Company Notes Digest 3.27.15

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:

By most metrics, the economy has continued to strengthen

“By most metrics, the national economy is continuing to strengthen, whether you consider job growth, the unemployment rate, GDP growth or consumer confidence” ($KBH)

Housing’s spring selling season has gotten off to an encouraging start

“The early signs of spring selling season have been very encouraging” ($KBH)

More first time buyers are coming out

“We are certainly seeing, with the traffic increase, a lot of people that are out for the first time, looking around. I don’t know that we can share that we have seen a big swell in sales to the first time home buyers yet but it’s an encouraging trend.’ ($KBH)

There’s incredible pent up demand

“it’s an incredible pent up demand that seems to be starting to get unlocked.’ ($KBH)

Darden is seeing consumers act a little less tight

“And the one thing that we’re seeing from the consumer today is we are seeing the consumer’s willingness to buy less on deal and actually for the first time in a very long time, we’re seeing alcoholic beverage sales growth, we are seeing add-on sales growth, we are seeing more dessert sales…we are seeing a little bit healthier of a consumer.” ($DRI)

There’s not even a slowdown in Houston

“There has been a lot of new coverage on the impact of declining oil prices on jobs and housing in Texas. At this time, we are not seeing any evidence of a slowdown in demand. While the central region was up a solid 15% in net orders, Houston’s results actually exceeded the region’s average.” ($KBH)

Steelcase doesn’t see a slowdown among its office furniture buyers either

“We have a normal level of uncertainty in the U.S. economy driven by the strong dollar and other factors that affect our customers. But we are not seeing signs of a broader slowdown in the Americas” ($SCS)

Large projects, which are more geared to new construction, showed the greatest strength

“Regarding project business, the growth in orders was driven by large projects from some of our largest customers, which is different than the trend we saw over the last two quarters when many small to midsize projects drove the growth.” ($SCS)

We’re seeing mixed signals on inflation:

The cost of building a new home went up faster than price

“you have a combination of — in many of our markets our cost of build went up faster frankly, than we could move price. So we have some margin erosion on the cost of build.” ($KBH)

Darden saw food inflation y/y but the inflation moderated versus last quarter

“Food and beverage costs as a percentage of sales this quarter were higher than last year, driven by continued elevated beef inflation. Dairy costs are also higher on a year-over-year basis, but have moderated significantly from the [fiscal] second quarter.” ($DRI)

HD Supply is dealing with outright deflation

“we are getting impacted by deflation, the same as everyone else, particularly where we have the commodities that you mentioned – you know, steel rebar, that sort of thing is going down.” ($HDS)

International:

Steelcase thinks that Western Europe has bottomed

“we continue to believe we have seen the bottom of the recession in Western Europe.” ($SCS)

Not surprisingly, credit quality declined in Greece, but there may be some early signs that deterioration is slowing

“Unsurprisingly the asset quality [delinquency] rate has picked up in the first quarter of 2015…that clearly reflects the uncertainty and perhaps more hazard in Q1. Its only saving grace is the latest weekly data shows perhaps a slowdown in that change in direction.” ($NBG)

Tiffany saw soft sales in Macau and Hong Kong

“Tiffany has seen a mark softening in sales results in Hong Kong and we’re also experiencing weakness in Macau. We believe that some tourists may be diverting their travels to other markets or perhaps increasing their spending locally.” ($TIF)

Financials:

Many companies continue to return more capital than they generate in free cash flow

“free cash flow now to be in the range of 3.4 billion to 3.7 billion. Finally, we continue to expect to return at least 3.8 billion through dividends and share repurchases” ($ACN)

That means they’re probably borrowing to fund repurchases…It’s a little curious when a company has to slow repurchases in order to manage debt metrics

“As we’ve done in the past, we expect to slow the pace of our share repurchase activity in order to return to our target debt to adjusted EBITDA level of 1.5 to 1.8. Even at a slower pace, we still expect to lower our shares outstanding by 1% in 2015.” ($MKC)

Mortgage underwriting remains tight

“I certainly think the mortgage situation remains tight. And it is holding back the recovery. You know we have talked about things like the mortgage insurance premium came down and that’s a good thing. I do feel that the big banks still have overlays and are still conservative in their underwriting because of the rules and the impact of Dodd-Frank are still getting clarified. So you have a recovery that’s occurring and demand is growing. It’s still a top shelf borrower, I will say, in that FICO scores that five years ago you could get a loan on you still can’t get today.’ ($KBH)

Consumer:

As Lululemon talked about product “ambassadors,” it struck me that the power of celebrity has never been greater

“This ambassador-driven campaign launched alongside a news stream capsule illustrates how our brand is most powerful when our stories are inspired and generated by our local communities and our local heroes. And as I mentioned, our brand operating model comprised of product, guest experience and brand and community will be leveraged in an omnichannel manner across diverse geographies to achieve our growth targets.” ($LULU)

Technology:

The machines are coming to take our jobs

“looking at all the innovations we are bringing especially around automation, especially around robotics and especially around cognitive computing. And if you bring these three capabilities all together we have indeed a unique opportunity…to bring a level of productivity and efficiency in our business process operations where we start seeing this bifurcation between headcount growth and revenue growth and we might expect some acceleration in ’16 and beyond. So it’s still early days regarding the leading edge characteristics of these technologies. But I’m feeling extremely positive…that we have the tools and techniques to move to the next level of productivity.’ ($ACN)

Mastercard says that the days of the plastic card may be numbered

“We see consumers moving to device based commerce. We are getting out of the physical world where plastic card goes to a terminal and that is just an awesome opportunity for MasterCard” ($MA)

Apple pay was the catalyst

“I think Apple Pay really served to capture the imagination of consumers and served as a catalyst in the market.” ($MA)

Visa says that consumers are seeking out places to use Apple Pay

“consumers are delighted with the experience…they like the form factor, they like the experience. And so people are seeking out places to use Apple Pay.” ($V)

More merchants are getting on board with NFC

“So we’re starting to see merchants who have terminals that are NFC ready, turn them on, because they see that experience, they see the consumer demand, they see how it speeds up the line at the point of sale’ ($V)

The “acceptance gap” of NFC is narrowing. Once 30-40% of merchants adopt NFC that will be a tipping point

“we could see a significant ramp up in the acceptance gap. And once that happens, you can see it three out of every ten places you want to or four out of every ten places you want to, that tends to be the tipping point where you see these systems really take off.” ($V)

Google is in the payments business because they need the data to justify the ROI of search ads to advertisers

“it’s the reason why Google is into payments, they hate payments…they like the data…the only way for Google to connect what happens when you do that search…is if you use Google Pay, so they can connect what happens with that search and what happens at the point-of-sale.” ($V)

Materials, Industrials, Energy:

Dry Bulk shipping companies may be getting more proactive about scrapping capacity

“Ship owners have been very proactive when responding to negative demand developments. This year we are experiencing an encouraging strong response that has come in the form of vessel scrapping, converting, canceling and curtailing of the order. During the first two and a half months of 2015, we have identified almost 10 million deadweight that has already been scrapped and/or committed for demolition.” ($SBLK)

Orders may be falling too

“I think there is a realization that to be able to get there, we need to act and looking at 600,000 deadweight ordering for the first three months of this year is amazing, I have not seen this since 1990 happen” ($SBLK)

Miscellaneous Nuggets of Wisdom:

Control the controllables

” our markets and environment are not controllable, therefore our approach is to analyze the facts to understand risks and opportunities, respond accordingly, and stay focused on executing what we can control and strive to get better.” ($HDS)

A Munger-ism from the Daily Journal annual meeting:

“Other people are trying to act smarter. I’m just trying to be non-idiotic.” ($DJCO)

Full transcripts can be found at www.seekingalpha.com


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