Earnings Call Notes 1.24.13

Like most analysts during earnings season I spend a lot of my day reading earnings calls.  I’ve been trying to figure out a good way to incorporate some of the data that I gather from those calls into the blog.  To that end below are quotes from calls that I’ve read today–snippets of information that I find relevant (typically on a macro/industry level) from companies that I have some working understanding of.  All the transcripts are found at Seeking Alpha.

Raymond James–RJF (Regional Broker)

“assets under management, have gravitated more towards fixed-income and our retail clients have gravitated more to fixed income as in asset allocation. So with all those factors at play, we’re not as sensitive to the U.S. equity markets as we have been in the past.”  

“I think that our investors’ sentiment and our sentiment — investor sentiment survey is up. We haven’t seen a massive move to equities. I know a lot of the funds are showing big inflows. I think we’ve been more with our investors, we try to keep them engaged, maybe they’ve been a little more engaged in other places. So I haven’t seen a big movement yet. But having said that, the commission levels in January have been pretty good so far. I’m a little bit behind in terms probably up to today. But I mean, I can’t say we’ve seen a huge flood into equity since the beginning of the year. “

McCormic–MKC (Spices)

“Globally, digital marketing was 12% of our total spending, up from 5% in 2010.” 

“Our brand marketing plans include further increases in digital marketing, support for new product launches and a sharp focus on retail price points. ” 

“Sandy. While this devastating storm had a limited impact on our sales to customers in the Northeast, it did impact a number of suppliers in this area, which created product shortages during our critical holiday selling period. We also lost several ships of production time in our manufacturing distribution facilities in Maryland.” 

“we’ve had about a 45% increase in commodity cost over the last 4 years and have taken about 25% pricing and we’ve taken a number of different actions along the way, and we are always evaluating the impact of that on volume….and by the way, what we have seen as our pricing has gone up, we have seen those price gaps close now as competition, largely private label, has also taken place increases to either catch up or improve their margins.” 

“About quick service restaurants: I’m following our customers’ releases as closely as — probably closer than you are because they really impact us. But I would say that we think that it’s going to be fairly challenged.”  

“[around the holidays] typically we do see an increase in branded shares for a couple of reasons. One is consumers are less willing to take chances on their meals.” 

Logitech–LOGI (Consumer Electronics/Peripherals) 

“As we discussed in our Q2 earnings call the main factor in our weak performance was a significant weakness in the global market for new PCs. This weakness which had a negative impact on sales in all our PC related categories reflects the combination of the slow transition to Windows 8 and the growing popularity of tablets and smartphones as mobile computing devices.”

Hill Rom–HRC (Healthcare, Hospital Beds)

“Our rental business in North America remains challenging due to continued efforts by hospitals to reduce their operating and supply chain costs. We expect this to continue given the economic pressures they are dealing with. “

Nokia–NOK (Cell Phones)

“we shipped 6.6 million Smart Devices units of which 4.4 million were Lumia devices.” 

“Now more than ever, operators are pushing for a third ecosystem to emerge, and they are committing to more marketing, more training, and more in-store displays to help Windows Phone and Lumia to grow.” 

Grainger–GWW (General Business Supplies Distribution)

“Light Manufacturing was up in the high-single digits; Heavy Manufacturing and Commercial were up in the mid-single digits; Government and Retail were up in the low-single digits; Reseller was flat; Contractor was down in the low-single digits; and Natural Resources was down in the mid-single digits.” 

Symantec–SYMC (Cyber security. Lots of interesting discussion. Worth doing a full read through)

“welcome to the unveiling of Symantec 4.0”  

“despite the fact that we have such great point solutions built mostly from acquisition…We haven’t really integrated the value of these different point solutions” 

“the porous nature by which information is flowing across enterprise, individuals, governments and your personal world. Those boundaries are now taken down.” 

“There was one large pharmaceutical company, and as the CIO was describing his real estate he said, look, we have 60,000 PCs. We have about 7,000 Macs. We have 15,000 iPads and over 10,000 Android smartphones in their environment that he was aware of. And he said what he needs is an offering that allows him to let people use those devices but, at the same time, protect the business. ” 

“while we had the great assets, we didn’t have a strategy or an operational plan to focus on delivering value for customers, and that’s what Symantec 4.0 is all about.” 

Western Digital–WDC (Hard Drives)

“there are early indications of consumers’ stronger intentions to purchase new PCs this year.”  

“The HDD market shipped approximately 136 million units during the December quarter, slightly less than the 140 million units we anticipated in our guidance.” 

Apple–AAPL (Fruit company?)

“Apple is in one of the most prolific periods of innovation of new products in its history.” 

“We have now sold well over 0.5 billion iOS devices” 

“The pipeline is chock-full, I don’t want to comment about a specific product, but we feel great about what we have got in store.”

Netflix–NFLX (Pay TV Channel which happens to be distributed via internet)

“Both the rise of tablet phones and the rise of smart TVs are very helpful to us, and they are really the beginning of a trend along Internet connected ecosystem devices. And certainly the more convenient those devices get, the more people will feel comfortable watching and enjoying content on a wide range of devices, some day including Google Glasses, Internet Watches all kinds of scenarios over the next five years and as well as multi-screen scenarios, where you use your tablet or phone to chose content on the TV. “

US Airways–LCC (Airline)

“several years ago, we started talking about all the things the industry needed starting with consolidation. Included on that list was management teams that care more about returns than market share. Included on that list was a better management that work better with labor. And I think all those things, we’ve made huge progress on. Also on that list, though, was a better understanding by the government of the importance of aviation and a national policy from a national aviation policy from the government, and that hasn’t happened. And that’s next on the list, and that’s where the rest of the value, I think, is going to come from, Jamie, and where it needs to come from. We’ve got — everything I’ve talked about so far is self-help, and the industry had to do a lot of this to get itself right, and I think we’ve made huge progress in that regard. But we’re fighting our own government on a lot of issues, and taxation is high on the list, but there are other issues. Other international carriers don’t fight the same battles we do, and we’re — well, the playing field’s not particularly leveled.”

BHI 4Q12 Conference Call Notes

From its 4Q conference call, Baker Hughes outlook for oil services market in 2013:

“Now let me provide some final thoughts on the year ahead. While we see a reduction in North America onshore spend led by continued weakness in pressure pumping pricing, it will be more than offset by growth in the Gulf of Mexico and in international markets. And what I like about that is that half of that increased spend will be in drilling and completions product lines.

The task of finding and efficiently producing oil and gas is not getting any easier for our customers. We all know that — about the challenges of maximizing recovery from deepwater reservoirs. And while much has been said and written on the abundance and real potential of unconventional reservoirs, the fact remains that these reservoirs present their own unique set of challenges for our customers, ranging from environmental to economic to operational. Harvesting both unconventional and deepwater opportunities in the future will require customers to leverage a portfolio of leading-edge products and services and basin-specific expertise from their service providers”

Did 2012’s Best Stocks Beat Estimates by the Most?

The heart of earnings season is fast approaching, but as someone who likes to value companies on a long term basis, it’s typically difficult to put a quarterly beat or miss into context.  Still, since there are plenty of people out there who live and die by earnings surprises, here’s a look at how much earnings surprises played into the returns of last year’s best performing stocks.

In a quarterly-earnings-obsessed-world perhaps it’s not too surprising that the best performing stocks of 2012 tended to beat analyst estimates and the worst performing ones tended to miss them.  Below the S&P 500 is broken down into quintiles by performance.  The best performing stocks of last year beat estimates by an average of 4% over the course of the year.  The worst performing stocks missed estimates by an average of 5%.
Earnings Estimates Stock Performance

INTC 3Q Conference Call Notes

Snippets from this afternoon’s call:

“PC related billings improved in September over the July and August levels.

In the coming months consumers will see tremendous phone factor and industrial design innovation. There will be more than 140 core based ultrabooks, more than 40 of which will have touch. This will include more than a dozen convertibles that combine the productivity of the laptop with the convenience of a tablet.

We significantly cut factory loading at the end of the quarter and we will maintain lower factory utilization rate throughout the fourth quarter

I don’t think that the tablet as we’ve seen it evolve over the last several years is the end state of computing, the innovation is going to start pouring in now”

Earnings Estimate Accuracy

Earnings season is set to pick up again starting next week, and it’s an important season because earnings growth has begun to slow in recent quarters even as the market has risen.  Analysts are expecting S&P 500 earnings to rise to $103 this year from $97 last year.  
Below is a chart of analyst expectations for S&P 500 earnings vs. realized earnings.  (The gray line shows the evolution of what analysts are forecasting for year end earnings throughout the year.)  No surprise, analysts’ mid year forecasts rarely end up being correct, but eyeballing the data, when earnings estimates are below their highest annual levels this late in the year, realized earnings typically end up disappointing early year estimates.

Historical Relationship of S&P 500 Earnings to GDP

The S&P 500 is up nearly 16% year to date, even though earnings are expected to grow 4-5% for the year.  If earnings grow by that much, the growth rate would be roughly in line with nominal GDP growth, which was up 3.9% y/y in the most recent quarter (real annualized GDP growth was only 1.3%).

Below is a long term chart of S&P 500 earnings compared to GDP.  Even though earnings are slightly more volatile than GDP, over the long term the growth of each has been about the same.  Recently S&P 500 earnings have grown faster than nominal GDP as the economy has had a V shaped recovery.  One might expect this circumstance to reverse, or at least temper itself going forward.

How Much Have Companies Benefited From Lower Interest Expense?

In an attempt to quantify the extent to which lower interest rates have helped corporate America, below is a chart of the total interest expense of S&P 500 companies for the last 10 years.  On an aggregate level, interest expense is below where it was in 2005, and as a percent of EBIT it is the lowest it has been in 10 years.  The lower interest costs are a result of both lower rates and deleveraging.  Total debt of S&P 500 companies is down from $7.4T to $6.7T since 2010.

Lower interest expense has added $157B in earnings before tax to S&P 500 companies.  If you assume a 35% tax rate and a market multiple of 14x earnings, the lower interest expense has added approximately $1.4T in market cap to the S&P 500–about 10% of the total market cap of $13.2T.

Tupperware Commentary 2Q12

An interesting take on the world economy from Rick Goings, CEO of Tupperware, an extremely global company:

I spent a lot of time this last month doing not only big group but one on one meetings with the investment community, not only in the United States but more and more focusing on Europe where people tend to hold longer. And but one of the key questions I’m asked almost everywhere I’m, is people want to tap into what are we seeing out there and what do we hear out there?
They understand that the bulk of our sales and profits are outside the U.S., which by the way is only 5% of the world’s population and this is an important question because the perspective one has, if they are getting their news from Wall Street Journal, Financial Times, CNBC or even many U.S.-based analyst reports, one would think that the world is in chaos and it’s bleak out there.
And yet, we just did a review and quite frankly, our perspective is there’s more firm places, more (inaudible) firm out there in the world and things look pretty good and look better than we’ve seen in years. Here’s a brief scan.
In Europe, contrary to what you may read, Europe is not going to fall into the Mediterranean, although it sells newspapers. Politicians there are showing a never before level of commitment and flexibility as they work to hold euro land together. And they are driven by two major things, the desire for peace and economic necessity.
But I do the review and I say well, CIS under Putin, Medvedev, Russian style but it works and we feel good. Nordics look good, Germany looks good. We get down into Turkey, looks good. Greece, who cares, it’s too small, Italy, 66 governments since the Second World War, its stability Italian style.
And then we turn it up, Benelux looks good and it is interesting in France, even under Holland, an interesting perspective. Most of the dramatic changes in governments with regard to repositioning government spending to be less happened under mid land who was an extreme left wing. So we, because he had the ability to bring the assembly within, so I feel, okay, about Europe.
Turning to Latin America, a few topline points in major markets, I already mentioned about the PRI in Mexico. So I feel good about that. In Venezuela, it appears Chavez’s grip is slipping, plus he’s sick, Brazil, fifth largest population in the world, sixth largest economy in the world and a real bright future.
In Asia, finally, 40% of the population, China, India, Indonesia and the driving force is going to be the explosive growth of their middle class, which is going to move from $500 million to $1.7 billion by 2020. In each of these markets, importantly, we have been awarded the status Superbrand. This is interesting, because we’ve never advertised.
Now, I know when somebody reads the recent talk of China’s economy slowing, two things are important to remember. Number one, it’s still growing at 7.5% and number two, the government which is very directive has been proactive with the stimulus and matter of fact, they cut the borrowing rates to stimulate the economy twice in one month.
So, net-net, before I turn it over to Mike, a final thought. When you put it all together, we’re confident in our portfolio and our future. We’re not going to hit on all cylinders in every quarter.