Company Notes Digest 07.23.18

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Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

We’re back again for earnings season!  The general economic outlook remains positive. CEOs and consumers are extremely confident and don’t see any clouds on the horizon.  However, the yield curve tells a different story.

There was a lot of talk about inflation and tariffs on this week’s calls. Companies are raising prices to offset increasing input costs. The impact of tariffs has been minimal so far but companies continue to monitor the situation.

The Macro Outlook:

There are not a lot of potholes in the economy

“The consumer balance sheet is in good shape, capital expenditure is going up, household formation is going up, home building is in short supply, the banking system is very, very healthy compared to the past. Consumer confidence and business confidence are very high, albeit off their highs, probably because of some of our trade. So, if you’re looking for potholes out there, there are not a lot of things out there, and growth is accelerating.”- JP Morgan Chase & Co. (JPM) CEO Jamie Dimon

The consumer is in very good shape 

“our consumer activity is the highest it’s been in many years here. Payments by consumers are up 9% for the first half of the year versus last year, so everything shows as the consumer driven U.S. economy is in very good shape” – Bank of America Corporation (BAC) CFO Paul Donofrio

“I think, frankly the United States economy is in a good place from a cyclical standpoint close to our maximum employment and stable prices target “- Federal Reserve Chairman Jerome Powell

Optimism abounds

“When I talk to business CEOs, they are very optimistic, they are spending and planning the spend on CapEx” – BB&T Corporation (BBT) CEO Kelly King

“We talk to our leaders and our lenders and they’re talking to their customers. Things are very positive…The consumer spend numbers are high. Corporate payment spend activity is high, payables and T&E. So there’s a lot of confidence out there, and I think, actually, loan growth will accelerate.” – U.S. Bancorp (USB) CEO Andrew Cecere

talking to our CEOs and other companies we interact with tax reform has increased, in many cases, their cash flows and has made them more confident…So I would say what we’re seeing on the ground is positive” – The Blackstone Group (BX) President Jonathan Gray

“our customers seem to be — continue to be very optimistic about the future” – CSX Corporation (CSX) CEO Jim Foote

No one sees fragility despite the long business cycle

“while this cycle is older than potentially typically cycles have been, growth over the last decade has been lower through the recovery. So, there is plenty potentially of room to play. And as we look at all the economic data, not just here in the U.S. but also globally, there are no real signs of fragility” – JP Morgan Chase (JPM) CFO Marianne Lake

“The economic backdrop is quite healthy, despite the recent turbulence in markets” – The Blackstone Group (BX) CEO Steve Schwarzman

But the yield curve is telling a different story

“The yield curve does say something different today and there could be other components to that that’s driving that differential. And Terry – from a positioning standpoint, we’re not assuming that there’s going to be a steepening in the short-term” – U.S. Bancorp (USB) CEO Andrew Cecere

Higher inflation is expected

“commodity inflation has picked up a bit. Certainly, we have seen a bit more in oil and in addition to that in aluminum; second, transport costs have also been under some pressure with the driver shortage in the United States; and then third, in international markets, as you know where we have seen some inflation – PepsiCo (PEP) CEO Indra Nooyi

“facing intense wage pressure and difficulty in finding the people that they need…. we can expect higher inflation and higher rates” – BB&T Corporation (BBT) CEO Kelly King

“We continue to see elevated commodity prices and as a result now expect inflation headwinds” – Stanley Black & Decker (SWK) CFO Don Allan

“the key issue is that inflation continues to run very quickly…it is inflationary for products and that inflation has not stopped.” – Fastenal (FAST) CFO Holden Lewis

Inflation begets more inflation

“we already implemented an initial set of price increases in June, with an additional set of actions planned for the third quarter…we are acting with agility to implement price and cost actions to offset these transitory [tariff] headwind.” – Stanley Black & Decker (SWK) CFO Don Allan

“we are seeing more headwinds on cost inflation…And we are raising prices to offset that” – Electrolux (ELUXF) CEO Jonas Samuelson

“It’s hard to imagine that the current cost pressures could sustain a whole lot longer before manufacturers have to move much more significantly” – MSC Industrial Direct (MSM) CEO Erik Gershwind

Labour markets are very tight

“with unemployment at the level that it is in the U.S. and some of the international markets, it is a very competitive market for labor” – Domino’s Pizza (DPZ) CEO Richard Allison

Construction activity is slowing due to shortage of labor

“we’ve seen a decline in construction opportunities. That’s not atypical at this point in a cycle, that’s for sure. There’s a real constraint in terms of, candidly, availability of labor and underlying commodity prices have increased. So that’s affected the pace of new home construction. That’s a little bit different than in prior cycles at this time.” – Wells Fargo (WFC) CEO Timothy Sloan

Tariffs and trade rhetoric have had little impact so far but companies are watching closely

“You can read in the papers, the specific companies that maybe impacted, but we have not seen that in any kind of – even that in the industry level” – U.S. Bancorp (USB) Chief Risk Officer Bill Parker

“we anticipate a minimal impact to our overall business results in 2018…this is a very dynamic situation that changes by the day…and we’re giving it substantial focus.”- Honeywell International (HON) CFO Greg Lewis

“when we look at the trade rhetoric, it certainly introduced volatility, but we haven’t yet really started to see any significant changes in behavior….the markets have the fears of what that rhetoric leads to.”- Citigroup (C) CFO John Gerspach

“We have not yet seen tariffs impacting customer demand. Although, they are now top of mind for both customers and suppliers, and are beginning to impact manufacturing input costs. We are just beginning to see cost pass-throughs from some suppliers.” – MSC Industrial Direct Co. (MSM) CEO Erik Gershwind

“if this escalates, is protracted, spills into the broader economy, it could have a broader impact and we’re obviously watching that”- The Blackstone Group (BX) CEO Steve Schwarzman

International:

It’s still deflationary in Europe

“Pricing in Europe, it remains a fundamentally quite deflationary environment…over the longer term, that you’ve got to assume that Europe remains a difficult place to take pricing” – Unilever (UL) Graeme Pitkethly

A transportation strike in Brazil had a negative impact last quarter

“growth was negatively impacted by the 11-day transportation strike that broadly disrupted commerce in Brazil.” – PepsiCo (PEP) CEO Indra Nooyi

Financials:

The markets are lacking breadth

“If you strip out a handful of outperforming tech stocks, the lack of breadth in the equity markets is troubling…companies are using excess capital to make acquisitions and more aggressively repurchasing shares at levels not seen since 2007, and the pool of investable equities is shrinking” – BlackRock (BLK) CEO Laurence D. Fink

Cash isn’t just safe anymore, it’s also profitable

“Short term rates have now surpassed 2%, a level not seen in almost 10 years. These rising rates and a flattening curve have made cash not a safe place but now also a more profitable place for investors to stand by and wait.”- BlackRock (BLK) CEO Laurence D. Fink

The outflow of tax payments was unusually high this year

“the outflow of tax payments was unusually high this year, which was not as much of a surprise as all that given the tax planning that people did in the face of the tax bill that happened” – First Republic Bank (FRC) CEO Jim Herbert

Consumer:

Consumers are traveling for leisure

“it is a relatively robust business environment and very, very strong leisure demand…We see very robust demand and continued strength into the third quarter and the early results for fall” – Delta Air Lines (DAL) CEO Ed Bastian

Unilever is seeing a different consumer environment than other companies

“If we go to North America itself, there is no question that the markets remain turbulent there. Nielsen actually shows the market was being more or less flattish. And we think that including ecommerce, that market might be up 1% to 2% maximum. Price growth has dropped off in the U.S. also. There, it’s not entirely surprising, in my opinion, because we’ve had several years of good price growth in that market” – Unilever (UL) CEO Paul Polman

Technology:

GDPR is having minimal impact on advertising spend

“we are seeing minimal disruption to date from GDPR to our third party advertising revenue in Europe” – eBay (EBAY) CEO Devin Wenig

Industrials:

Companies aren’t spending on traditional CapEx

“middle market customers remain cautious, probably the greatest source of caution right now relates to the what may or may not have happened on the tariff side of the house…we are not yet seeing what I would call a lot of like traditional CapEx spending occurring” – Comerica Inc. (CMA) President Curtis Farmer

The domestic steel industry is benefiting from tariffs

“Our steel mill capacity utilization in the second quarter of 2018 was an impressive 95%…The U.S. steel market is…benefiting from a reduction in unfairly traded imports entering our country.” – Nucor Corporation (NUE) CEO John Ferriola

Aerospace markets continue to be strong

“So based on what we’re seeing right now, based on the orders, long cycle, short cycle that we’re seeing, there’s every reason for me to continue to be bullish on our growth” – Honeywell International (HON) CEO Darius Adamczyk

Materials, Energy:

Oil demand is strong

“The fundamentals of the global oil market continue to evolve favorably…as the balance of crude oil supply and demand tightens further. Global GDP growth remains robust and oil demand growth was strong in the first half of this year, helped by cold weather in the northern hemisphere” – Schlumberger Limited (SLB) CEO Paal Kibsgaard

The supply base is weakening

“In spite OPEC’s recent decision to increase oil production, the supply base continues to weaken, with growing geopolitical pressure to remove Iranian barrels from the market, with no apparent resolution to the falling production in Venezuela, and with Libyan exports continuing to be volatile.” – Schlumberger Limited (SLB) CEO Paal Kibsgaard

Exploration spend is turning a corner

“But we are starting to see that exploration spend appears to be turning a corner as well…both deepwater and exploration is starting to show kind of double-digit growth already in 2018. And I can only see that accelerating going into 2019.” – Schlumberger Limited (SLB) CEO Paal Kibsgaard

Miscellaneous Nuggets of Wisdom

A lot can change in a year

“There is a lot of things that change, as you know, over the course of the year. And the year never goes quite like you expect it to go.” – Abbott Labs (ABT) CEO Miles White

Full transcripts can be found at www.seekingalpha.com