Company Notes Digest 1.24.14

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

Retail investors are making their way back into the market:

“With less uncertainty in Washington, an improving macroeconomic environment and the beginning of Fed tapering, retail investors are making their way back to the markets, leaving us with a lot to feel good about.” ($AMTD)

Less uncertainty makes retail investors more comfortable:

“there is less uncertainty for investors to worry about, and as we all know, investors do not like uncertainty. As a result, the trading environment has improved. Our broader base of investors has re-engaged, boosting trading activity and contributing to the strength of our quarter” ($AMTD)

Their investment advisors are bullish too:

“If you went to the RIA side, they have been fully invested all the way through. They’re very low—they’re sort of the lowest client cash—allocation to client cash that we’ve seen, and again they would be fairly bullish on equities.” ($AMTD)

But caveat emptor, retail investor, there may not be many attractively priced companies to buy:

“I feel more constrained by what I view as a not terribly robust set of opportunities or valuations. I’m always vigilant for opportunities for the company but they’ve got to be good fits strategically and they’ve got to be good valuations.” ($ABT)

Individuals were buying stocks, but it doesn’t appear they spent any time at brick and mortar in 4Q:

“I’ve seen one research firm describe as the worst seasonally-adjusted holiday performance period in the last 10 years, obviously, excluding 2008.” ($CSH)

Howard Schultz, Starbucks’ CEO, thinks that 4Q13 was a turning point in retail:

“Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers research, compare prices and then bought the brands and items they wanted online, frequently using a mobile device to do so…traditional brick and mortar retailing is at an inflection point…Navigating the seismic shift will continue to be very, very difficult” ($SBUX)

Cash America thinks the low end consumer is about to hit a positive inflection point though:

“I’ve been doing this an extraordinarily long period of time and intuitively, I still believe that this customer will be back and will be back with the traditional behaviors that we had seen through most of the 30-year history at Cash America. And I just have an intuitive sense today that we’re getting close to that return.” ($CSH)

It’s all about confidence:

“The issue in my mind has been confidence and our future confidence in their employment, confidence in their take-home pay. And when that strengthens in our particular consumer base, I am pretty optimistic that we’ll see some growth we haven’t experienced on a same-store basis here over the last 2 years.” ($CSH)

IBM says China weakness is a result of a hangover from new government structural reforms:

“The largest declines in China were in our hardware business. We continue to be impacted by the process surrounding the implementation of a broad-based economic reform plan. While there is more clarity on the overall plan, we continue to believe that it will take some time for our business in China to improve.” ($IBM)

It’s not clear to IBM whether China will return to growth even by 4Q14:

“It’s hard to tell. China is hard to tell, because I don’t have a good sense of how those reforms work their way through the system and the decision-making that goes all around it. This is a, as I am sure you will appreciate it, pretty complex environment and it’s difficult to gauge exactly what’s going to happen on a roll-out basis.” ($IBM)

Freeport McMoran seems more confident that infrastructure spend is still a big part of China’s growth plan:

“During 2013, China went through a government change, a reorientation of its economy towards internal consumption with less emphasis on exports and infrastructure development and major spending on infrastructure continues as evidenced by the recent announcement by state grid to increase its capital spending and that has a major impact on copper consumption there, but consumer demand remains strong. Infrastructure investment in China is a major part of this marketplace.” ($FCX)

According to Freeport, this is supporting copper fundamentals:

“copper markets appear to be strengthening from where we were a year ago…when you look at the performance of the economy in China, even though there’s some slowdown, the size of the economy is growing to the extent that the somewhat lower percentages still translate into very substantial amounts of copper demand.” ($FCX)

Jacobs Engineering agrees, mining is actually getting better:

“Mining and minerals is growing. It’s growing for us and the good news is, we think the industry is seeing the market come back a little bit. Commodity prices are firming. People’s expectations about where commodities would go, particularly iron ore and gold, haven’t come through. The copper supply situation remains a concern, and so we’re starting to see people contemplating real projects again.” ($JEC)

Financials

City National Bank doesn’t see strong loan demand in 2014:

“I think it’s really just a reflection of our outlook for the economy, the general level of loan demand. We had, I think, very strong growth this year and attracted a strong group of new clients. We think we will have another very solid year of growth in 2014. But at this point, we’re not projecting quite as robust a level of growth, just given the general economic conditions and low levels of loan demand.” ($CYN)

Real estate is a bright spot though:

“I think there’s a tone of additional optimism in the real estate space and in the commercial space. And our pipelines are actually looking pretty good across the company.” ($CYN)

Technology

PC was better than Microsoft expected:

“the PC market was slightly better than our expectations.

Businesses led PC demand, but consumer demand was still soft:

Business PCs grew again, for the third consecutive quarter, and benefited from an improving macro-environment, better availability of innovative new hardware, and a refresh cycle ahead of Windows XP end of support…Consumer PCs, while better than our expectations, continued to be soft, as they face challenges from competing form factors. And, as a general theme, developed markets outperformed emerging markets.” ($MSFT)

People still like to consume content on big screens, not everything mobile:

“For a lot of our entertainment, we are really pretty large screen centric. And so we are less driven by mobile trends than say a music service would be” ($NFLX)

NFLX isn’t too worried about net non-neutrality:

“if ISP especially major ISPs were to contemplate blocking Netflix or other services it will significantly fuel the fire for more regulation which is not something they are interested in.” ($NFLX)

4K video is a catalyst to adopt higher speed internet:

“If you are on the cost side than ISP, then you may be affected by that and think about that, but if you are on the revenue side, you are celebrating, because now there is a real need to get a 40 or 50 megabit plan. So you could support two streams and you have got something to get people to upgrade to the faster plans.” ($NFLX)

Applications push computing power, which pushes applications:

“For 20 years, we saw PCs get faster, applications get richer, which was a reason to get faster PCs, which then enabled richer applications. And that ecosystem really grew” ($NFLX)

There are still 25m Americans without smartphones:

“We still have approximately 25.5 million basic phones and 24.7 million 3G smartphones in our customer base which gives us plenty of opportunity in 2014.” ($VZ)

Materials, Industrials, Energy

Brazil drilling activity will likely remain weak through 2014 and recover in 2015:

“In Brazil the business environment remained difficult with lower activity in the fourth quarter for Petrobras as well as the local independent and the international oil companies. We have adjusted our cost base in the country and are prepared to manage what appears to be a challenging 2014 before activity growth likely resumes in 2015.” ($SLB)

Still pricing pressure in North America services market:

“The main challenge in the North America land market is still pricing and we saw further downwards pricing pressure in most product lines in the fourth quarter partly amplified by the renegotiation and roll over of several key contracts.” ($SLB)

Pricing pressure probably wont get better this year:

“at this stage we do not expect the market to reach equilibrium in 2014.” ($SLB)

Oil service companies have to continue to push technology in order to protect pricing:

“I’m quite positive and optimistic that through the new technology introductions we can continue to drive the effective pricing up.” ($SLB)

Low hanging fruit in drilling efficiencies may have been picked by now, but there is still room for improvement:

“I think clearly the low-hanging fruit has been picked. Right now, I don’t see any reason why we will not continue to get year-over-year well count efficiencies. You’re starting to see sort of a massive upgrade to the rig fleet that’s out there. The move to pad drilling, obviously I think is one of the real drivers we saw last year in terms of the efficiency gains. But…there’s other plays in the U.S. that are still moving toward more pad, more horizontal drilling. So I think just the nature of the transition of the market, the new technologies that not only Halliburton and the other service companies have, but the rig contractors are investing more in efficiency. So I don’t really see an end to it at this point in time, but I think your big low hanging fruit’s been picked at this point.” ($HAL)

Fundamentals support oil price (Brent) at $100 per barrel:

“we also expect the global oil market to be well supplied in the coming year driven by continued growth in North America liquids production, leading supply and demand relatively well balanced…continuous support for Brent crude prices around $100 per barrel.” ($SLB)

Miscellaneous Nuggets of Wisdom

Slower growing businesses have value too:

“You can get hung up on the optics of growth rate and say, Geez it’s hurting, it’s diluting my growth rate but at the same time I think the notion that it’s making a fair amount of money and it’s profitable and there is value in that. So I think our job is to figure out best way to optimally derive that value for our investor” ($ABT)

Consumers make price choices around heuristics, not logic:

“in pricing period, there is also a sense that consumers make choices around heuristics. And so a dollar rich might not sound like a lot on a logical basis, but consumers may have shortcuts that they make, they take the middle or the upper or the low and so that factors into the right course as well.”($NFLX)

Respect your competitors even when it looks like you’re the top dog:

“So there is a number of players in all the major markets and then the smaller markets. They are all doing good work. I think what we have seen with our success in the UK is that there can be very strong players like the BBC iPlayer, (indiscernible) and Sky. And we can still build a very successful business. And so I think the key is having unique content, a great reputation, a good value proposition and we can succeed and in many cases, that competitors can also.” ($NFLX)

Go to extremes to please your customers:

“we have got a go to great extremes to give consumers control of the content you know going all the way to the extreme of putting the entire season out at one time”($NFLX)

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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