Company Notes Digest 10.11.13

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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

Costco not seeing broad effects of the government shutdown:

“I actually told our senior executives in operations, on the west coast there is really not seen any effect [of the government shutdown]. Around D.C. is the only place where we’ve seen some effect downward a little bit.” ($COST)

Neither is regional bank Webster Financial; question is will it effect psychology?:

“Not really at this point…I guess the question is whether it’s going to have a psychological impact at some point down the line.” ($WBS)

Mixed views of loan demand:

JPM seemed downbeat:

“The commercial real estate business continues to grow strongly…However, in C&I, demand remains soft and competitive pressures high” ($JPM)

Wells Fargo seemed positive:

“we continue to have strong loan growth with period-end loans up $29.7 billion or 4% from a year ago and up $10.3 billion from the second quarter…I think what we were really excited about in the third quarter was how broad based loan growth was. It wasn’t just in one of our portfolios.” ($WFC)

Credit card chargeoffs at historic lows at JPM. Sign of conservative consumer or conservative underwriting?:

“In card…we saw a slight increase in average outstandings quarter on quarter…The net chargeoff rate has reached historic lows at 2.86%” ($JPM)

Yum saw weaker labor inflation than expected in China, but probably not a trend:

“There’s no doubt that labor inflation has been much lower in China that we had anticipated. You’ll recall that we had guided mid-teens labor inflation, and what we now expect for 2013 is high single digits…But I do want to stress that we don’t necessarily see that continuing into next year. The fact is that wage growth had moderated across China, but the central government’s objective remains to double disposable per capita income by 2020.” ($YUM)


Big banks, especially JP Morgan are still dogged by litigation and regulation:

Sounds like something changed for the worse relatively recently:

“over the last few weeks, the [litigation] environment’s become highly charged and very volatile. Things have been very fluid, and the situation escalated to the point where we’re facing very large premiums and penalties, the level of which has gone far beyond what we reasonably expected…we didn’t, even a few weeks ago, reasonably expect things to have escalated to where they are now” ($JPM)

The new regulatory environment is global:

“it’s important to point out that we do have to adjust to a new global financial architecture. It’s not just the US, it’s really rules around the world.” ($JPM)

The compliance infrastructure is permanent:

“500 people working on CCAR, 500 people working on resolution and recovery. We just turned in a, believe it or not, 100,000-page plan. We’ve added 5,000 people. And so this is a permanent investment.” ($JPM)

WFC has plenty of “dry powder”:

“there is a lot of what I would call dry powder there that’s available and a lot of that’s just because of what the deposit growth has been.” ($WFC)

WFC took a huge reserve release this quarter. Stumpf argues it was partially because credit quality is so good on post crisis originations:

“No change in the philosophy in terms of how we’re thinking about reserving. And you’re right. I mean $900 million is an increase over the prior quarter. It’s not the largest reserve release we’ve had over last few years, but it is in the last year or so…When you look at our commercial loan portfolio, almost half of the loans that are in that portfolio today were originated post-crisis, so 2009 and forward…the new loan portfolio, the post-crisis, the credit quality is just exceptional.” ($WFC)


Yum got hammered in China:

“we are very disappointed with our overall third quarter results, and the fact we now believe China same-store sales will unlikely be positive for the fourth quarter. Frankly, these results are well below the high expectations we have for our business.” ($YUM)

And then hammered by analysts skeptical of whether the company is telling the whole story. The company insists it is battling broad concerns over food safety:

“Our number one priority at KFC China is to build and reinforce positive consumer perceptions around the safety of our food…This is not a precise science, you know? I can’t tell you 100% for sure, but when we look at what do we have to target at KFC…we think it’s continuing to make progress on regaining the trust….what we really have here is a country wide issue of trust. And it’s in tier four, five, six cities, tiers one, two, three cities. That’s what we really think we have to address. That’s what our marketing folks have determined by listening to our customers, and that’s what we’re getting after.” ($YUM)


Private health insurance exchanges may present an opportunity for those who understand how to sell defined contribution benefits plans:

“we’re talking directly to carriers. We’re talking to large employers, TPAs, benefits administrators and the like, in addition to brokers and direct to individuals. But the health exchanges will be an increasingly important part of the business.” ($WBS)

Costco, at least, doesn’t have any plans to change anything:

[analyst question] “I wanted to know whether Costco is giving consideration to having its employees enter healthcare exchanges, going to kind of a defined contribution, if you will.” [costco response] “we have no plans to change what we currently do.” ($COST)

Materials, Industrials, Energy

Higher aluminum content may be a solution for some important challenges facing auto-makers:

“automotive. It looks like it’s small today which it is but there’s a historic opportunity because we see that the high volume cars are now aluminizing…aluminum intensive vehicles have a clear competitive edge. And when you go through it, it’s on the safety and durability, it’s on the CO2 emissions and it’s on the fuel efficiencies.” ($AA)

Miscellaneous Nuggets of Wisdom

If you want to exist in your own league, you have to be your own toughest competition:

“while we certainly aren’t cavalier about our competition, we think our toughest competitor is ourselves and we’re going to keep driving that.” ($COST)

Remember who your shareholders are:

“We have shareholders. And those shareholders, by the way, I remind people, it’s not me, it’s veterans and retirees, and mothers” ($JPM)

The terms of a deal can change, especially when you deal with the US Government. JPM learned that lesson the hard way:

“this is very painful for the company. So Bear Sterns, we did do quickly. We didn’t anticipate that we’d be paying anything for prior losses for Bear Sterns. I tell people, even at Bear Sterns, remember I think it was $80 billion of bonds were made good, which would have failed that day had they gone bankrupt.And we did ask. We weren’t completely stupid. We did ask the SEC and only the SEC for would they please agree not to take enforcement actions against JPMorgan for things that happened at Bear, which of course they couldn’t do outright, but they did say they’d take in consideration the circumstances in which the transaction took place.And in Wamu, we don’t believe we’re responsible, by contract. But that does not mean that people can’t come after you. So that was a little bit of a lesson learned, too.” ($JPM)