Predictions for 2014

Of all the holidays that we celebrate this time of year, New Years has quickly become my favorite. Particularly for a professional investment manager, it’s the one time of year that we get to pause and catch our breath.  New Years is a great time of year to look back at the year that was and look forward to the year ahead.  Earlier this week I took a look at some of my calls from past years, and below is a list of some predictions for the year ahead.

A quick caveat on forecasting in general:  Obviously no one knows the future, but there is still value to forecasting. Just like in life, you can’t avoid the fact that things are going to happen that you didn’t expect, but you can and should have a plan, and above all it’s crucial that you are able to adapt when you’re thrown a curve-ball. A good forecast starts with the fundamental acceptance that reality will most definitely be different than forecast. Because of this, I usually prefer to think about the future in terms of likelihoods, but for the fun of the post, I’m making some declarative statements here.  In general, I tried to focus on things that I think have a better likelihood of happening than markets are currently reflecting.

Sure things:

On average 144 million Americans (give or take a million) will go to work each work day
Most will gain knowledge that will make them better at their job in December than they were in January
They’ll get paid wages for their work
They’ll spend those wages on some combination of shelter, food, entertainment and savings
Babies will be born, the population will grow
The weather will be variable
People will be really optimistic at some points and really nervous at other points

Stepping out on a limb:

Macro:

We’ll start to see signs of inflation for the first time in five years
The yield curve will flatten
The Fed will be viewed as acting too timidly
The economic cycle will crest, along with share prices
Democrats will win control of congress

Business/Stock Trends:

Financials:

The banking system will finally put the ghosts of 2008 to rest
There will be consolidation among small and mid cap banks

Consumer:

Consumers will continue to focus on quality of life
That means eating healthier, building relationships and taking time for leisure
Unfortunately for capitalists it doesn’t mean spending more
Millenials will get engaged, Baby Boomers will retire, and Gen X will whine that nobody cares about them (jk, love you guys)

Technology:

Apple will release an iPhone with a bigger screen
Google will be notified by the Justice Department that it is being investigated for antitrust
More consumers will cut their cable subscriptions
More advertising dollars will be spent online
The PC market will stabilize

Healthcare:

Health insurance companies will pretend to have a tough year adjusting to Obamacare
But the transition will be smooth for healthcare providers
There will start to be a realization that genetic testing is crossing the chasm toward mass market relevance

Energy/Materials:

The shale oil boom will begin to slow output growth leading to higher oil prices
Farmers will plant less corn and unfavorable growing conditions will lead to higher food prices
Mining will stabilize but be far from prosperous

Pop culture:

The Lakers will play better without Kobe Bryant than with him
Tiger Woods will win a major championship
Google searches for “Rules of Curling Sport” will spike in February
There will be a billion dollar Mega Millions jackpot
Miley Cyrus will start to crack
An album with a fresh new sound to define the decade will be released
Edward Snowden will be extradited to the United States
Kate Middleton will become pregnant with a second royal baby

Avondale’s Best Calls Since 2011

Over the last two and a half years I’ve written more than 1300 posts related to investing, most of which focus on objective data.  I generally don’t give an explicit opinion on markets except for in my investor letters which I write on a monthly basis.

I write these letters for Avondale’s investment management clients, for whom I manage about $7 million.  The portfolios that I manage for these clients reflect the opinions voiced in these letters.

For a number of reasons I don’t post the returns of these portfolios in public, but with the year winding down, I wanted to share a track record of-sorts here by looking back at the calls that I’ve made in investor letters.

I am proud of the job I’ve done and want to use this opportunity to highlight how my thoughts on the market have evolved over time.  Past performance is not a guarantee of future results, but I think you’ll see that I’ve done an exceptional job of tracking the market’s ups and downs over the last two and a half years. Below are quotes from each of the 28 letters that I’ve written since September of 2011.  The chart shows the S&P 500 since June of that year.  The red squares are dates that I distributed an investor letter and the numbers correspond to the quotes below.

In my opinion these were my best calls between 2012-2013:

2012

Expected a double digit return in 2012.  This was as most others were expecting a recession. (Note #5)

Warned of a double digit decline if the market continued to rise in March 2012 (Note #7)

Reiterated a year end price target of 1450 at heights of the market in April 2012 (Note #8) and lows of the market in May 2012 (Note #10).  The market finished at 1425.

My best call of all: said that the market could rise by 30-50% in 18 months in June 2012 (Note #10).  It has risen by 43% since.

Implied that the sharp drawdown in 4Q12 would bottom half way through November 2012 (Note #15).

Noted that the fiscal cliff was a red herring at the beginning of December 2012 (Note #16), one month before CNBC stopped talking about it.

2013

Came into 2013 much more bullish than most, expecting a >20% rise during the year (Note #17 and #18).

Maintained bullishness through May 2013 (Note #18, 19, 20, 21) and only turned long term bearish once the market had sustained the bulk of its 2013 gains. (Note #22)

Despite long term bearishness, I still expected that market would show strength and wrote that the S&P 500 had the potential to hit 1850 (Notes #22, 25, 27, 28).  I also never got overly worried about the government shutdown (Note #26).

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Avondale Investor Commentary

On a personal note, I would like readers to know that this type of post isn’t an easy one for me to write.  It’s not really in my nature to be self-congratulatory and I much prefer to let my work stand for itself.  Still, I recognize that if you don’t promote your work, no one else will, and so it’s important to highlight the things I’ve done right over the last couple of years just to make sure people are noticing.

The other reason that I put this post together is that as I have become more bearish in recent months, I have felt more and more isolated.  This is probably a good thing for investment returns, but no less socially difficult.  Above all I don’t want to be labeled as a “perma-bear,” or a “doomsayer,” which are individuals that are widely loathed today.  It’s not that I’m permanently bearish, I just have to call things as I see them.

All Notes

2011

1) September 2011: “I remain optimistic that the economy will continue to show slow but steady progress” (This was written after markets had fallen by a double digit percentage as most people feared recession)

2) October 2011: “the odds are in our favor for a positive bounce in October.” (The market ended up bottoming in October of 2011 and had one of its best Octobers ever)

3) November 2011: “In hindsight, I clearly wish I would have reinvested more at the beginning of October…Going forward I continue to look for opportunities to redeploy capital.”

4) December 2011: “we do know that this volatile period will eventually pass.”

2012

5) January 2012: “Given the current valuation, I would not be at all surprised to see a double digit return from the S&P this year.” (After a flat 2011, the S&P 500 was up 13.4% in 2012)

6) February 2012: “While the historical patterns point toward a great year for stocks, my advice would be to temper one’s expectations.  A 20%+ return would be a welcome-but-unlikely scenario for 2012.  Even though I remain optimistic for the year ahead, it’s hard to envision returns exceeding high single digit or low double-digit levels.” (The S&P 500 didn’t hit a 20% return in 2012)

7) March 2012: “a March rise would bring the market to even more dizzying heights.  This would likely put markets in a position for a double-digit drop in the months that follow.” (The market did rise in March and did have a double digit percentage drop in April and May)

8) April 2012: “my expectation to start the year was that the S&P 500 might reach 1450 by year-end.  This would represent a 16% gain, which I thought would make stocks slightly overvalued, consistent with this part of the cycle.  At 1420, the S&P 500 is already within 30 points of that level though, which means that either my price target was wrong or the market isn’t going to rise much more between now and the end of the year. ..So far I haven’t seen anything that suggests my target needs to be revised higher, which is why I continue to expect a pullback…if 1450 is the right target then the market will have to effectively move sideways between now and the end of the year. With 9 months left in 2012, that’s a long time to go without some sort of hiccup. As summer approaches seasonality will begin to be a headwind for the market just as expectations may be reaching a near term high.” (The market finished the year at 1425)

9) May 2012: “I wrote last month that I would be watching earnings closely for signs that my initial optimistic forecast for the year needed to be revised even higher. After listening to many companies describe their business and prospects, I am not convinced that it does.” (Reiterated expectation for 1450)

10) June 2012: “In February and March I wrote that it was difficult to find stocks that looked attractive on a long-term basis. That changed in May, and today many of the stocks that I analyze appear to be selling at 30-50% discounts to where I believe they could be valued just 12-18 months from now.” (18 months later the market is up 43% from that point. Few if any other market commentators said anything like this)

11) July 2012: “we remain opportunistic in our purchases and have now reinvested most of the excess cash that we have been holding since February.”

12) August 2012:  “the indices are returning to levels at which I’m not as comfortable committing a larger portion of our cash. As I’ve written before, I think it makes sense to end 2012 somewhere around 1450 on the S&P 500.” (Markets did end 2012 around 1450)

13) September 2012: “housing is showing signs of genuine strength…housing has been the missing piece for the US recovery and so if the housing market returns, we may see a stronger economy yet to come….A pullback would be more than welcome to give us the opportunity to make purchases at lower prices.” (Case Shiller has risen by 13% since)

14) October 2012: “A lot changed in September…QE3 creates more inflation risk than either of its predecessors because the economy is not nearly as impaired as it once was…For our portfolios this means that we will be making some significant adjustments before the year is done. In the near term, I continue to expect a market pullback on the realization that earnings growth is slowing, but in the long term, cash is quickly losing its status as a safe harbor, and we hold too much of it. Counter-intuitively, equities are becoming one of the safest assets to hold because earnings will eventually grow with inflation.” (the market fell by almost 9% before QE3 set the stage for a big rally)

15) November 2012: “QE3 hasn’t technically hit the markets yet. The mortgages that the Fed has purchased take about 60 days to settle, so the first purchases made in mid September will begin to clear next week. Curiously, markets have gone down ever since QE3 was announced, and this is probably at least part of the explanation. We should start to see more of a boost from QE once the trades clear. That leaves us still with lots of cash but looking to start reinvesting over the next few weeks. That cash served us well in October as markets declined, but I continue to expect the S&P 500 to get somewhere closer to 1450 by year-end.” (The S&P 500 finished the year at 1425)

16) December 2012: “after further analysis I’m glad to write that I think the cliff could be more manageable than the market currently expects…In the middle of last month, we reinvested a sizable portion of our cash position and were able to benefit from the pullback by buying some really good companies at favorable prices.” (the fiscal cliff did not end up being a big issue for the economy)

2013

17) January 2013: “Whereas last year 1450 was the maximum level that I believed the market could reasonably bear, this year 1650 seems possible to me, and privately I would be willing to admit that I would not be surprised to see a number much higher than that. In 2013 caution, valuation and stimulus could create a potent cocktail for equities.” (Others were so bearish that I was actually embarrassed to say that I thought 1850 was a possibility)

18) February 2013: “In last year’s February letter I pointed out that a good January has historically been a good sign for the rest of the year…I wrote then that these statistics were encouraging, but that a high single digit to low double digit return was more likely for 2012. This year I am inclined to believe that the S&P 500 could be up 20% at some point mid-year, but it would be surprising to me if it held on to close the year at that level…This is an uncomfortable circumstance for investors who are price sensitive, but it’s not yet time to sound the alarms for two principal reasons. 1) Valuation is becoming stretched but not necessarily extreme…We’re not quite at the level where there is unanimous belief in the bull” (The market rose by more than 20%)

19) March 2013: “Dow 14,000 does not represent a magical line of eternal resistance. There isn’t reason to fear a market peak just because it has peaked here before.In the near term, the main indicators that we follow continue to support higher prices” (The market was up a lot by March, but continued to rise)

20) April 2013: “So far 2013 has followed a seasonal pattern that has become well known to investors. For the past three years early year strength has given way to mid-year weakness, and the pattern has become so ingrained that many are already looking to bail out of the market for the summer.While seasonality can be a potent force, there are reasons to believe that this year could break the trend…there could be enough pressure to force security prices significantly higher if we don’t get the expected selloff.” (Many people got faked out expecting a seasonal swoon.  It never happened)

21) May 2013: “As for our outlook on equities, we continue to be positive, but increasingly bearish. Back in January I wrote that 1650 was the highest reasonable value that I could ascribe to the S&P 500, but did not rule out that the market could briefly trade much higher than that level. I do think that prudent long-term investors should be incrementally selling at these levels, while keeping in mind that if we push through the “spring malaise” the market could shoot much higher before loosing steam.” (The spring malaise never hit, and the market shot higher instead)

22) June 2013: “Back in January, I wrote that 1650 was the peak level that I could justify for the S&P 500…In January I also noted that I wouldn’t be surprised to see the market rise much higher than this point though. That’s because it’s typical for the markets to pass well beyond realistic value into the realm of illogical value as an economic cycle ages…For me, 1650 represents the limit at which market prices tip from following aggressive logic to following little logic. Past here 1850 is probably the next point at which I would change our fire danger sign to “extreme.” At that number it’s unlikely that there would be much of anything left with the potential to meet our return objectives.Although I think it’s a reasonable likelihood that we could see 1850, I certainly don’t think it’s prudent to expect that we will, and so I continue to sell holdings as individual companies reach our valuation limits.” (Markets did run past logical value)

23) July 2013: “while the Fed has softened its language for now, the tightening process has been set in motion and the Fed has made its intentions clear.” (Fed policy has made a shift towards tightening)

24) August 2013: “increased caution is warranted in the back half of 2013…I hope that the market will continue to give us opportunities to sell; I would like to be as little as 30% invested at higher price levels.” (Markets didn’t correct in the back half of 2013, but we did keep selling)

25) September 2013: “even though the S&P 500 has been falling in recent weeks and I urged caution in last month’s letter, I’m not quite ready to declare that this was the beginning of a major correction. In fact, if anything August’s decline turned me slightly more positive on equities. A mild correction like the one we’ve experienced can help refresh the market in the near term and allow prices to continue to rise…For some time my outlook has been that the S&P 500 could reach into the 1850-2000 range at the peak of this economic cycle” (the markets appeared to be starting to roll over in early September, but continued higher)

26) October 2013: “the broad economic effects of the government shutdown should be containable…Many portfolio managers are trying to catch up to a market that has given few buying opportunities. When lagging performance is combined with the threat of losing clients, emotions become heightened and managers become desperate to buy on pullbacks. This dynamic may be contributing to the market’s resilience, and if the government situation improves, it sets the market up for a spike higher.” (The government shutdown didn’t turn out to be material)

27) November 2013: “While I initially expected a peak in the 3rd quarter, I must now concede that the market is statistically more likely to continue to rise than fall between now and the end of the year…Because this was not in our game-plan, our portfolios are not positioned to materially participate in a continued market rally…This may leave us modestly out of position to close the year, but that’s ok. It’s not worth buying at prices that ensure poor long-term returns in order to chase short-term capital gains.” (November and December have been very strong months)

28) December 2013: “I think it’s still more likely than not that Wall Street will be visited by Santa Claus and finish the year with strength…Statistically, 2014 faces tough odds.” (Santa did come to town even though December started weak.)

Is Tapering Really a Good Thing?

The S&P 500 is currently streaking higher even though the Fed announced that it would be tapering its bond purchases by $10 Billion a month.  This is counter-intuitive to most since it was assumed that the market would have a negative reaction to the news that the Fed was moving in a tighter direction.

It still may be the case that equities will start to weaken as the market digests the change in policy, but as I’ve written many times, a taper is not an end to QE, just QE at a slower pace.  As long as the Fed is still buying bonds, its balance sheet will be expanding, and we’ll get to see if precedent holds.

Looking at the chart below, the effect of the Fed’s bond buying on equity markets is a pretty open and shut case.  The market has steadily risen every time the Fed has been adding bonds to its balance sheet, and, conversely, both large declines since 2009 came almost immediately after the Fed stopped buying.

It’s not clear whether this relationship is psychological or mechanical, but it has been as tight of a correlation as it comes for the last five years.  If there is a mechanical link between the two, then it’s totally reasonable that stocks could continue to rise as the Fed’s bond holdings continue to expand.  However, since the ultimate destination of tapering is the end of QE, it’s hard to imagine how tapering could be a good thing for equities.  There’s five years worth of data that support the belief that as QE winds down, rougher seas lie ahead.

S&P 500 vs. QE

American Housing was Never Underwater in Aggregate

There’s been a kind of misleading chart circulating around the internet in the past few days, so I just wanted to take an opportunity to make a note of it here.

The chart, put together by the economist, compares “owners’ equity” to “mortgage debt” and shows that the two are about to converge.  The implication, which is inaccurate, is that this means that homeowners are no longer under water on their homes in aggregate.  Even the economist gets the interpretation wrong:

“American homeowners are finally returning to positive equity. The calamitous financial situation of “negative equity” is when the mortgage on your house dwarves the value of the house itself. That has been the situation of American homeowners in aggregate since late 2007, according to “flow of funds” data from the US Federal Reserve. But this may be coming to an end, after 23 quarters.”

The chart is misleading though because in reality the value of the US housing stock has never been less than the amount of debt owed on it.  The “home equity” line shown in the Economist’s chart actually quantifies the amount that homeowners have been above water on their houses over time.  Just like on a company balance sheet, owners’ equity equals the value of the housing stock (assets) minus the debt held against it (liabilities).  The fact that home equity is rising is unequivocally a good thing, but the fact that it is rising above mortgage debt outstanding doesn’t by itself tell us anything other than that household balance sheet leverage relative to wealth is declining.

The chart below corrects the Economist’s chart to include the total value of the housing assets.  Hopefully this helps illustrate that American homeowners in aggregate were never underwater even at the depths of the housing market.  A lot of paper value had been lost, but owners’ equity never turned negative.

The correct interpretation of the data below is important because it was something that was consistently missed during the financial crisis.  A lot of Americans own their houses outright or have built up large equity stakes in their homes because they have paid down their mortgages over time.  Because of this, the amount of homeowners that were underwater was frequently overstated and overestimated by analysts.

Importantly, these improper assumptions also bled through to analyst assumptions of loss rates on bank loan portfolios and, even more consequentially, on mortgage securities portfolios.  The assumption was that banks would lose tremendous amounts of money on defaulted loans because all loans were so far underwater.  On top of that many analysts argued that homeowners would start walking away from their homes en mass because there was no reason to stay current on a property that was underwater.  In reality, seasoned loans had low loan to values which protected banks and buoyed recovery values even when home prices fell.  Additionally most homeowners had more equity in their homes than many realized making it totally irrational to just walk away.

One might go so far as to argue that these faulty assumptions may have even caused the financial crisis since securities analysts applied these assumptions quickly and hap-hazardously with devastating collateral effects because of mark to market accounting.  When securities portfolios were marked to asset prices that were being priced with unrealistically gloomy assumptions, investment banks showed paper losses, appeared insolvent and the conditions for a bank run were formed.

Unfortunately I’ve never seen a comprehensive study of what the true total losses and default rates were on mortgage debt during the recession, but I suspect that some of the institutions that we assume were insolvent were in actuality just illiquid.

It’s worth noting that the same report from which this data is pulled (Fed Z.1) has a line item that shows the replacement value of home owner’s real estate.  The number is $13.5 T vs. $19 T in market value.  That’s a 28% discount to current prices.  The loss of paper wealth would certainly be damaging to the economy if house prices fell to that level, but don’t be fooled, homeowners’ equity would still be positive.

Housing Value vs. Mortgage Debt

 

Source: Flow of Funds, FRED

10-K Tuesdays: Rock-Tenn

We are taking a look at Rock-Tenn ($RKT) this week, a name that popped up in Avondale’s proprietary quantitative value screen. The screen looks at historical financial data to potentially identify high quality companies trading at low valuations. The screen is an important part of Avondale’s investment process, but this post should not be taken as an investment recommendation.

Fundamental Data

Price: $101.70
Market Cap: $7.3 B

Income Statement:

Revenue: $9.5 B
Gross Profit: $1.8 B
Operating Profit: $814 m
Gross Margin: 19%
Operating Margin: 8.5%

Balance Sheet:

Cash: $46 m
PP&E net of depreciation: $5.6 B
Tangible Assets: $8.2 B
Debt: $2.2 B
Pension Liability: $1 B

Statement of Cash Flow:

OCF: $1.03 B
D&A: $552 m
Capex: $440 m

Notes From 10-K Filed (11-18-2013)

We are one of North America’s leading integrated manufacturers of corrugated and consumer packaging.

Three Segments:

Sales and Income by Segment

Facilities and Capacity (thousands of tons)

Location of Facilities and Capacity

Corrugated Packaging (68% of sales)

Shipments of Corrugated Packaging (Thousands of Tons, SF=Square feet):

Corrugated Packaging Shipments

containerboard mills and corrugated converting operations

high-quality corrugated containers designed to protect, ship, store and display products

packaging for shipment and distribution of food, paper, health and beauty and other household, consumer, commercial and industrial products

serve local customers and large national accounts.

We provide customers with innovative packaging solutions to advertise and sell their products. We also provide structural and graphic design, engineering services and custom, proprietary and standard automated packaging machines, offering customers turn-key installation, automation, line integration and packaging solutions.

To make corrugated sheet stock, we feed linerboard and corrugated medium into a corrugator that flutes the medium to specified sizes, glues the linerboard and fluted medium together and slits and cuts the resulting corrugated paperboard into sheets to customer specifications.

Consumer Packaging (27% of sales)

Shipments of Consumer Packaging

Consumer Packaging Shipments

coated and uncoated paperboard mills

Our consumer packaging converting operations include folding carton converting operations as well as our 65% owned solid fiber interior packaging converting operations.

We internally consume or sell our coated recycled and bleached paperboard to manufacturers of folding cartons, and other paperboard products.

We are one of the largest manufacturers of folding cartons in North America and believe we are the largest manufacturer of solid fiber partitions in North America measured by net sales.

cartons are used to package food, paper, health and beauty and other household consumer, commercial and industrial products primarily for retail sale.

We print, coat, die-cut and glue the cartons to customer specifications and ship finished cartons to customers for assembling, filling and sealing.

We also manufacture and assemble (pack out) temporary and permanent point-of-purchase displays.

Recycling (5% of sales)

Recycling Volumes:

Recycling Segment Fiber Brokered

recycled fiber brokerage and collection operations

Notes:

Raw Materials:

Recycled Mills: recycled fiber at our recycled paperboard and recycled containerboard mills and

Containerboard and Bleached Paperboard Mills: virgin fibers from hardwoods and softwoods

Converting operations: We supply substantially all of our converting operations’ needs for recycled paperboard and containerboard from our own mills

Energy is one of the most significant costs of our mill operations…In our virgin fiber mills, we use wood by-products (biomass), coal, fuel oil and natural gas to generate steam used in the paper making process to generate some or all of the electricity used on site and to operate our paperboard machines. We use primarily electricity and natural gas to operate our converting facilities. We generally purchase these products from suppliers at market or tariff rates.

Inbound and outbound freight is a significant expenditure for us.

We spent approximately $623 million on all energy sources in fiscal 2013. Natural gas and fuel oil accounted for a little less than two-fifths (approximately 39 million MMBtu) of our total energy purchases in fiscal 2013.

A hypothetical 10% increase in recycled fiber prices in our mills for a fiscal year would increase our costs by approximately $64 million

A hypothetical 10% increase in virgin fiber prices in our mills for a fiscal year would increase our costs by approximately $70 million.

Although the majority of the containerboard consumed is produced at our mill locations, we do purchase containerboard externally. A hypothetical 10% increase in containerboard costs for containerboard purchased externally, net of trade swaps, would result in increased costs of approximately $21 million in a fiscal year.

A hypothetical 10% increase [in freight costs] for a fiscal year would increase our costs by approximately $89 million in a fiscal year.

25,800 employees…11,900 of our hourly employees are covered by collective bargaining agreement

Customers/Competitors

Our top 10 external customers represented approximately 15% of consolidated net sales in fiscal 2013

we sold approximately half of our coated recycled paperboard mills’ production and bleached paperboard production to internal customers…two-thirds of our containerboard production…approximately one-third of our specialty mills’ production to internal customers

paperboard and containerboard industries are highly competitive, and no single company dominates any of those industries…Our competitors include large and small

Notable Risks

the costs of recovered paper and virgin fiber, our principal externally sourced raw materials, have fluctuated significantly due to market and industry conditions…The paperboard, containerboard and converted products industries historically have experienced significant fluctuations in selling prices…Our operations generally have high fixed operating cost components and therefore our earnings are highly dependent on volumes, which tend to fluctuate.

Back of the Envelope Math

Corrugated Segment:

Revenue: $6,550 m; Segment Profit: $680 m

77.1 billion square feet produced per year; 7.5 million tons of material

implies ~8.5 cents in revenue per square foot; $873 per ton of material

implies 0.88 cents in profit per sqft; $90 per ton

If one cubic foot box uses 6 square feet of material then produce about 12.85 billion boxes (assume 1 cubic foot) per year.  Produce 51 million boxes per day.  Revenue of ~50c per box.

42 cubic foot boxes per US capita per year. (Divide by lateral length-squared for each incremental cubic foot of average box size).

One ton of material makes about 1750 boxes of 1 cubic foot.

Consumer Segment:

Revenue: $2,528 m Segment Income: $295

20.7 BSF per year; 1.4 million tons of material

implies ~12 cents revenue per square foot; $1,805 per ton of material

inmplies 1.4 cents in profit per sqft; $210 per ton of material

If a milk carton uses about 1 sq foot of material, the paper content of the gallon of milk would be 12c or about 3.5% of the cost of a gallon of milk.

that means Rock Tenn produces enough consumer paper to make 20 billion milk cartons, 66 gallons per capita per year.  The average american drinks 22 gallons of milk per year.

Average operating Metrics

Total tons of Capacity: 9.3 million

Sqft of Material produced per ton of capacity: ~10,000

operating profit per square foot: 1 cent

Revenue per ton: ~$1,000

Gross profit per ton: ~$200

Operating profit per ton: ~$100

Cost analysis:

COGS: 7,698

Cost components (imputed from 10% sensitivity analysis in 10-K):

Energy: $623 m (8%) Energy cost per ton: $67

Freight: $890 m (12%) Freight cost per ton: $96

Market pulp costs $700-$900 per ton

Depreciation Analysis

$552 m per year depreciation

$5,554 m in net PP&E

Implies 10 years worth of life left in equipment

9.3 m tons of capacity can produce 93 m tons of material in remaining useful life

Enterprise Value Analysis

Enterprise Value: $9.4 B

EV/ton of Capacity = $1010

EV/ton of “remaining useful life” capacity = $101

Enterprise value worth ~94 million tons of operating profit, roughly equal to remaining useful life of equipment.

Amazon’s Market Value is Approaching Walmart’s

Amazon’s market cap is currently $178 Billion which puts the company 71% of the way to Walmart’s $251 B market cap.  That price implies that $AMZN is not too far from unseating $WMT as the king of retail, but looking at the facts Walmart is still by far the largest retailer in the world and Amazon trails by some distance.

Amazon only generates 15% as much revenue as Walmart does and only 2% of Walmart’s operating income.  Even if Amazon grew its revenue at 25% per year (an acceleration from its current pace) it would take 8.5 more years for Amazon’s revenue to match Walmart’s current revenue.

Assuming that Amazon’s operations do eventually match Walmart’s 8.5 years from now, and also assuming that Amazon is able to expand its operating margin to match Walmart’s, then at that point perhaps even a value investor could be comfortable with Amazon matching Walmart’s $250 B market cap.  If the stock does appreciate by that much it would work out to a 41% gain.  That’s 4.1% annualized over an 8.5 year time frame.

Amazon vs Walmart

Company Notes Digest 12.13.13

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

At Goldman’s Financial Conference, banks sounded extremely positive:

“I think we’ve had some pivotal positive changes that are kind of unfolding” ($BBT)

Credit quality issues are behind them:

“the difference for us in ’14 if you can go to one thing which is the legacy assets servicing side has come down…You can’t under-estimate, not only does that mean money because the run rate is $1 billion less year-over-year per quarter, but not doing that helps our brand, helps the spirit of the company” ($BAC)

Borrower’s balance sheets are repaired:

“certainly today our customers are in a better financial position than they have been in years on both the business side and the consumer side of our balance sheet.” ($RF)

Rules have been clarified:

“We’re seeing a number of the rules get to be clearer in the banking industry today. And while you may not like exactly what a particular rule is, I think all of them, by and large have been reasonable, and the clarity of having them laid out gives you a lot more confidence as you try to make decisions going forward” ($BBT)

And congress is playing nice:

“I think a not so small event occurred yesterday as we see the beginnings of an agreement into Congress with regard to the budgets. So I think that’s kind of a water shed event.” ($BBT)

The consumer is loosening up:

“I think ever so gradually you have seen the consumer step out a little bit and certainly we have seen spending pick up. And I don’t see any reason to think that that gradual trajectory wouldn’t continue into next year.” ($COF)

And businesses are feeling “frisky”:

“I think that the average business person we talk to is getting incrementally more frisky and they want — if they can see the window for it they’ll start to make activities and they’ll draw on their lines I think” ($BAC)

BB&T sees CRE returning to the pipeline including hospitality, shopping center and office:

“I think we’re going to see a relatively stronger pickup in CRE…We’re beginning to see shopping center growth activity again. Office is still relatively weak. Hospitality is strong, medical is strong. So I think CRE in general will grow rapidly.” ($BBT)

Toll Brothers has seen housing demand slow a little but is optimistic for the spring season:

“We still feel like pent-up demand is building, demographics are on our side, affordability is in place, and we are cautiously optimistic about the spring season, which begins the end of January…The limited supply is a very real thing. You’ve got a market that fell apart, basically, in ’07 and stayed apart until ’11. And during that time period, of course, there is no land being put in for approval” ($TOL)

Perhaps only the Fed poses an impediment to this suddenly white hot economy, but Brian Moynihan is optimistic that even tapering can’t stop this freight train ‘comin down the tracks:

“If the tapering is done because of why we think it’s being done and then why it is being done and why it’s being debated is the economy is growing and that’s always good for us.”($BAC)

Financials

There’s been some talk of over-aggressive auto lending, but Capital One doesn’t see cause for concern:

“The auto business, while we worry about the competitiveness, it is really not about crossing the inflection point. It’s about going from a probably once in a lifetime situation in the auto business where everything lined up” ($COF)

Banks really need LIBOR to move in order to benefit from rising rates:

“if LIBOR moves you start to get the assets re-priced that are LIBOR based which is substantially part of the floating rate assets in the company are LIBOR based” ($BAC)

The big guys prepared for the Volcker rule years ago:

“[in regards to Volcker rule] from a prop change definition that went out two years ago we stopped doing that” ($BAC)

Small banks, exhausted by the environment, are looking to sell:

“I think — and they’re looking very rationally at the economics of the new world and they’re recognizing that it’s going to be very difficult to generate the kind of returns to the shareholders that makes sense. And so a combination with a good institution makes a lot of sense as they go forward. But this appetite for sellers, is increasing. Today, the buyer appetite when I talked to my colleagues is not very strong because people are concerned about can it get — approved…I think that’s quickly moving to the side lines and so as the seller appetite increases, buyer appetite I think will increase. I think economics will be reasonable…we’re going to have consolidation in the industry, we had a lull. It will continue, and it will be good for the industry, it will be good for the clients. And it will be really good for the shareholders.” ($BBT)

Consumer

E-commerce is all the rage in in a variety of industries:

8% of all check deposits now mobile at BofA:

“Our mobile banking platform…continues to grow. Last year we had 11 million customers. This year it’s 14 million customers are active mobile users…In the third quarter, 8% of all the checks deposited at Bank of America were deposited through mobile devices. That’s 13 million checks. It’s a major change in activity” ($BAC)

Even home-buyers are researching first on-line:

“virtually every buyer is spending some time on our website. That’s one of the reasons why our conversion ratio from visitor — physical visitor to the sales center to agreement is at a company high because of the prequalification, prescreening the client does online.” ($TOL)

Home Depot says e-commerce is an important part of an integrated distribution platform:

“This blending of the channels is what we call interconnected retail. And in the past, e-commerce has been viewed as a separate and distinct channel. That’s no longer true. Moving forward, e-commerce has simply become commerce…a customer in Minnesota, who recently bought a house about 12 months ago…has spent over $20,000 with us over the last 12 months…over the course of the year she’s had 22 transactions, 14 physical in-store transactions, 8 online transactions, 6 of those from a PC and two from the mobile device…inside of those transactions, we can count literally hundreds of interactions with our company and our brand…rarely can you find a purely online order or a purely in store order” ($HD)

Brick and Mortar is an important piece of the puzzle:

“We know that actions like offering our customers refreshments, putting the tool in their hand so they can try before they buy or having personalized training during a workshop, our activities of a pure online competitor cannot replicate. And it reinforces the importance while making an emotional connection is part of our customer service strategy.” ($HD)

Technology also continues to transform retail’s back-end:

Big data helps manage the business more efficiently:

“leveraging Big Data…It can help us better understand the customer and market to them; adjust assortments to trends and demographics; control costs and better manage our stores.” ($HD)

More price transparency is leveling the playing-field:

“pricing is an area where the retail landscape has changed drastically over the last several years. Pricing is increasingly becoming more and more transparent and dynamic…In today’s multichannel world with pricing data for end stores and online readily available, there is more information available to help understand the pricing landscape. We believe understanding the competitive environment is an imperative for any retailer who wants to win.” ($HD)

However, Capital One warns that if you’re not careful the costs of multi-channel can overwhelm the benefits:

“I will make a prediction to you, and that is that the tendency of banks is going to be to add digital as a channel….And customers are offered all channels and if you don’t watch out it becomes more costly not less.” ($COF)

And argues that you have to work hard to refine the digital experience:

“Any of you who do digital stuff probably know that you try to do it and then you get stuck. And I think a number of times I get stuck on my digital journeys just as a consumer it’s striking to me.” ($COF)

Technology

Rackspace provides a great discussion of the architecture of the Cloud:

The Software makes the magic happen:

“if you think about building a cloud, there is a data center, there’s a bunch of servers, a bunch of storage, and then there’s some software. The software is the magic of making the cloud into a cloud. The software pulls those resources together. It makes the — computing a pool of computing, it makes the storage a pool of storage that can be even carved up and served to a customer via an API. An API is a programming interface that the customer uses to control the cloud or write or read from the cloud. Without that software, a cloud is just a bunch of servers.”

In the cloud computing capacity is rented by the hour:

“And that’s what we used to do. We used to dedicate individual servers to a customer. They will put one operating system on that server and they would build a website. Now what we do is we rent capacity by the hour.”

Rackspace’s software platform is open-source, called “OpenStack”:

“OpenStack in our case is the software that does that orchestration of all those computing resources. It’s what tracks which customer is using which virtual machine. It’s what gives us the ability to automate the provisioning of servers rather than having individual technicians go out and do it by hand. It’s what allows us to scale horizontally on our — on a lot of the platforms and automate that scaling, rather than having individuals go copy data from server to server by hand.” ($RAX)

Rackspace’s competitors Amazon, Google and Microsoft run proprietary software:

“Now Amazon and Google and Microsoft have all built their own proprietary cloud software technology. They — Google probably had it ever since their days as a search engine company from the early days. Amazon built it for their own purposes and then turned it into a service offering…Rackspace took a little different perspective on things and took a different path. We being open source guys from the early days, we believed in open source from our early routes, we decided that we would build our cloud platform in an open source way. So we donated all of our original cloud code that we built to a project called OpenStack.” ($RAX)

And to varying extents they have focused on the “public cloud”:

“A lot of our competitors, you know, Amazon is obviously the biggest, Google, Microsoft, others in the market, are really only public cloud. They’re only offering virtualized multi-tenant cloud services.” ($RAX)

Which may or may not be the right solution for enterprise:

“If a customer tries to run all of their application in a public cloud, there are some trade-offs they have to make. Sometimes they have to over-provision, sometimes they have to make performance trade-offs. But when you can blend dedicated bare metal servers and the control that you get of a private cloud with the scalability and the elasticity of a public cloud we believe, and we’ve seen many cases, that you actually get a better overall total cost and much better reliability in performance.” ($RAX)

Amazon in particular is running a low service model:

“fundamentally, what Amazon has done is built an infrastructure-as-a-service offering that is the most — I guess the leader in the market, certainly. What they haven’t done is really taken that to the next level and offered customers a service wrapped around that.” ($RAX)

Which is good for developers, but maybe not the large guys:

“there are different buyers in the market. There are buyers who value the cheapest possible cost. Sometimes if you’re a startup, and Amazon has thrown a huge startup program kind of offer at you and said, free cloud for the first year. It’s attractive, you know, and developers sometimes need that. But other times when they grow up a little bit, as the companies evolve and have expanded, they find that sometimes Amazon’s incremental posted price on the website doesn’t necessarily translate into the overall cheapest price or the overall best value.” ($RAX)

Meanwhile a Qualcomm SVP had a good discussion on mobile chip dynamics:

The focus of mobile isn’t the CPU, which is why PC chip manufactures (i.e. Intel) have had such a hard time competing in smartphone and tablet markets:

“The point is that a phone unlike a computer, the CPU was the focus in the computer, CPU and a phone for us is less than 20% of the actual silicon content. So in wireless, in phones and in tablets, it’s about doing the whole thing well. You can’t just be good in CPU, you have to bring this whole solution together very elegantly…I think its why some coming from the computing space to try to compete with us have been challenged, is they really looked at the modem as a commoditized peripheral and that the heart of device was the CPU.” ($QCOM)

Qualcomm is preparing for us to consume 1000x more data than we already are:

“we need to be able to support a 1,000 times the data coming to the device than comes to at today” ($QCOM)

The solution will dramatically reduce the cost of data-plans:

“what happened with voice pricing when you think about in the early 2000s, we want to see the same thing happen with data pricing” ($QCOM)

Achieving that goal will take re-designing the network. Cell towers soon coming to your closet:

“much like today you probably have a broadband access point sitting in a closet or in the computer room in your house somewhere that provides Wi-Fi, vision is you’ll have a device that will broadcast wide area coverage as well.” ($QCOM)

Phones are getting smart. Maybe a little too smart…

“if you look at what the phone is capable of today, it knows where it is, it knows whether it’s moving, it can see, it can hear, it will be able to smell soon” ($QCOM)

Healthcare

The market for Health Insurance is going retail:

This is a huge change because, consumers make choices differently from employers:

“we believe that the marketplace is going to retail…And that retail marketplace is going to have individuals making the buying decision. And what they value is fundamentally different than the people we have dealt with in the past as benefit managers.” ($AET)

Health insurers are going to need to change the way their products are packaged:

“when you get to a retail marketplace where the individuals making the decision based on the subsidy they get from either the employer or the government, their view of what is important changes, and it needs to be a system where the consumer gets what they want or finds what they want, value.” ($AET)

The system is way too complex for consumers to navigate because it was built for a different era:

“if you’re one of those people trying to navigate the health care system, you’re looking in a system that was originally built in 1945…to create a health care system that takes care of people and to employ people after they came back from the war…this model has to change. This is too complex for consumers to figure out. The incentives are all wrong in dealing with an individual consumer. And so moving this payment model will get all of these parts of the system to work together.” ($AET)

Exchanges are going to be a big part of the solution:

“all the tools that we invest in, the ACS investments we made, the retail exchange, private exchange models we will build and our public exchange participation is all aimed at having the system work for the individual versus having the individual trying to find their way through the maze.” ($AET)

Private exchanges will be important:

“And now if we can make that happen on an individual basis, then what happens is private exchanges allow us to take this across the country.” ($AET)

Public exchanges aren’t going anywhere:

“Public exchanges are struggling. The enrollment is lower than everybody expected. But my view is that by 2015…nobody will remember it. I think it’s just going to continue. I’m saying public exchanges are here to stay.” ($AET)

The Affordable Care Act has changed more than it initially intended:

“the system’s evolving. And while the intention [of the Affordable Care Act] wasn’t to have that all happen, it’s happening anyway, because the private sector is reacting to it.” ($AET)

Investors should expect some turbulence through 2016:

“in 2016, it’s a completely different game. The ACA pressures abate…longer-term revenue growth opportunities begin to mature and we’ll return to longer-term operating EPS growth dynamics.” ($AET)

Materials, Industrials, Energy

There are signs that mining equipment may be turning more positive:

“We think the U.S. aftermarket is now through most of its correction period…we’re probably getting to the end of the miners’ ability to stretch these maintenance intervals. We’re beginning to see our process list stabilize. We’re seeing selective projects moving forward that can achieve acceptable returns in the current pricing environment.” ($JOYG)

Thermal coal may have bottomed, Met coal still needs to see more supply come off market:

“Thermal coal is what we talked about is bouncing around the bottom. We see some opportunities probably more in thermal coal in the second half of the year. And then, met coal, as I highlighted, we still see some production has to go offline. We know where we put in a lot of our longwall systems around the world. And so we know we have some high productivity, low-cost production coming online in 2014.” ($JOYG)

Copper currently has the best fundamentals of any commodity:

“Global copper markets continue to see the strongest commodity fundamentals. In 2013, global consumption is expected to increase 3.6%. Pricing level should remain above the marginal cost of production and should attract continued investment in additional production capacity.” ($JOYG)

Miscellaneous Nuggets of Wisdom

Change is constant:

“the only constant is change and change brings opportunity” ($AET)

When things change for the negative you can either ignore it or deal with it:

“Well, you have 2 choices. You can admit you’re a commodity. And when you do that, you put your thumb in your mouth, you get in a corner in a fetal position and you wait till it all goes away…The other option is to take a look at the things you do as a company and decide which of those things that you do are of value to other parts of the value chain and create a different business model that makes you relevant in powering the rest of the value chain so that you’re no longer a commodity.” ($AET)

One anecdote that combines the perils of listening to consultants and long term forecasting:

“there was that famous McKinsey study that really caused AT&T a divestiture to let the wireless licenses go to the Regional Bell Operating Companies. And McKinsey forecast that by the year 2000 there would be 900,000 wireless users in United States. They were off by a little bit. It was about a 109 million. And that was a key decision for the phone company at break up, as I said to let those licenses go to the Regional Bells.” ($QCOM)

Creating a successful business takes perseverance, faith and luck:

“like every other startup, we have stories of people mortgaging their homes and literally we got to the point where we were at risk of not making payroll. And so it was the legal team, at that point in time we have been issued I think 50 patents, and they said, well maybe we could go out and drive some license revenue from a couple of these patents and keep the company going…And it was actually our first licensees who said, we know you’re the only ones working on this. I think they handicapped the chances of it ever seeing the light of day as very low. So they said we don’t want to deal with you and your patents again, why don’t you just license them all to us. So that was a grand birth of the portfolio licensing program. So not a well thought out business plan on how to capitalize the company, one of just being opportunistic.” ($QCOM)

Home Depot Analyst Day Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“For Home Depot the journey on product authority began with a fundamental restructuring of our supply chain. It’s difficult to claim private place on product authority if you don’t have best in class capabilities for getting product into the customers’ hands. As you know over the last several years, we’ve developed a new supply chain network with our Rapid Deployment Centers or RDCs. The RDC strategy along with improvements in our stocking and bulk DCs allowed us to improve our in-stock rates, improve current and improve customer service.”

Matt Carey, our Head of Information Technology

“2009 investor conference…At the time I told you our capabilities were basically 15 years behind other retailers.”

“there are four trends I’d like to talk to you about today that will influence our future technology direction. First, leveraging Big Data: we have to efficiently utilize the vast amount of data our company produces to simplify and automate decisions. Second, pricing transparency and analytics: pricing transparency has changed the competitive landscape and we must use advanced analytics to constantly fine tune our portfolio strategy. Third, supply chain efficiency: our investments in technology for a supply chain will be a driver of efficient seamless customer experience. And finally, creating a seamless customer experience: customers expect a seamless experience across all selling platforms even at a home improvement store.”

“With 1.3 billion transactions annually, over 15 million visits to our website a week, and over 600,000 SKUs, 300,000 plus associates across 2,200 stores, we have a vast amount of data as you can imagine.”

“through analytics, rules engines, dashboards, we can make and form decision efficiently. It can be provide insight into what’s happening across our business whether it’s marketing, merchandising, finance, supply chain and even in our stores. It can help us better understand the customer and market to them; adjust assortments to trends and demographics; control costs and better manage our stores.”

“pricing is an area where the retail landscape has changed drastically over the last several years. Pricing is increasingly becoming more and more transparent and dynamic. ”

“In today’s multichannel world with pricing data for end stores and online readily available, there is more information available to help understand the pricing landscape. We believe understanding the competitive environment is an imperative for any retailer who wants to win.”

“customer expectations have changed in an interconnected world. The customer expects to be able to buy something online or in a store and have it delivered to their home or in some cases installed.”

Marvin Ellison, our Head of U.S. Stores

“We know that actions like offering our customers refreshments, putting the tool in their hand so they can try before they buy or having personalized training during a workshop, our activities of a pure online competitor cannot replicate. And it reinforces the importance while making an emotional connection is part of our customer service strategy.”

VP of Merchandising, Craig Menear.

“Product authority starts with understanding the customers’ needs and there are factors that we must be keenly aware of over the next few years”

Kevin Hofmann, the President of our Online Business.

“we are increasingly focused on how the physical and digital worlds are converging. The lines are blurring across these channels.”

“This blending of the channels is what we call interconnected retail. And in the past, e-commerce has been viewed as a separate and distinct channel. That’s no longer true. Moving forward, e-commerce has simply become commerce.”

“We see over one-third of our online orders getting picked-up or fulfilled out of a physical store location, 90% of our online orders, excuse me, our online returns enjoy the convenience of free returns in our stores…Almost half of our online visitors indicate their next stop is The Home Depot store, so that’s interconnected retail.”

“let me introduce you to Janet. This is a customer in Minnesota, who recently bought a house about 12 months ago…anet has spent over $20,000 with us over the last 12 months…over the course of the year she’s had 22 transactions, 14 physical in-store transactions, 8 online transactions, 6 of those from a PC and two from the mobile device. Now inside of those transactions, we can count literally hundreds of interactions with our company and our brand, some with a website, some with an in-store associate and some with the call center associate or an in-home agent… rarely can you find a purely online order or a purely in store order along Janet’s journey. The transactions are only part of the story. These lines are blurring and the physical and virtual worlds are colliding to solve problems for our customers.”

Mark Holifield, our Senior Vice President of Supply Chain.

” Our RDC process is superior to traditional retail hard lines distribution as in these innovative facilities product never gets put away into storage or into a pick allocation as in a traditional DC.”

“there are some products that remain optimal to move directly to stores from vendors. And these are typically products where store sales a full truck load a week or more or products requiring special handling like locally sourced live goods.”

Aetna Investor Day Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“At a recent investor conference, I was actually asked multiple times, “What do you think investors will look back on in a couple of years and really kick themselves over?” I really didn’t have to think about it very long because I think the fog of 2014 and all of the change in 2014 is masking the incredible growth opportunities that are before this company and, frankly, this industry.”

Mark T. Bertolini – Chairman, Chief Executive Officer

” Here’s how you want to think about taxes and fees. You’ve got to get them in the baseline and then — for in future years, the pain isn’t nearly as bad as it was this year.”

“there are 2 ways you solve for these taxes and fees. One is you price for it, and we will detail some of that later. And the other is you solve for it.”

“we believe in the future, that with virtual integration with the provider system, that we’ll become like the Intel Inside of the provider system through virtual integration, connecting with them in ways that allows them to do a bigger piece of what we do today.”

“Secondly, we believe that the marketplace is going to retail. And I’ll show you some statistics in a moment. And that retail marketplace is going to have individuals making the buying decision. And what they value is fundamentally different than the people we have dealt with in the past as benefit managers.”

“what’s happened with the Affordable Care Act is that it has — broke open the black box of managed care. How the business works has been exposed and regulated in far finer ways than it has in the past.”

“what does that cause you to do? Well, you have 2 choices. You can admit you’re a commodity. And when you do that, you put your thumb in your mouth, you get in a corner in a fetal position and you wait till it all goes away, till you’re out of business, or you keep cutting costs, cutting price and hope you’re the last standing. Think of the steel industry in the United States.”

“The other option is to take a look at the things you do as a company and decide which of those things that you do are of value to other parts of the value chain and create a different business model that makes you relevant in powering the rest of the value chain so that you’re no longer a commodity. And that’s the choice we have made.”

“We believe that we have the opportunity to enable the provider network to handle risk, to change the way the provider system works. And we have the opportunity to drive a retail market in health care. ”

“in the future. It will not be about employer-sponsored insurance, it will be about who is providing the subsidy to the individual who’s buying a health care policy. And we believe that subsidy will come in 1 of 3 places: it’ll be the employer providing a subsidy, the government providing a subsidy or people paying for all of it out of pocket.”

“when you get to a retail marketplace where the individuals making the decision based on the subsidy they get from either the employer or the government, their view of what is important changes, and it needs to be a system where the consumer gets what they want or finds what they want, value.”

“Third is that the distribution channel is going to change, and I think pretty dramatically over time. That’ll be more of a retail marketplace, not the model we have today.”

“the system is labyrinthian in its thinking and the way we work. Just take a look at Healthcare.gov. And those people can’t figure it out, and so we have to make it a lot simpler.”

“When you incorporate out-of-pocket cost changes with the amount of premium employees are paying, employees, consumers are now paying 41% of the health care dollar in the United States. We are not far from them paying more than their employers. That’s a huge change.”

“More and more are asking their doctor, do I need to do this? Oh, by the way, how much does it cost? ”

“we believe that the retail marketplace, whether it’s fully insured or self-funded, the retail marketplace grows to 75 million by 2020.”

“here’s how we see it breaking out: we believe there will be 9% uninsured; that there’ll be 15% in government fee-for-service, Medicaid and Medicare; and then the retail market will be individual private and public exchanges, Individual MA, Medical Supplement, managed Medicaid, 46%; and there’ll be 30% remaining in the commercial employer-sponsored market but with largely, probably, employees making a greater part of the decision given their out-of-pocket.”

“CMS, every time they make a decision, impacts the rest of this industry. They’re like the blocking fullback going through the line, and we’re like tailbacks following them. Every time they fix the SGR, we reduce our physician fee schedules because we don’t have to make up for what we thought the SGR was going to generate.”

“if you’re one of those people trying to navigate the health care system, you’re looking in a system that was originally built in 1945 for — with the Hilbert and ACT and a whole bunch of other programs to create a health care system that takes care of people and to employ people after they came back from the war.”

“so this model has to change. This is too complex for consumers to figure out. The incentives are all wrong in dealing with an individual consumer. And so moving this payment model will get all of these parts of the system to work together.”

“all the tools that we invest in, the ACS investments we made, the retail exchange, private exchange models we will build and our public exchange participation is all aimed at having the system work for the individual versus having the individual trying to find their way through the maze.”

“And now if we can make that happen on an individual basis, then what happens is private exchanges allow us to take this across the country. ”

“If you have a health system that’s approaching its community, sign up individuals to be part of its health plan, the carrier doesn’t matter anymore. Multi carrier is extraneous as a concept. It’s really about, are you able to offer a breadth of plan designs, a breadth of care management capability, wellness, et cetera, a product set that provides value to consumers to want to purchase in that place.”

“That same experience is going to occur here when these retail marketplaces occur up. They’re going to want to stay with their system, the people who know them, not necessarily the benefit plan that they have before.”

“the only constant is change and change brings opportunity.”

“Public exchanges are struggling. The enrollment is lower than everybody expected. But my view is that by 2015, if we get it fixed right, it will be a new start, and 5 years from now, nobody will remember it. I think it’s just going to continue. I’m saying public exchanges are here to stay.”

“I don’t think we’re going to repeal the Affordable Care Act. I think we’re going to change it, we’re going to make it better, because it’s now starting to get metastatic to the system in the way we’re all changing and the way the system’s evolving. And while its intention wasn’t to have that all happen, it’s happening anyway, because the private sector is reacting to it.”

“So in the long term, public exchanges will survive. We believe there will be 25 million members on public exchanges and $75 billion in premium. That’s a CBO estimate. We think that’s legitimate”

“in 2016, it’s a completely different game. The ACA pressures abate, hopefully we’ll be over some of the kludginess of what’s going on today, longer-term revenue growth opportunities begin to mature and we’ll return to longer-term operating EPS growth dynamics. So we think the next couple of years is like hard work.”

“For every million members that go from self-insured to fully-insured, it’s $4 billion more in revenue. And 4x to 5x margin, dollars of margin. Public exchanges for every million members, $3 billion of revenue. Medicare Advantage, every 500,000 members, $5.5 billion of revenue. Every 100,000 of dual eligibles, which we’ve won a number of large contracts, $3.5 billion of revenue.”

“we believe that we can go from 2013 to 2020 all the way up to $100 billion in revenue. We believe we can more than double our revenue.”

Joseph M. Zubretsky – Senior Executive Vice President of National Businesses

“[Providers] now understand that by forming communities, health care communities, with physicians, ancillary and ambulatory facilities and acute care facilities and engaging in virtual integration themselves, they can change their revenue model, be reimbursed on the basis of value and not volume and completely change the game.”

“aiming our product line in our business at the large sophisticated integrated delivery systems and freestanding hospitals is the way to go. Because the hospitals are rolling up the docs. We thought about rolling up physician practices. We thought about buying bricks-and-mortar, vertical integration. Our view is, let the hospitals deploy their capital, monetizing the value of physician contracts and physician practices, let them create the communities and we’ll contract with the hospitals.”

“In order for these to work really nicely, having 30%, 40% and 50% market share aggregated in the ratio delivered to the insurance marketplace is about right. So in Chicago, where it’s very fragmented, you need 6, 8 or 10 ACO deals to make it work. But in Dallas and Houston, you may only need 1, 2 or 3. Concentration of patient market share is what make these work really well.”

“if anybody think that just because you own a physician’s contract, you can tell them what to do and how to behave, you’re wrong.”

“our differentiated solution allows us to then convert from volume-based reimbursement to value.”

“This is about enabling them to convert from episodic acute care to patient population health. Episodic acute care, when you show up, I’ll patch you up and send your home. Patient population health, I know everything there is to know about everybody in this room, you’re part of my medical community, you’re part of the medical home.”

“The shift from episodic acute care to patient population health allows the hospital system to convert from volume-based reimbursement to value-based reimbursement.”

“Aetna is your patient aggregator.”

“the business of provider contracting. We’re not in that business anymore. We’re in the business of Supply Chain Management. And the most complex, arcane, Byzantine supply chain ever designed is the healthcare delivery system”

“this is not an HMO. An HMO had a gatekeeper, that gatekeeper was sitting as a payer. That HMO shifted the risk, but it didn’t share the risk.”

“the intense clinical focus of the ACO is a completely new model and is completely anathema to the HMO model of the mid 1990s.”

Dijuana K. Lewis – Executive Vice President of Consumer Products and Enterprise Marketing

“the healthcare system was built to deliver healthcare. It was not built to deliver a simple shopping experience for consumers. That’s the transition that we are making”

BB&T at Goldman Sachs Conference

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“I am — more optimistic about kind of where we are and where we’re going than a few months ago. I think we’ve had some pivotal positive changes that are kind of unfolding.”

“employment growth has been good. I think a not so small event occurred yesterday as we see the beginnings of an agreement into Congress with regard to the budgets. So I think that’s kind of a water shed event.”

“We’re seeing a number of the rules get to be clearer in the banking industry today. And while you may not like exactly what a particular rule is, I think all of them, by and large have been reasonable, and the clarity of having them laid out gives you a lot more confidence as you try to make decisions going forward.”

“things really did hit a lull in October and November as we kind of headed into that period. Now, we’ll tell you more recently, things are beginning to look up as we have some conversations about maybe not hitting a budget wall this time, so momentum seems to be improving.”

“Credit quality continues to be just absolutely outstanding.”

“We are continuing to invest in our insurance business. It’s a really big business for us so it’s running about 15% or so of our revenue now.”

“So I think we’re going to see a relatively stronger pickup in CRE. CRE has been relatively soft for the last 18 months or so except in multifamily…We’re beginning to see now some interest in new activity. We’re beginning to see the single family residential beginning to grow. We’re beginning to see shopping center growth activity again. Office is still relatively weak. Hospitality is strong, medical is strong. So I think CRE in general will grow rapidly.”

“mostly we think we’re going to win the game based on being more responsive. I’m convinced that the way you really win the game is to be the most responsive in the business and that’s what I think we can do and we’ll continue to do.”

“You have to be relentlessly focused on every expense. I tell our people you need to save the rubber bands and save the paperclips. People were laughing when I say that but look, with 35,000 associates, that adds up. But more importantly when they see the bosses worrying about the paperclips and the rubber bands they understand that expenses are important around here.”

“I think — and they’re looking very rationally at the economics of the new world and they’re recognizing that it’s going to be very difficult to generate the kind of returns to the shareholders that makes sense. And so a combination with a good institution makes a lot of sense as they go forward. But this appetite for sellers, is increasing. Today, the buyer appetite when I talked to my colleagues is not very strong because people are concerned about can it get — approved”

“I think that’s quickly moving to the side lines and so as the seller appetite increases, buyer appetite I think will increase. I think economics will be reasonable.”

“we’re going to have consolidation in the industry, we had a lull. It will continue, and it will be good for the industry, it will be good for the clients. And it will be really good for the shareholders.”