Company Notes Digest 10.23.14

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

Was the market decline just a head fake? US Bank’s CEO thinks yes.

“I think the stock market is a head fake…I’m not changing my view that in ’15, things turn around quickly and start to take off…when rates start to move…will create this, I think, tsunami effect of people acting quickly…I’m not responding to the vagaries of 2 weeks of either 10-year interest rates or stock market variances. I’m just going to stick with it.’ ($USB)

He wasn’t the only optimist last week:

Jeff Immelt says that the US is the healthiest it’s been since the financial crisis

“The US is probably the best we’ve seen it since the financial crisis, right, when you look at rail loadings and things like that, you’ve got a decent and healthy US market.” ($GE)

Robert Half says labor markets are stronger than they’ve been in several years

“Labor markets are stronger now than they have been in several years, particularly in the United States and most notably in the professional segments in which we specialized” ($RHI)

M&T Bank is hearing from its clients that economic conditions are still improving

“there is a slowly improving underlying economic condition and we are hearing that almost across each of the footprint.” ($MTB)

Still, earnings have been so-so and not all commentary has been so optimistic

There were a lot of mea culpas from blue chips this week

“the reality is that we haven’t been changing at the same rate as our customers’ eating out expectations or, more specifically, their expectations of us at McDonald’s. So we’re changing.” ($MCD)

“we recognize that we must do more. Above all, the slope and pace of our actions must change to improve our ability to capture non-alcoholic beverage industry growth.” ($KO)

“part of the reason I am on the call, obviously we were disappointed in this quarter, but when we talk about what we’re doing for the long term and these actions, these actions go on the heels of what has been a series of what I think are very bold actions from the entire year with a very clear strategy” ($IBM)

Coke partially blamed the economic environment

“In many of our key emerging markets we see deteriorating economic environments coupled with continued softness in consumer spending in the U.S. and particularly in Japan and Europe…The consumer is challenged everywhere around the world…There just is a lot of apprehension.” ($KO)

IBM said business decelerated in September

“As I mentioned earlier, we saw a deceleration in September. This is true in nearly all regions and was most pronounced in our growth markets that have a higher transactional content.” ($IBM)

Caterpillar’s stock was up after earnings, but they didn’t exactly have positive things to say about construction markets

“In terms of construction, it’s a mix bag around the world…in the U.S..it’s been actually pretty positive, it’s been quite a bright spot although…that doesn’t mean it’s great…Other parts of the world it’s a little bit of a different story. China has been week…Europe has been flat to slightly up for us which I think is a surprise to a lot of people but again you kind of have to think back to where it’s come from and how low it got” ($CAT)

Simon property group says back to school sales were spotty

“The [back to school season] I think it was generally spotty. I mean, I think, it was certainly wasn’t robust, and I think it still represented the cautious consumer’ ($SPG)

Currency may have a material impact on 2015

Abbott’s CEO says he is tracking the issue closely

“one issue that I continue to track closely…is just the overall currency volatility…it appears to me we’re going to be under some exchange pressure at companies around the world” ($ABT)

The dollar strength is becoming a “significant” headwind for Apple

“It is becoming a significant headwind in [FY] Q1…it’s a fact of life if the U.S. dollar strengthens, that creates a headwind for us both in revenue and margins for our business outside the United States” ($AAPL)

IBM expects currency to have a larger impact going forward

“With a sharp movement in currency rates in September, there was some effect in the quarter and we expect it to have a larger impact going forward and for the business overall” ($IBM)

Hedging programs are temporary

“of course, these hedges roll off and get replaced by new hedges at new spot levels, and so the protection that you get from hedging program is temporary.” ($AAPL)

The best hedge is to produce where you sell

“Over the long term, our best hedge against currency fluctuations is to have our cost basis in the markets where we serve.” ($ABT)

Currency isn’t an issue for Chipotle, but CMG does serve as a reminder that in addition to currency headwinds, many companies will go up against tougher comps in 2015

“I would expect for that you will see our comps decline by that tougher comparison…the tougher comparison is going to have an impact for sure.” ($CMG)

Financials

Capital One thinks it’s hit an unsustainable low point in charge-offs

“We think the 2.83% charge-off rate is in unsustainable low point and then losses are headed up from here.” ($COF)

This isn’t calling a turn in credit though, it’s actually more a function of growth

“this is not calling a turn…What we have going on here is much more – is partly just mechanics…then most importantly, it’s the growth story…Longer term, loan growth will start to impact the charge-off rate in 2015.” ($COF)

Most banks continue to agree that credit quality is strong

“Our credit quality performance continues to be strong.” ($STI)

“With continued strong credit quality we expect net charge-off and provision to remain low” ($CMA)

However, all of that is contingent on economic conditions

“as you all are well aware, the ultimate level of reserves and provision expense will be determined by future economic conditions” ($STI)

Capital markets can wag the economic dog

“We’re closely watching the recent turmoil in capital markets and abroad…we note that the rate of reserve release…could slow down, depending on what we see in the external environment.” ($ZION)

Banks have way more liquidity than they need

“the excess liquidity that exists nationally there is no really use for that.’ ($MTB)

It makes you wonder what the world looks like without all that liquidity around. Can pricing really stay here?

“if you think about the idea that there is huge amounts of liquidity in the system, indirectly that means that asset prices are very, very high. And if that liquidity were to not be around, you start to wonder about looking at deals with the ten year structure and really whether they can sustain those higher rates and so forth.” ($MTB)

US Bank isn’t bashful about being the price competition that others are complaining about

“I’d expect you’ll hear on other calls that the pricing competitiveness is still high and pretty peaked. You haven’t heard that here because we’re either a part of the problem or we choose to use our funding advantage to be more competitive on price” ($USB)

US Bank says it’s skeptical of new FHFA rules to ease mortgage conditions

“unless we’re convinced that the rules are going to be permanent…we’re simply going to stay on the sidelines in the concerns of both compliance risks and other uncertainties’ ($USB)

Refi applications have spiked as interest rates have fallen

“The last two days have been really good. Our locked volume and app volume was up 80% in two days, so very significant. I don’t know if that’s going to continue.” ($STI)

Better data and analytics may be taking the cyclicality out of insurance

“I personally believe that the property and casualty business will have a meaningfully lower level of cyclicality. Never said zero, but always said a less, lower amplitude of that cyclicality. There are a host of reasons why I believe that. Analytics and data are just one, but a very important one.” ($TRV)

Consumer

Chipotle and McDonalds provided a fascinating juxtaposition in values this week

Chipotle argues that fast food companies have alienated their customers by sacrificing quality for cost

“The traditional fast food sector has traded food quality and taste for low cost and ease of preparation. It has aggressively marketed low prices to entice customers to visit more often which has resulted in the need to reduce cost by cheapening ingredients and by compromising the overall dining experience.” ($CMG)

McDonald’s thinks they just haven’t given customers enough choices

“Customers want to personalize their meals with locally relevant ingredients. They also want to enjoy eating in a contemporary inviting atmosphere. And they want choices; choices in how they order, choices in what they order and how they’re served” ($MCD)

Chipotle says that rather than focusing on what the consumer wants, fast food companies have focused on gimmicks

“The gimmicks that have driven the fast food sectors for years, dollar menus, limited time offers, and merchandizing partnership are not producing results like they used to as consumers simply want better tasty nutritious food at a more compelling experience not gimmicks.’ ($CMG)

Guilty as charged: McDonald’s is going to fight slow traffic by modernizing decors and improving payments technologies

“Our efforts to create this experience in our restaurants build upon the investments that we’ve already made including the Made for You operating platform, modernized decors and leading edge point of sale and mobile technologies, all brought together in a visible, tangible way to enhance convenience for our customers.” ($MCD)

Chipotle attacks QSRs for systematizing everything

“the traditional fast food formula…depends on…simplifying the tasks in the restaurant to the point where they are essentially fool proof. Instead we are creating rewarding environments with skilled teams who do work that they are proud of.” ($CMG)

Case in point: McDonalds tests every change in their innovation lab

“you know anything that we would implement in an restaurant…has been through the innovation lab, the innovation center and the testing protocols” ($MCD)

Chipotle says fast food restaurants are changing their marketing, not their culture

“these other companies are looking to revamp their branding efforts to change their customer’s perception but not the food. Fundamentally these are short sighted reactions that seem out of touch with what customers want.” ($CMG)

McDonalds says that customers just misperceive the quality of their ingredients

“Conveying the facts and adjusting misperceptions about the freshness, quality and integrity of our ingredients appeal to our customers and supports the work we’re doing to offer greater menu choice.” ($MCD)

McDonalds actually addressed Chipotle’s comments directly on their conference call. Their response: to each his own

“I know Steve I use to visit his first restaurant when we entered into an initial partnership back then when we were sharing the McDonald’s supply chain system which helped him as he move forward Chipotle. But I would not say Steve is wrong or right, I think each individual organization has to look at that and look at it through the eyes of the customers and what customers are asking them to deliver.” ($MCD)

McDonalds says that they’ll focus on food quality only if it becomes “more trendy”

“I mean if these things become even more large, even more trendy then that something clearly we’ll look even more aggressively at.” ($MCD)

Technology

Mac sales were particularly strong in emerging markets (This is noteworthy because PC sales had been especially weak in EM)

“We achieved double-digit Mac growth across most markets around the world, with particularly impressive performance in emerging markets where Mac sales were up 46%.” ($AAPL)

It’s not so easy to roll out Apple pay

“Right now, we don’t have imminent plants to roll out Apple Pay support. It’s something that we are considering for 2015. There are considerable technological constraints implementing it, just based on the way payments are processed with our system.” ($CMG)

The impact of the internet of things is becoming non-trivial. Of 2m new subs on AT&T’s network last quarter 500k were cars

“Overall we added more than 2 million total subscribers led by postpaid and connected devices…1.3 million connected devices were added in the quarter including more than half a million cars” ($T)

As consumers use more mobile data price per MB may go down, but overall spend will likely go up

“if you back in time and you go back to the voice world. And you go from the beginning of time to where that voice world matured. What happened was the price per minute decreased and usage increased, and the overall industry increased its revenue because of that increase in usage. And I, kind of, look at the data world in the same perspective. You are going to see the price per megabit decreased but the usage is going to outpace that” ($VZ)

Add peer to peer lenders to the list of startups that get to operate outside the law and worry about it later

[on whether or not they would get into the P2P lending space] “Quite frankly, we have got a number of competitors, that their rules of engagement are different than ours. And so you know today in our environment some of that type of lending, I just think we have to stay away from.” ($RF)

Healthcare

Companies are trying to figure out their ACA costs as the employer portion of the law goes into effect on January 1

“it would be an incremental cost but we think it will not even reach 1%…We think it is likely to be less than that. We just won’t know until our people begin to enroll and that will happen here between now and the end of the year.” ($CMG)

Robert Half doesn’t expect ACA to be a large headwind

“we do have ACA to deal with next year. We think that’s a very small single digit percentage headwind that we hope we can deal with for bill rates” ($RHI)

and isn’t seeing companies use temps to avoid breaching the ACA thresholds

“We’re not seeing any hard demand from clients where they are explicitly trying to avoid the thresholds to comply with ACA.” ($RHI)

They are seeing a lot of companies tweak benefits though

“That said, we are seeing…they are tweaking, changing their internal benefit plans in part because of ACA. And as an example, many companies are going to these private exchanges to offer health coverage to their own employees” ($RHI)

Materials, Industrials, Energy

Schlumberger says that the world growth story is still in tact and the oil demand situation is largely unchanged

“we continue to believe that the slow, but steady recovery and the world economy is still intact and that the overall oil demand situation is largely unchanged.” ($SLB)

The supply picture hasn’t changed much either

“we still see the supply situation as relatively well balanced given the continued challenges in the non-NAM non-OPEC production base, lack of growth in OPEC’s sustainable production capacity…and…continued geopolitical risks in several key producers.’ ($SLB)

Halliburton says the current price isn’t sustainable

“on a longer term, we believe industry fundamentals suggest that these lower prices are not sustainable.” ($HAL)

SLB expects the price to settle wherever OPEC wants it to

“We therefore expect Brent to recover and stabilize when and at the level that is deemed appropriate by the main oil producers.” ($SLB)

E&P free cash flow turns negative with WTI at $90. Borrowing capacity is the key to continued oil drilling activity

“[activity] is clearly going to be a function of the level of free cash flow for the E&Ps, which was already negative in general at the WTI of 90. And the key going forward is going to be continued borrowing capacity.” ($SLB)

Banks are watching energy loans very closely

“This quarter actually was quite good on the energy side, but it’s one that we’re going to watch and be careful about” ($STI)

But there may not be much cause for concern at this point

“The short answer is no, we are not concerned at this time. We’ve been in this business for 30 years so we have seen lots of ups and downs; in fact the price was in the low 80s in 2012, 2010 and 2009 as well…At current prices drilling activity probably will plateau, but production is going to be fine. So, overall I’m very comfortable at this time.” ($CMA)

There wont be credit issues unless oil stays in the 60s for a while

“you’ll probably see some credit issues begin to arise if we go in the 60s and stay there for a prolong period of time, because as I said a lot of our customers now are well hedged.” ($CMA)

Some of the strength in rail shipments may be pulled-forward demand to avoid strikes at west coast ports

“Similar to the second quarter, we believe some of the portion of this strength can be attributed to cargo owners advancing peak-season shipments in anticipation of a possible impasse during the renegotiations of labor contracts at West Coast ports.” ($UNP)

This year is likely to be a record harvest for corn and soybeans

“This year, all indications is that it’s going to be another record corn harvest. I think last year was 13.9 billion bushels. This year might be — I think the estimates are 14.4 billion bushels. And likewise, soybeans I think are going to be up close to 4 billion bushels, which would be a record.” ($UNP)

Miscellaneous Nuggets of Wisdom

One quarter isn’t enough to judge a company’s performance

“One quarter really isn’t – any one quarter no matter whether it’s good or bad, really isn’t telling about sort of overall trends.” ($STI)

Wild cyclicality is bad for everybody

“Wild cyclicality up or down is actually bad for everybody. And better insight, better data, better analytics is actually better for everybody. You get better analysis, you get better, more thoughtful pricing related to risk.’ ($TRV)

If you want to maintain a relationship you can’t always fight for every last penny in a negotiation

“we believe in repeat business with our retailers. So…we’re always trying to calibrate the win-win, all right? How do you keep the retailer who is our…customer in addition to the consumer happy? How do we reach our financial goals? But we are not getting the last dollar because we do multiple deals, multiple business with them, year-after-year, day-after-day..we’re not trying to get to the point of no return. We’re trying to find that balance. And I’ll be the first to tell you, sometimes we don’t do it, sometimes we make mistakes, but we’re always trying to find that balance for future positive relations with our clients going forward. Just like any other business.” ($SPG)

Full transcripts can be found at www.seekingalpha.com


Subscribe to our RSS FeedThe Latest


  • Length of Bear Market Rallies
    , October 22nd, 2014 at 10:24 am

    Bear Market Rallies (times that the market rises during a bear market) are some of the sharpest types of advances that markets experience.  They are buying […]


  • Company Notes Digest 10.16.14
    , October 16th, 2014 at 6:13 pm

    A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here. The Macro Outlook […]


  • Average Duration of Economic Recession
    , October 15th, 2014 at 10:36 am

    As the market falls, it’s looking more and more like we have to start pondering the idea that we may be entering a new recession. […]


  • Things to Watch For This Earnings Season
    , October 13th, 2014 at 11:32 am

    The heart of earnings season will start to get underway this week.  This will be an interesting quarter as it comes against the background of […]


  • October 2014 Investor Letter
    , October 10th, 2014 at 2:11 pm

    Below is a letter that is written monthly for the benefit of Avondale Asset Management’s clients. It is reproduced here for informational purposes for the […]


  • Company Notes Digest 10.9.14
    , October 10th, 2014 at 6:14 am

    A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here. The Macro Outlook […]


  • Company Notes Digest 10.2.14
    , October 3rd, 2014 at 1:21 am

    A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here. The Macro Outlook […]


  • Company Notes Digest 9.26.14
    , September 26th, 2014 at 3:09 am

    A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here. The Macro Outlook […]


  • Company Notes Digest 9.19.14
    , September 19th, 2014 at 11:05 am

    A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here. The Macro Outlook […]