Company Notes Digest 1.15.16

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.

This Week’s Post: “A Psychological Movement Towards Caution”

Jamie Dimon doesn’t expect a recession, but the recent decline in the stock market and ongoing economic headwinds have caught the attention of CEOs in many industries. Will this “psychological movement towards caution” create a broader slowdown? We’ll have to wait and see.

Other interesting data points in this post: First Republic Bank says that San Francisco commercial real estate markets are slowing, General Motors says that ride-sharing companies will adopt autonomous vehicles before consumers, and most people still expect oil to rise back to $50 by the end of the year.

The Macro Outlook:

When Jamie Dimon speaks, it’s wise to listen to what he has to say. He’s not forecasting a recession.

“We’re not forecasting a recession. We think the U.S. economy looks pretty good at this point…obviously, market turmoil we all look at it every day but I’m not sure most of the 143 million Americans look at it that much who have jobs and you have a big change in the world out there. People are getting adjusted to China slowing down…hopefully this will all settle down. It’s not the beginning of something really bad.” —JP Morgan CEO Jamie Dimon (Bank)

There’s a lot of evidence stacking up in a different direction though

It’s well known that industrial end markets are weak and getting weaker

“Agricultural and construction equipment businesses. Sales there were down by 23% in the fourth quarter only 16% for the year so it’s certainly ramped up as we moved through in the third and fourth quarters. We anticipate that pressure to actually get a little bit worse based on the orders that we have here in the first quarter.” —CLARCOR CFO David Fallon (Industrial filtration products)

CSX’s CEO says you can almost think of it as a straight recession

“you have multiple aspects working against you. The low gas prices; the low commodity prices; the strength of the dollar, all three of those together are really pushing. And in some ways, I think you can almost think of it as a straight recession.” —CSX CEO Michael Ward (Railroad)

Aerospace and automobiles have been two areas of strength

“We believe that aerospace in 2016 is going to grow 8% to 9%. The large commercial aircraft segment we believe shows a growth — will show a growth of 15%.” —Alcoa CEO Klaus Kleinfeld (Aluminum)

“if you look at the North America light vehicle production, I think we’re up about 17.5 here in ‘15 and the projection is for 18.2 next year…it looks like we’re going to have another year of growth…we need these sorts of growth opportunities.” —CSX Executive VP Fredrik Eliasson (Railroad)

But General Motors acknowledged that the auto cycle may be maturing

“clearly there’s a lot of concern in this room and around the investment community in general about the automotive cycle is maturing and if you look just simply at the volume numbers coming out of 2009 for the global industry you see exactly that picture where the growth rate was initially pretty rapid, coming out of the trope and has begun to moderate going forward.” —General Motors President Dan Ammann (Automobiles)

The real concern is that a “psychological movement towards caution” is spreading to other industries

“we’re seeing a little bit of a slowdown, or a psychological movement towards caution – that’s definitely happening, and that translates into maybe a little more down, in fact, and a little less robust bidding.” —First Republic Bank CEO James Herbert (Regional Bank)

M&A pipelines have weakened

“I would say that the pipeline coming into 2016 in M&A was good, solid, up in fact. Obviously, volatility can dampen the confidence of Boards and CEOs. Dialogues are pretty active and we think the types of deals that we’ll see in 2016 will look different. But I think in the first couple of weeks it’s not being particularly strong and we do need to see some of the stability come back I think for us to really see our conversions start to pick up.” —JP Morgan CFO Marianne Lake (Bank)

There’s a higher level of caution among technology investors

“On the technology side…On the capital call line portion of the business banking portfolio, I would say there is definitely a higher level of caution, given some of the valuations in that world.” —First Republic Bank Chief Banking Officer Mike Selfridge (Regional Bank)

Commercial real estate is an area of concern

“commercial real estate, we’re paying particular attention to. We’re not immune to the concerns that everybody has about it.” —First Republic Bank CEO James Herbert (Regional Bank)

Supervalu is coping with “very significant deflation”

“we continue to be impacted…with the significant deflation…the most important task that our teams are managing is this very significant deflation” —Supervalu CFO Bruce Besanko (Groceries)

“it’s a 10% swing on inflation and deflation. So that means when you open up the door, you’re 10% behind before you start…My hope is…that the deflation stops, hopefully it will settle down…I have no idea of what’s causing it, but there is nothing more significant in that that’s affecting our business.” —Supervalu CEO Sam Duncan (Groceries)

Burberry saw a tougher luxury environment than expected

“In a tougher external environment for luxury than we were expecting…comparable sales were unchanged year-on-year, an improvement from Q2 but below our internal functions…The trading pattern throughout the quarter was uneven with a very late Christmas.” —Burberry CFO Carol Fairweather (Apparel)

Semiconductor companies are planning for weakness

“macro economics of this year as you know is still several uncertain factors in it. Therefore we are just taking those two factors on account to make our current forecast, therefore it will lead to a bigger range.” —Taiwan Semiconductor CEO Mark Liu (Semiconductor Foundry)

Even biotech CEO’s have taken note of the economic concerns

“the year is off to a somewhat challenging start with the implications of concerns about the transformation of the Chinese economy and the reverberations in equity markets. But I do have to tell you that I don’t think those reverberations and those short-term implications can mask the underlying strength of our industry.” —Celgene CEO Bob Hugin (Biotech)

For now it is just psychology though. Credit quality hasn’t deteriorated outside of energy, metals and mining.

“energy, metals and mining, we’re watching very closely industries that could have knock on effects like industrials and transportation but we’re not seeing anything broadly in our portfolio right now…behind the scenes we’ve had upgrades and down grades of a number of other different companies across sectors but nothing particularly thematic yet but we’re watching.” —JP Morgan CFO Marianne Lake (Bank)


Taiwan Semiconductor sees signs of a rebound in smartphone demand in China and other emerging markets

“For our first quarter 2016 this quarter, we see a reduction of high end smartphone demand. On the other hand, demand for smartphones in China and other emergent markets shows signs of recovery with a upward momentum. We thus forecast a mild revenue decline of minus 1.3% to minus 2.7% quarter-to-quarter for the first quarter 2016. Beyond the first quarter 2016, we expect to be back to a growth trajectory. For 2016 we forecast the world smartphone shipment unit growth rate to be plus 8%, PC minus 3%, tablet minus 7%, and the digital consumer electronics minus 5%.” —Taiwan Semiconductor CEO Mark Liu (Semiconductor Foundry)

Burberry saw sales in China return to growth, but sales in Macao and Hong Kong fell significantly

“Mainland China and Korea both returned to growth and our relatively small business in Japan once again posted exceptional growth. Hong Kong and Macao again still comparable sales decline by over 20% with the continuation of very weak foothold for us and to the sector.” —Burberry CFO Carol Fairweather (Apparel)


San Francisco commercial real estate supply may have caught up with demand

“We’re obviously intensely focused on it. I would say our best call would be that in the commercial area, it’s calming. The supply is beginning to meet the demand, possibly exceed it a little bit, but I wouldn’t be worried yet, although we are cautious. There is a lot of new space coming online in the next 24 months, commercial in San Francisco, much more than has historically been the case, so the rents appear to have topped a bit.” —First Republic Bank CEO James Herbert (Regional Bank)

If oil prices stayed here for an extended period credit would probably start to show more stress

“And has the outlook for oil has weakened, we would expect to see some additional reserve build in 2016 but prices would need to remain at this level for an extended period for them to be significant.’ —JP Morgan CFO Marianne Lake (Bank)


General Motors believes that ride share companies will deploy autonomous vehicles before individuals

“as we engaged with people around the industry and in particular as we engaged with the team from Lyft we found we had this very common view that the first scale deployment of autonomous vehicles will not be selling them to individual consumers, but it will be into this ride share business model and there’s lots of reasons why that’s the case from safety and regulatory to the fundamental economics of taking an expensive new technology and deploying it into a high utilization model into the technical constraints in the early stages of this, which will lend themselves much more to an owned fleet in a controlled operating environment.” —General Motors President Dan Ammann (Automobiles)


Walgreens’ CEO wants to see more consolidation in healthcare

“you know what I think. I couldn’t have been clearer since the very beginning. I have seen this market and I am really convinced that vertical integration is a necessity for the market, [by] market. It is part of what we have to do to reduce — to control the costs in the healthcare arena. Any kind of vertical integration is good.” —Walgreens Boots Alliance CEO Stefano Pessina (Pharmacy)

Celgene and Pfizer both talked about the benefits of working with external partners for innovation

“Pfizer comes from a history of a strong internal R&D…But, around 2010 or so, we started to evolve in creating an organization that would be equally key in to mix internal and external innovation. We built off centers that have huge innovation. That was a new disruptive model to work with academia. We started to use seed capital to simulate start-up biotech that had unique ideas” —Pfizer President of Worldwide Research Mikael Dolsten (Pharmaceutical)

“when we put out pipeline together internal and external, it’s more than double what it would be if we were focused on these exciting areas of technological promise alone. But its not just it — of in terms of just an additive, it is synergistic and the probability of success for all of us is greater because we work together.” —Celgene CEO Bob Hugin (Biotech)


Long term trucking contract prices haven’t come down as much as spot prices

“The contract side on the trucking side, it’s still holding up, even though the spot market is very soft…you know that still we have probably 10% to 15% gap between what the truck prices are and what our prices are.” —CSX Executive VP Fredrik Eliasson (Railroad)

Materials, Energy:

Many people are still expecting oil to end the year in the $50 range

“Our experts are forecasting the price of oil to bottom in Q1 and to end the year in the $50 range.” —IHS CFO Todd Hyatt (Oil Services)

And this downturn may actually have served to increase long term bullishness on oil prices

“Most of the energy price cycles have been these, if you will, high, down, back up. This is a deep U and we hope the bottom of the U as we said occurs and it’s for many, many reasons, different than ever before. We hope the bottom of the U, if you will, occurs in the first quarter. If you go way out to 2020, our teams would be forecasting that there is actually going to be, as demand continues to increase, there will be a real tightening of pricing because the huge capital cuts that Todd has talked about where our key customers have cut 30% to 40%. So, I think it will be a different cycle than ever before. ” —IHS CEO Jerre Stead (Oil Service)

Full transcripts can be found at