Schlumberger 2Q12 Conference Call Highlights

Quote from SLB on its macro outlook:

Let’s then turn around to the macroenvironment, where the continuing Eurozone crisis, coupled with the disappointing numbers from China and the U.S., has led to downward revisions of the outlook for GDP growth and oil demand. High production output from OPEC also lead to a period of crude inventory buildup during the quarter, which, together with fares or lower demand, brought Brent crude prices briefly below $90 before recovering. 

At the same time, global spare capacity for oil is at the lowest level for 5 years and there continue to be a risk of potential production disruption from geopolitical events.
The situation in the global economy remains unsettled, and it seems increasingly clear that the present macro uncertainties will remain for a considerable period of time. 

In this environment, we believe Brent crude prices, in general, will be supported around current levels, although they could be subject to periods of considerable volatility. Continued macro uncertainty coupled with price volatility could make customers more cautious in terms of future activity plans. However, in the international markets, we have seen no signs of this so far. We maintain, absent a future significant setback to the world economy, our safety view that international activity will grow in excess of 10% this year.

CSX 2Q12 Conference Call Highlights

“Automotive was a key driver in the industrial sector, growing 27% as North American light vehicle production increased 25% in the quarter. The chemicals market grew 1% with the frac sand and petroleum products being the primary drivers.

“In the construction sector, growth in building products was offset by a decline in aggregate shipments due to the completion of several stimulus projects.

“In the agricultural sector, volume declined across all major commodities. Corn shipments to the Southeast for animal feed were lower as a strong local wheat crop displaced Midwestern corn. Phosphate shipments declined as buyers delayed purchases in the expectation of moderating commodity prices. Finally, ethanol shipments softened as a result of lower gasoline demand. Looking forward, the Automotive market will continue to drive growth in the industrial sector. In addition, we continue to see growth opportunities in chemicals and Metals, particularly in commodities that support the oil and gas industry. In the construction sector, aggregate shipments will remain challenged, while recovering housing starts will drive continued growth in building products. Finally, we expect the agricultural sector to be stable with an increase of phosphate shipments being offset by a lower ethanol demand.”Coal revenue declined 14% as strength in Export Coal partially offset significant weakness in utility coal volume. Domestic utility tons declined 37% as natural gas prices remain low, leading to the continued displacement of coal at some utilities. In addition, electrical generation declined in the Eastern United States. Partially offsetting this weakness, export coal volume grew 41% to 14.7 million tons in the quarter as demand was strong for U.S. thermal coal.

“Looking ahead, even though the market for export coal is volatile, we clearly expect to exceed the ton shipped in 2011 as the demand for U.S. coal will remain strong in the second half although not at the level we saw in the first half. At the same time, domestic utility volumes are expected to face continued challenges due to low natural gas prices, above normal inventory levels and environmental regulations. Headwinds should begin to moderate somewhat through the balance of this year.

“And if you look at the average age of the automobiles and the light trucks in the United States, they’re some of the highest numbers that they’ve been post-World War II. The ability to secure financing and particularly longer-term financing in the range of 6 years has proved to be positive for the consumers as they go to purchase automobiles. Chrysler, for example, are adding third shift to their Belvidere plant. Hyundai Montgomery is adding third shifts to their plant. So I feel nothing but positive things about the automotive industry as we go forward.”

PNC 2Q12 Conference Call Highlights

This is the preface to the CFO’s segment on performance for the quarter.

In my remarks today, I will focus on the following: our loan growth and favorable shift in our deposit mix; our strong gains in net interest income; our growth in commercial and consumer fee income, excluding our mortgage repurchase provision; our disciplined expense, capital and liquidity management; and an update on our outlook for 2012 versus 2011.

While seemingly innocuous this quote is indicative a huge shift in focus for the banking system in general.  Two years ago, banks were focused on capital and credit.  Today, the focus is back to growth.

WFC 2Q12 Conference Call Highlights

Quotes from 2Q12 WFC Earnings Call

  • organic growth in both commercial and consumer portfolios.
  • average core deposits up $10.1 billion from the first quarter, up $73.2 billion or 9% from a year ago. 
  • net interest margin was unchanged at 3.91%
  • established an efficiency ratio target of 55% to 59%
  • charge-offs were…1.15% of average loans, down…$3.2 billion or 59% [from 4Q09 peak].
  • Nonperforming assets were down $1.8 billion from the first quarter, down 11% from a year ago. NPAs were 3.21% of total loans in the second quarter, the lowest level since 2009.
  • Our estimated Tier 1 common equity ratio under the latest Basel III…7.78% for the second quarter
  • Return on assets was 1.41%, the highest in 16 quarters and within our target range of 1.3% to 1.6% that we provided on Investor Day. Our ROE grew to 12.86%, also within our target range of 12% to 15%
  • I think the market continues to provide opportunities for firms that have the liquidity and the capital to [make acquisitions]. Whether or not we’ll be successful, I certainly can’t promise you because we turn down more than we pursue.
  • We’re not taking any significant duration risk or any significant credit risk [in the securities portfolio]. This is still a very high-quality portfolio and the duration is relatively short.
  • Random quote from Stumpf that typifies WFC culture: But, Mike, we will not stretch for something. If — I mean, that we — it’s just not in our culture to do that. So if we happen to have something that goes down one quarter, that’s life.

Citi 2Q12 Conference Call Summary

Quotes of interest pulled from the C 2Q12 call:

  • On a macro level, we believe the euro zone overhang will continue. Our on the ground sense of the emerging markets leaves us more positive than we were a few months ago, and maybe even better than some market perceptions.
  • In the U.S. consumer demand and Basel loan demand remain low, as consumers continue to deleverage. And as Federal banks have lowered interest rates, the margin from lending has decreased, and it is expected rates will stay low for the near future.
  • Citigroup end-of-period loans grew 1% year-over-year to $655 billion as continued loan growth in Citicorp outpaced the wind-down of Citi Holdings, and deposits grew 6% to $914 billion.
  • Total Citicorp loans grew 10%, with consumer up 2% and corporate loans up 22%. Excluding FX, Citicorp loans grew 13% with consumer up 5%.
  • SWe ended the quarter with a $191 billion in Citi Holdings were roughly 10% of total Citigroup assets. The $18 billion reduction in the second quarter included roughly a $11 billion of sales approximately $6 billion of net runoff and pay-downs and $1 billion of net credit and net asset marks.
  • …Global Consumer Banking, overall credit quality remains good, with continued improvement in North America and stable credit in Asia and Latin America. 
  • Latin America, despite the noise this quarter from FX was the fastest growing of our regions in consumer….particularly in Mexico
  • Asia consumer revenue growth has slowed…retail investors in Asia have de-risked giving the same global macro concerns…specific country slowdowns, most notably in Korea where policy actions by the government have trimmed the availability of consumer credit in that market…
  • …some revenue headwinds for Asia, into the third and fourth quarters. 
  •  North America consumer benefited from another quarter of strong mortgage activity…however, in cards…[reflect] ongoing economic uncertainty and deleveraging
  • …do not infer from the situation of one LIBOR submitting bank that every bank is in the same or a similar position…
  • There are still an awful lot of foreclosed – or foreclosures and profits that had yet to hit the market. So I don’t look at this yet as being a robust housing situation…the early 90s were small potatoes compared to what we’re going through now

Comments from Fastenal CEO

I thought this comment from the Fastenal conference call was worth highlighting.  It’s the first thing that the CEO addresses:

Manufacturing has slowed, that’s clear. But on a very positive note, I’ve been out talking to lot of our regional people and district people, and we have not seen a lot of abrupt changes. It’s more of a step-down, and we haven’t seen a lot of panic from our customers, so we think although it’s much slower, so much slower than it was, it doesn’t appear to be a lot of panic going on, so that gives us some optimism for the next several months.

May 2012 Investor Letter

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 readers of this blog.

Dear Investors,

April was the start of earnings season for the first quarter, which is when public companies report their quarterly results. Earnings season is by far one of the most chaotic times to be an investor because of the sheer volume of data that is being generated by the companies that we follow. It’s a whirlwind of events that lasts for roughly 30 days starting in the second week of April, July, October and January. During this time period a majority of the 5000 publicly traded US companies will issue a press release and hold an hour-long conference call in which management gives a recap of quarterly events and an update on forward outlook. All told, these 5000 companies may generate between three and seven thousand hours worth of data in the span of 720 physical hours. Surrounding the news flow the volatility of individual stocks can become extreme. It’s common that individual stocks will move up or down by double-digit percentage points in one day based on a quarterly miss or beat.

As longer-term investors, we make it a point to not lend too much weight to any single quarter’s results. Still, we operate in a marketplace that is dominated by those who do and therefore our companies will tend to get swept up in the frenzy. In such an environment the most important skill an investor can have is the presence of mind not to make capricious decisions. Decisions made based on half formed opinions can be particularly costly in an environment in which stocks may gain or lose one fifth of their value in a single trading session.

Earnings season is important to long term investors too though. From all this data we gain new insights into the companies that we own, ensure that the reasons that we own them are still valid and also gain insight into the general economy from some terrific management teams.

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. In general most companies have reported strong earnings, but not so strong as to justify significantly higher stock prices for the time being. Most companies seem to be reporting that the US is healthy, but that China is slowing and Europe is in recession. While it’s remarkable to see the US leading the global economy, it’s troublesome that two of the three largest global markets are showing signs of weakness. If our own recovery is expected to continue, either Europe or China will have to keep pace. I’m am skeptical that the US can detach from the rest of the world, especially considering that our economy continues to receive a large amount of stimulus in the form of large budget deficits and low interest rates. Looking further out, I am concerned that the European situation is a model for what could happen when stimulus is removed from our economy. In particular, England, which shares many attributes with our economy, entered a recession last quarter partially thanks to budget cuts.

In April, these concerns started to affect US equity prices. The S&P 500 fell 0.75% and was down as much as 3.5% at mid month. While our portfolios were not immune to this pullback, we do have extra cash to capitalize on it, and the good news is that global economic uncertainty has already brought the price of many desirable companies to levels that are attractive for our portfolios. I have been opportunistically beginning to purchase more shares of these companies in April and May. However, I am still conscious of adding too much general exposure to the market until I see a more broad-based selloff. I feel that patience is still key.

Scott Krisiloff, CFA

Opinions voiced in the letter should not be viewed as a recommendation of any specific investment.  Past performance is not a guarantee or reliable indicator of future results.  Investing is subject to risk including loss of principal.  Investors should consider the suitability of any investment strategy within the context of their personal portfolio.  For more information on Avondale Asset Management, readers may be directed here.

DFS new leverage targets

Though it probably seemed like it would be a long time before leverage came back to the financial system, the following comment from Discover caught my eye on its most recent conference call. The company is moving from benchmarking equity on a tangible common basis to a Tier 1 (less strict) standard. It is also targeting a lower level of capital and therefore more leverage. From the call:

Turning to capital. For some time now, we have benchmarked our key capital ratio as tangible common equity-to-tangible assets with a target of plus or minus 8%. Going forward, we will switch to focusing on our Tier 1 common capital ratio as it better represents how regulators and the industry look at capital levels, and we have established a 9.5% long-term target. We ended the most recent quarter at 14.3%

Apologies to anyone who read this with glaring typos earlier.  That’s what I get for posting from my iPhone.

Troubling Comment on Asia From UPS

UPS has spent a lot of money (like most companies) betting that the future growth of the company will come from the Asia Pacific region.  While one quarter should never be taken too seriously, the following comment from the 3Q conference call probably doesn’t give UPS investors the warm and fuzzies.

“The bottom line is we built a network [in Asia] expecting certain levels of growth that did not materialize” in the third quarter.