Company Notes Digest 1.31.14

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

UPS’ 4th quarter results fell far short of expectations:

“I would like to start my comments today by saying UPS fourth quarter results fell far short of our expectations.” ($UPS)

In the best way possible–overwhelmed by too much demand:

“Shipments produced by e-commerce significantly exceeded even our most optimistic forecasts as more and more Americans shopped online.” ($UPS)

Pretty clear that this holiday shopping period was a transformative year for e-commerce:

“From my perspective, the 2013 holiday period has to be one of the most transformative I’ve seen, particularly here in the United States. Consumers came out much later and less frequently to brick-and-mortar stores with ShopperTrak showing retail foot traffic in stores to be down as much as 15%.” ($MAT)

Mattel says that consumers bought, but more deliberate and focused on deals:

“And while consumers ultimately bought, they seem to have done a lot more online research than they had in the past, and they were more deliberate, focusing on discounts and deals.” ($MAT)

Mastercard postulates that the US and Europe will carry the rest of the world:

“Overall, it feels like the U.S. and Western Europe markets where we generate well over half of our revenue are slowly starting to regain their economic footing. The general consensus is the U.S. should have a decent economic growth in 2014, and there is increasing optimism about Europe. As these developed markets recover, it could be a catalyst to spark further growth in Asia and Latin America.” ($MA)

UPS sees signs of recovery in Europe, but Asia remains sluggish:

“on a positive note, Europe began to emerge from recession. Also, cross border trade improved in 2012, express shipments out of Asia remains sluggish.” ($UPS)

Mastercard agrees that Asia is slow:

“In Asia Pacific, consumer and business sentiment levels declined in the fourth quarter across major markets, including Australia. In addition, worries about slowing growth in China go beyond being just a domestic issue and have broader implications, as you all know, for other markets that depend on Chinese demand.” ($MA)

Caterpillar doesn’t think anything has gotten materially worse recently in China:

“The market reaction has really occurred over the past week or 10 days or so. I think in our business, it’s been pretty positive. We’ve seen not just our sales but kind of the overall construction equipment group sales in the industry ticking up year over year, over the past few months. And we saw that again in December. So I think what we’ve seen has been pretty good. We’ve done better than the market there as well. Our sales in China were up more than 20% this year. They were up in the quarter. So you know, it’s not been a big negative for us.” ($CAT)

Financials

Apple is intrigued by mobile payments:

“The mobile payments area in general is one that we’ve been intrigued with, and that was one of the thoughts behind Touch ID. But we’re not limiting ourselves just to that. So I don’t have anything specific to announce today, but you can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it’s a big opportunity” ($AAPL)

Mastercard says mobile payments are a natural fit for tech in multiple dimensions:

“You all know that they’re all thinking about this. And the fact that Google is out there first and actually doing something, doesn’t mean that the others weren’t working on it. They’re all working on it. And they’re all trying to figure out what the right role to play for their respective strengths and weaknesses are, as this payment opportunity evolves. And it’s not just payments. When you talk to most of them, they will tell you it’s about the before, during and after the transaction. So Google tends to think about it as a metric to look at enhancing their advertising and consumer outreach business, not really as a payments business. Others think differently. And everybody comes in from a different perspective. ($MA)

Mastercard sees itself as an integral partner:

So that’s why what we’re trying to do is to partner with as many of them as we can. And we’ve managed, I think, well to shift the dialogue from one of distant mediation to one of partnership, because we bring some very strong assets to the table in terms of what we haven’t possess and also what we’re investing in. And so that’s kind of where they’re going with it. That’s our — I’m not the least surprised. I believe it’s the right thing to do anyway with all the strong players in the digital world. We’ll have a role to play in some way to enable payments for their consumers. It’s the right thing to do.” ($MA)

Property/Casualty insurance companies are staying rational:

“post-9/11, the type of increases that we were seeing, they were accelerating and they decelerated. This is a much different marketplace. People have very good metrics in their — our competitors are trying to be very rational. I don’t think reinsurance is driving it to the same degree that it had in the past. People’s primary carriers, our primary competitors, have very strong balance sheets. I think they’ve got a lot better analytics as we do today, and people are trying to find niches where they have competitive advantages and compete there.” ($CB)

Low potential investment returns keeping insurers in check:

“don’t forget, we are in a much different investment income and interest rate environment today as well. So that also comes into play.” ($CB)

Consumer

E-commerce growing worldwide, not just in the US:

“E-commerce continues to evolve at a rapid pace, not only here in the United States, but around the world.” ($UPS)

Customers care more about price than time:

“customers put greater emphasis on cost rather than time in transit.” ($UPS)

Holiday season 2014 compressed again:

“We are going to spend extra money operationally. We are going to accelerate investments and we are little cautious about exactly how the next peak turns out. It is another compressed holiday season although we get one extra day.” ($UPS)

Technology

Two thirds of the world still doesn’t have internet:

“Only one-third of the world’s population has access to the internet today, and for even many of those, the return on experience remains pretty weak.” ($FB)

These growth rates are unreal on a company this size:

“Our total revenue grew 63% year over year, led by 76% growth in advertising revenue.” ($FB)

And Facebook probably could have grown even more:

“the strategy has been, for the last period, and will continue to be, to primarily focus on increasing the quality of the ads and the experience.  And I really think that it’s easy to look at the model and say, okay, if we ran more ads then the business would grow faster in the short term, but investing in quality is really actually the most important thing, because it’s what improves the experience for the people who use the product. It drives greater returns for advertisers, and over time it increases the potential size of our business.” ($FB)

It’s still early days for digital advertising:

“I think we’re still in the very early days of how much advertising is going to move over to digital media. And I think you’re right to identify that, places like Google+, places like YouTube are still very, very sort of in their infancy in the amount of advertising they can support vis-à-vis the amount of usage we’re getting.” ($GOOG)

After the 2013 holiday experience, more marketing budgets are likely to shift to digital.  Spending on an end cap doesn’t make sense if people aren’t going to the stores:

“I think some of our promotional spending was not as effective. As we’ve been saying here, the store traffic is down 15%. It’s hard for an end cap to work as hard in 2013 as it did in 2012. So there’s a lot going on in terms of where we are in share.” ($MAT)

Apple didn’t do so well in North America, partially because carriers changed their upgrade policies:

“In North America, we did not do as well, and this weighed our results. Our North American business contracted somewhat year over year… some carriers changed their upgrade policies. And this affected last quarter, and will have some effect on the current quarter.” ($AAPL)

Carriers’ customers showing a willingness to pay more up front for phones in exchange for lower monthly contract cost–end of subsidies near?:

“what is probably most interesting to me as we look at what has played out in 2013 and carried into the first month of 2014 is the idea that our customers are demonstrating an interest desire even to put more of their money into the handset in exchange for lower monthly pricing. And that’s what you see happening in the marketplace right now. More and more customers are moving to the handset financing plans picking up more of the cost of the handset with the desire to have a lower monthly rate. And so we are seeing that play itself out.” ($T)

Net Neutrality decision from courts doesn’t change much in AT&T’s opinion:

“We did have this court order. From our standpoint David that changed really nothing. It doesn’t change anyway that we will operate, I really don’t believe it’s going to change much of what anybody in the industry will do.” ($T)

Healthcare

Illumina broke the $1,000 genome barrier.  Demand for whole genome sequencing is insatiable:

“Interest in the HiSeq X10 continues to be exceptional…The demand we’ve seen for the $1,000-genome reinforces our view that there is, as far out as we can see, an insatiable demand for whole-genome sequencing.” ($ILMN)

The $1,000 price point could be the start of a second renaissance in genomic discovery:

“at $1,000 this has catalyzed the imagination of many of our customer types. Our hope is that we have sort of a second Renaissance in genomic discovery begin to happen on the back of the X10. I think it really has that potential broadly.” ($ILMN)

We’ve still only scratched the surface of our understanding.  Large sample sets the key:

“after all the work we and everybody in the industry’s been doing over the last 15 years, we’ve still only scratched the surface about understanding what the genome really means. All of the analysis now that are done by the brilliant scientists in our field say that the way you break through that barrier is by sequencing very large sample sets, and by that, the numbers pencil out to be hundreds of thousands of samples.” ($ILMN)

The $1,000 genome enables that large sample set.  We’re at the point where the tools have caught up to the theory:

“I think what you’re seeing in terms of the market reaction is a sense that there really is an opportunity now to redo the discovery programs that were done or attempted to be done 10 or 15 years ago, but now with a set of tools it’s up to the task. That’s really what it’s all about.” ($ILMN)

Mass market applications still “only” a few years away:

“I think we’re only a few years away from the point where everyone who has cancer gets it tested genomically one way or another, with one kind of panel, or exome, or genome.” ($ILMN)

Materials, Industrials, Energy

Argentina has the best shale outside North America:

“Argentina, as far as we know it’s the best shale outside of North America. So we took the opportunity to bring those into the portfolio. ” ($CVX)

Chevron selling pipeline assets to MLPs–not particularly fond of the MLP structure:

“We’re in the process right now of making some sales in our midstream business for example. You referenced MLPs our approach – we’re not fond of the MLP structure as a way for us to hold assets, but we can sell into MLPs and get that value. And so we have been selling pipelines and we’ll continue to do so for pipelines where they are not critical to our upstream or downstream business, now there is more merchant type lines.” ($CVX)

Spread volatility favors integrated oils:

“I think when you look in the middle of the country today I think it makes all the sense in the world to be an integrated company. You’ve had tremendous volatility in relationship – in crude pricing and you capture refinery, recapture on the upstream side just depending upon how infrastructure moves…so I frankly think that the integration story for us is pretty straightforward.” ($CVX)

Miners running their equipment, but not replacing it:

“Based on the size and age of existing equipment fleets, we believe that miners are buying new equipment at a rate that’s well below the average replacement level they’ll need going forward. As an example, we think that our sales of large mining trucks in 2014 will be around half the long term replacement level…we don’t think that can go on indefinitely” ($CAT)

Replacement is going to have to happen either this year or next:

“I’m not making that prediction here today. I hope it’s in 2014. I know it will happen in 2014 or 2015″ ($CAT)

Miscellaneous Nuggets of Wisdom

In allocating capital, focus on the things that you understand and can predict:

“it is very hard to predict oil prices, foreign exchange, local content requirements, cost of goods and services. What we have been fairly good at understanding is the competitive nature of our project, so when we put out long-term production forecast we’ve had a view that we know the world is going to need energy, we know that we’ve got projects that will compete because of the resource and general nature of the project.” ($CVX)

R&D takes a long time to come to fruition, and if you cut the pipeline, you can’t buy back the time you lose:

“one thing that I would say that I am concerned about as we go through this budget process, we seem to be protecting personnel and readiness, which is okay. Those can be bought back very quickly, and I’m going to be working hard to make sure that on the R&D side that we don’t take a lot of cuts in the budget there because, being an engineer, I know how long it takes for R&D to come to fruition…I know Raytheon, even in the tough times when we had $13 billion in debt, we still invested, and that’s paying off in some of our wins as we look today, and we’ll continue to invest as a company. But I think as a nation, as we look at the — our investments, we’ve got to make sure that R&D is not sacrificed because you can’t buy back that time that you lose.” ($RTN)

Business is all about relationships and trust.  They don’t happen overnight:

“it takes a while to establish your credibility internationally. And our customers really count on the fact that, I mean, we’ve been in the Mideast 50 years, Japan 50 years, Taiwan 50 years, Korea. I mean, these are the sort of things we’ve done for a long time, and your performance over that period really helps you capture new business. And it’s, to me, it’s all about relationships and trust, and that does not happen overnight.” ($RTN)

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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