the watch too

“I haven’t actually spent that much time with [the Apple watch] so far so, I mean, I mostly just want to congratulate Apple on shipping something that seems like a pretty amazing piece of technology and work, and we’re proud to be supporting. And I know that we have a bunch of apps, and it’s a space that’s going to be really interesting and we’re going watch closely and build what our community wants us to.” ($FB)

Search is bifurcating between traditional Google and human interface like Siri

“there are two types of products that are emerging. The classic web search, call it deep reference web search which is classic Google search, Bing search, and there’s a new class of products that’s really arising with Cortana, Siri, Google Now. And those products are really heavily differentiated both from each other as well as from the historic legacy products” ($YHOO)

Mainframes don’t get enough respect for the critical role they play in high volume applications

“If you are UPS, one of the largest logistics companies in the world, you have to manage nearly 5 billion deliveries a year with highly seasonal changes in demand…This requires a system that can handle the growth and scale seamlessly when activity spikes, maintaining a secure system that’s always available. That’s why UPS chose to upgrade to the IBM z13 mainframe because it could meet the expanding demands of the mobile economy. I don’t think that mainframe is fully appreciated for the essential nature of the work it does.” ($IBM)

Telecom continues to be a competitive environment, but Verizon says that it will not chase every customer on price

“we are in a competitive pricing standpoint..we are making every effort to maintain our base…we are not satisfied with any losses. But then again, we will not chase every add either, based on just cheap price.” ($VZ)

50-60% of customers are now on no-subsidy phone plans

“About 60% of our postpaid smartphone subscribers already are on no-device subsidy plans.” ($T)

Verizon is looking for new ways to monetize its network

“the key to this is to develop these other ecosystems to create more monetization around customer usage…that’s really what we are concentrating on.” ($VZ)

Verizon and AT&T will have big opportunities with the connected car and internet of things

“we are just in the beginning phases of the connected car, of the Internet of Things, and of the opportunities that that’s going to provide us.” ($T)

Verizon also made a big move to break “the bundle” this quarter and move towards a la carte cable packages. They believe that their contracts allow them to do this.

“Look, this is a product that the consumer wants. It’s all about consumer choice. I mean, if you look at the TV bundles today, most people only on average watch 17 channels. So, this is a way to give consumers what they want on a choice basis. And we believe that we are allowed to offer these packages under our existing contracts. So, we will leave it at that.” ($VZ)

Materials, Industrials, Energy:

Core Labs thinks that energy markets will be balanced by the end of the year

“Core believes that the worldwide crude oil supply and demand markets are well underway for year end 2015 balance. On the crude oil supply side, U.S. production is beginning to rollover as we speak…at current activity levels in the field, U.S. production could fall significantly in 2016.’ ($CLB)

They are calling for a V shaped recovery

“Core sees a V shaped recovery led by higher commodity prices and then shortly there followed by increased worldwide drilling activities in the start in early 2016.” ($CLB)

Halliburton said that the speed of the oil cycle has been historically high

“the speed of this downturn has been historically high…customer service company and supplier behavior is pretty much as you would expect. What is unique is the speed at which this is happening.” ($HAL)

Historically it takes about three quarters to move from peak to trough

“We’re not going to call a bottom but historically it’s taken rig count three quarters to move from peak to trough.” ($HAL)

While supply has been cut, demand fundamentals haven’t really changed

“our view on the macro hasn’t really changed, compared to what we said both on the October and January call. First of all, the 2015 oil demand remains strong.” ($SLB)

However, even if oil prices recover, Schlumberger said that activity will probably settle back at a lower peak

“the current financial challenges will not disappear, even if oil prices were to recover to the levels seen in recent years…We further believe that a recovery in U.S. land drilling activity will be pushed out in time, as the inventory of uncompleted wells builds and as the refracturing market expands. We also anticipate that our recovery in North America land activity will fall well short of reaching previous levels, hence extending the period of weak pricing.” ($SLB)

Oil service companies will have to live with price concessions for a while

“pricing concessions that are currently being given, we unfortunately are going to have to live with for a while, because there’s going to be a pretty significant order capacity for all sorts of services, given the lower activity level that we’re going to recover to.” ($SLB)

Halliburton thinks that these prices are unsustainably low though

“at this point in time…I simply don’t believe that this is sustainable in terms of pricing.” ($HAL)

Core Labs is ready for increased activity levels in 2016

“Core’s operations have positioned the company for increased activity levels in early 2016, but we know significant challenges stills await in 2015.” ($CLB)

Obvious but important: Capital equipment purchases are correlated with customer profitability

“historically airplane orders are highly correlated to airline profitability.” ($BA)

“our customers that they are all making very good of profits in their business reinvesting in new trucks and expanding their fleet I think both strategically and tactically…I think our customers are enjoying good rates, good profitability and thinking about their business expansion plans in a pretty aggressive way.” ($PCAR)

When the mining industry returns to profitability there will probably be huge demand for capital equipment because they are running their equipment without replacing it

“I think customers are pushing out rebuild times. In our view that can’t keep happening but it has been happening…we understand…what’s at least for equipment a reasonable replacement level. It’s far below that. But when that’s going to turn around it’s hard to say.” ($CAT)

Miscellaneous Nuggets of Wisdom:

A good product is the most powerful marketing strategy

“The marketing we do at Chipotle is unlike that of any other fast food brand. The reason for this is simple, very early on we decided to spend more on our ingredients and less on our marketing. It’s always been our belief that better quality food, prepared by hand and served by excellent teams will be the most powerful marketing of all.” ($CMG)

Growth comes in waves

“we seem to have these waves and if you go back even as we are private company, these waves where people figure out that’s Chipotle exists. They like it, they come back more often. And so we have this kind of surge and then we have a leveling off and then a surge and leveling off.” ($CMG)

It’s not hard to find good assets. It’s hard to find good assets for sale at the right price

“it’s not hard to find really good assets. That part is easy and it’s not hard to find assets with good management, good fit, good products, good geographic location…hard part is getting beyond the recognition of it and getting to something where either somebody is interested in a transaction or it’s the value that [makes sense] and that’s sometimes a challenge.” ($ABT)

If you’re going to pay $19 B for a company, you had better have pretty high expectations for it

“I mean, on the messaging question, yeah, we’re pretty happy with how it’s all going. I think if we’re going to pay $19 billion for a company, we should have pretty high expectations for how it’s going to do.” ($FB)

Sometimes you have to give up short term upside for long term success. The key to insurance (and all risk management businesses) is avoiding big mistakes

“We have achieved these results by…often giving up short term upside to avoid big downside. Our results have been lumpy, often disappointing, for extended periods of time. The key to success in the insurance business is to avoid big mistakes” ($WTM)

Sometimes you have to leave your capital unallocated for years at a time in order to take advantage of high return opportunities

“The short duration positioning of the fixed income portfolio left money on the table but protected our capital position from what we continue to perceive as an asymmetrical risk to rate movements…Intellectually, we really don’t care much about leaving our capital lying fallow for years at a time. Better to leave it fallow and to wait for the occasional high-return opportunity. Frankly, sometimes shareholders would be better off if we all just went to play golf.” ($WTM)

Full transcripts can be found at

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