Company Notes Digest 1.27.17

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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.

The Dow broke through 20,000 and optimism is the mood of the moment. Last week US Bank said that optimism hasn’t translated to action quite yet. But comments this week from Cullen Frost Bank suggest that it’s only a matter of time. Companies are eager to invest in growth and are moving forward with plans that they had delayed. There doesn’t seem to be much standing in their way at the moment. The new president loves that the Dow is at a new record and although he talked about bubbles on the campaign trail now he wants it to keep going “up, up, up.” Presidents often get their way.

The Macro Outlook:

The industrial economy is seeing a broad based improvement

“it was broad-based growth in Industrial, both in terms of the businesses and in terms of the geographical area…And if you look upon PMI, the United States had a PMI of 54.7% in the quarter, China 51.4%, and Germany 55.6%. If you think about that in terms of big economies that will help us as we move forward, and as I said, it was broad-based.” —3M CEO Inge Thulin (Conglomerate)

Customers are moving forward with plans they had delayed

“As I have gone around the state, visiting all our locations during the month of December, one thing it was a consistent message was how many customers particular I would say mid and small customers are moving forward with plans that they had, had delayed, right? Somebody had a piece of equipment they want to put in and they can wait for six months, after they got the clarity from the political situation, the word was let’s move forward, let’s move forward now. So I think you are definitely seeing just general optimism in the market moving forward…I think we are seeing momentum increase. I would expect loan growth to be better than 2016 for sure.” —Cullen Frost CEO Phillip Green (Bank)

The housing market is solid

“The market therefore is a very solid market…we continue to see good sales trends in January, very early into spring.” —DR Horton CEO David Auld (Homebuilder)

The Hawaiian economy remains “pretty darn strong”

“the economy remains pretty darn strong. There really aren’t any factors at this point pointing to a softening or a downturn in the local economy. So I think that’s, if you will, the tailwind that we are looking at from a loan perspective and a deposits perspective” —Bank of Hawaii CEO Peter Ho (Bank)

Even energy producers are excited again

“Customers are excited again, and our conversations have changed from being only about cost control to how we can meet their incremental demand.” —Halliburton CEO Dave Lesar (Oil Service)

Texas’ economy never faltered

“Despite lingering low oil prices in the first half of 2016, the Texas economy grew faster than the national average and all other energy states. The service sector and the I-35 corridor remain strong throughout the downturn. According to the Texas Workforce Commission, Texas added 210,000 jobs last year. The unemployment rate in December was 4.6%.” —Cullen Frost CFO Jerry Salinas (Bank)

Corporations can’t wait for lower taxes

“Obviously our new administration is pro-business, but there’s a lot of moving parts in that…I think we’re all waiting to see if there’s a tax reform package that would allow us the ability to access overseas cash and repatriate cash…I think that would make a big difference for a lot of multinationals” —Abbott Labs CEO Miles White (Healthcare)

“I think all of us recognized we’ve got a new administration in Washington which has an agenda to be friendly to business and I think, we’re anxious to see how all of that will play out certainly tax reform is the biggest single item that we’re focused on this year.” —United Technologies CEO Greg Hayes (Conglomerate)

“I think what GE wants and what we think is most important to competitiveness for U.S. companies is essentially a competitive tax rate, something that looks more like the OECD averages, which is just roughly 21%, 22%.” —GE CEO Jeff Immelt (Conglomerate)

“we also are advocating for the modernization of the US tax codes. As both sides in the aisle in the Washington have noted, the US tax code for business is outdated and in many cases makes the US a more costly place to do business leaving US workers and the US economy at a disadvantage. We are very encouraged by the proposals currently in discussion and we will support business tax policy that is competitive with most developed countries and encourages innovation and growth.” —Johnson and Johnson CEO Alex Gorsky (Healthcare)

But in theory, lower corporate tax rates increase WACC

“if the risk free rate goes up, cost of equity goes up. If the tax rate goes down then our after-tax cost of borrowing theoretically goes up…if you just started with those two simple assumptions, you would look at that and say, gee, if the risk free rate goes up and if the tax rate goes down, you would speculate that our overall cost of capital would go up.” —Travelers CEO Alan Schnitzer (Insurance)

Still, Trump couldn’t be more pleased

“The Dow on top of it just hit 20,000. First time in history. I’m very proud of it. And now we have to go up up up. We don’t want it to just stay there. That’s gonna be the challenge, but its gone up a lot since I won. Don’t forget when I won people thought maybe it will go down, but the business world doesn’t think that. The business world knows me, they don’t think that. And it was a steady climb and now we just hit a record and a number that’s never been hit before, so I was very honored.” —President Donald Trump (Government)

International:

US optimism hasn’t translated to international optimism yet

“I think outside the U.S., I really haven’t seen much change in interplay, post the election in terms of what our customers are saying and how to think” —General Electric CEO Jeff Immelt (Conglomerate)

Many companies remain positive on China though

“China continues to be a very attractive opportunity. This is a market that is among the highest growth rates across the world on a sustained basis and that really hasn’t changed.” —Procter and Gamble CFO Jon Moeller (Packaged Goods)

“performance was driven by strong results in China…Notably, China had a strong quarter with comparable sales of 7.9%” —McDonald’s CEO Steve Easterbrook (Fast Food)

“Looking ahead in the China market, we expect another year of significant volume growth. Category demand should remain strong” —Kimberly Clark CEO Thomas Falk (Packaged Goods)

China is posturing for free trade

“In a world with a plethora of uncertainties, China offers an anchor of stability and growth with its consistent message of support for reform, openness, and free trade. The times may be difficult. But that’s all the more reason not to lose sight of these principles, which have stood China—and the world—in good stead.” —Chinese Premier Li Keqiang (Government)

Financials:

The credit window wont stay open forever

“I think this window is still open but…you know this thing won’t stay open forever…You know after a number of years post the great recession where the growth of revolving debt was near zero or even negative, it has crept up in the last couple of years and now it is running at a 7% year-over-year rate and obviously that’s a faster growth rate than the economy is doing. And if you look at this growth it is broad-based although subprime growth has picked up and is now growing faster than prime…So our primary point has been – look in the end this is physics. The year after year just amazingly low losses…this has to be the bottom, things are going up from here.” —Capital One CEO Richard Fairbank (Bank)

Rate-increase expectations are low

“we are projecting just one rate increase and we are projecting that in November of this year.” —Cullen Frost CEO Phillip Green (Bank)

Technology:

AI requires unique data sets

“Yes, we have world-class cognitive technology, but that’s table stakes. We are building datasets by industry that we either own, or we partner for. Importantly, we’ve designed Watson on the IBM Cloud to allow our clients to retain control of their data and their insights, rather than using client data to educate a central knowledge graph.” —IBM CFO Martin Schroeter (Enterprise Tech)

The next frontier for automation is the back office

“if you think about a customer transaction, if we could take the customer’s order, get the price exactly right, the quantity shipped on the date they wanted it with the correct terms. So it flies right through our system and their system without any additional [human] intervention that’s a big opportunity and it takes friction out of everyone’s transaction costs. But we still got a long way to go to get to that.” —Kimberly Clark CEO Thomas Falk (Packaged Goods)

Healthcare:

ACA didn’t drive significant volumes so it may not be missed

“We did not see any significant impact uptick in business as a result of the implementation of the Affordable Care Act…So therefore, any change going in the opposite direction, we don’t think will be negative.” —Johnson and Johnson CEO Alex Gorsky (Healthcare)

Industrials:

Auto production is likely to decline in 2017

“As we look at 2017, most industry sources are predicting a minor decline in North American automotive production rates of about 1% to 3% compared to 2016, but this comes after the all-time record year of 2016. So even if such decline would indeed materialize, we would still anticipate another solid year in the automotive market.” —AK Steel CEO Roger Newport (Steel)

Defense budgets could increase

“there appears to be bipartisan support for eliminating sequestration. As I’ve said in the past, we have a lot of independent dialogues with various members of Congress, every one I’ve ever spoken to [Technical Difficulty] they don’t think it’s good policy and they want to get rid of it…there’s also a strong discussion around increasing defense spending” —Lockheed Martin CEO Marillyn Hewson (Defense)

Energy:

Oil service companies are looking for a V shaped recovery

“As we projected earlier this year, our third quarter results established the bottom of the expected V-shaped recovery that we believe will continue into 2017. We believe that the global crude oil market is currently undersupplied.” —Core Labs CFO Dick Bergmark (Oil Service)

US oil companies got a jump start from outside capital

“growth in E&P investments will be led by the North America land operators who appear to remain unconstrained by years of negative free cash flow as external funding seems more readily available and the pursuit of shorter-term equity value takes precedence over a full cycle return” —Schlumberger CEO Paal Kibsgaard (Oil Service)

International may take longer to recover

“Most people agree that the U.S. is now the world’s swing producer and it has demonstrated its ability to ramp up production quickly at a price that may make it difficult for deepwater projects to compete…Therefore, we do not expect to see an inflection in the international markets until the latter part of 2017.” —Halliburton CEO Dave Lesar (Oil Service)

We may actually be looking at a supply shortage

“I think the key here is that we look at 2017 as a starting point of a new multiyear cycle, where the main challenge is actually going to be reverse the effect of several years of Global E&P underinvestment and then try to mitigate the pending supply shortage that we see unfolding.” —Schlumberger CEO Paal Kibsgaard (Oil Service)

Only 4 billion barrels of new oil were discovered last year but 55 billion were consumed

“operators discovered less than 4 billion barrels of new oil in 2016, while the globe consumed over 55 billion barrels. Therefore Core believes crude markets more than rationalized in late 2016 and price stability followed by price increases, some occurring as we speak, are returning to the energy complex. Remember, the immutable laws of physics and thermodynamics mean that the crude oil production decline curve always wins and it never sleeps.” —Core Labs CEO Dave Lesar (Oil Service)

Materials:

Freeport McMoran is in a dispute with the government of Indonesia

“We have the rights to pursue claims against the government in the form of international arbitration. And our legal team advises us that our case is very strong in doing that. We have consistently represented to the government that we don’t want to do that, I don’t believe that would be advantageous for us, but I also think it would be very negative for the Government of Indonesia.” —Freeport McMoRan CEO Richard Adkerson (Mining)

Miscellaneous Nuggets of Wisdom:

It’s about the journey, not the destination

“You never want to characterize something as an ultimate vision because when you get there, there’s always more that you want to do.” —Netflix CEO Reed Hastings (SVOD)

Uncertainty creates opportunities to talk to clients

“it creates more uncertainty which actually creates an opportunity for us to talk with our clients about options and how they can think about it and attack it going forward particularly based on whatever is the outcome of the changes.” —Brown and Brown CEO Powell Brown (Insurance Broker)

Please don’t text and drive!

“The deterioration [in losses] is primarily driven by an increase in the trend towards more severe accidents. Some of the factors that lead us to this observation are a higher percentage of claims involving distracted driving, more accidents involving higher speeds and more accidents on highways and at intersections. This is also consistent with recent industry data. For example, the National Safety Council report of significantly higher traffic fatalities in 2015 and 2016, a two year trend that we haven’t seen in decades.” —Travelers COO Brian Maclean (Insurance)

Full transcripts can be found at www.seekingalpha.com