Company Notes Digest 10.16.15

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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 Macro Outlook:

Fastenal was definitive that the industrial economy is in recession

“The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do.” —Fastenal (Industrial Distributor)

They’re not expecting that it’s going to bounce back quickly either

“We’re not economists; we don’t know what the economy will do over the next two to three quarters, but we’re not real optimistic that it’s going to bounce back quickly” —Fastenal (Industrial Distributor)

Colfax said that its markets may not recover until 2017

“we’re seeing tough trends in the market and we think we need to presume that 2017 would be the earliest market base recovery” —Colfax (Manufacturing/Engineering)

Blackstone did not see a recession, but did see slowing in certain regions

“From our prospective, we do not see a recession, but we are seeing slowing in certain regions and sectors with some excess coming out of markets.” —Blackstone (Private Equity)

CSX saw “vibrancy” in core segments, but also expects volumes to decline in Q4

“I think that if you look at some of the core tenants of our economy, such as the housing and the automotive side, you continue to see good vibrancy…Looking forward, we expect volumes to decline in the fourth quarter. Although we are projecting stable to favorable conditions for several key markets, this will be more than offset by unfavorable conditions for the remainder of the portfolio.” —CSX (Railroad)

John Stumpf and Richard Davis were two CEOs that had always skewed positive on the economy, but sounded a little more tempered this quarter

“I think – we think it’s getting better, but only incrementally better.” —Wells Fargo (Bank)

“I would say just more of the same which is not pessimistic but it’s not uber optimistic either…Undeniably it’s not getting worse. I mean things aren’t going backwards…I’ll call it a tortuously slow improvement over the course of time” —US Bank (Bank)

In other economic eras we probably would have called this an “inventory recession”

One analyst suggested that inventories are still elevated from the west coast port strike

“Just on the economy, again, there has been some talk that what we are seeing, at least in part, is an inventory correction that’s related to the West Coast port disruption. Because, in effect, shippers over ordered when they weren’t sure how quickly inventory could move through the supply chain.” —Analyst Comment on CSX call (Railroad)

The good news is that inventory recessions usually work themselves out relatively quickly

“Customers and distributors are taking down inventory, right? So people are producing below consumption, and that gives me some confidence…we think the most likely scenario, assuming there’s not another leg down on the China economy…is that this will be a two-quarter phenomenon. And that most of the inventory correction will be done by the fourth quarter” —Fairchild Semicondutor (Semiconductors)

In fact, inventories may already be normalizing in some industries

“We exited Q3 with healthy worldwide supply chain inventories. We actually think we probably undershipped the market a little bit in Q3” —Intel (Semiconductors)

At least the US has been more resilient than the rest of the global economy

“the global economy showed some signs of weakness in the third quarter, primarily in China and other emerging markets… the U.S. economy while not immune to these developments has proven quite resilient.” —Wells Fargo (Bank)

International:

Larry Fink seemed to suggest that volatility in Asian markets may have been driven by three or four large institutions

“We have seen some clients because of cash needs have been selling products. So I think Asia-Pac has been dominated more by three or four large institutions moving around. I think I’m talking about the whole ecosystem of the markets.” —Blackrock (Asset Management)

Chinese spending on home appliances has been hit with the housing market

“I would characterize it is that the industrial and appliance businesses is normal all around the world, except for the combination of Korea and China…white goods are at the epicenter of it, very tied to housing. Housing is in a big correction. There’s no surprise there.’ —Fairchild Semiconductor (Semiconductors)

One reason that consumption is weak is that Xi is running an anti-corruption campaign

“President Xi discovered that the people of China felt that government officials were corrupt and feathering their own nest. And he thought that that was very malignant for the health of his party and the future of his country and made a decision to correct that and have a campaign against corruption.’ —Wynn (Casinos)

The corruption probe has made businessmen think twice about conspicuous consumption

“every businessman in that country dealt in one way or another with a government official because the government controls so many aspects of public policy and business interface…So businessmen who had nothing to hide as well as those who might have had something to hide all went into the fox holes..And it has caused across the board, a contraction of all VIP consumer spending at the higher level” —Wynn (Casinos)

Financials:

It’s tough for banks to grow in this environment

“revenue growth remains challenging in this interest rate environment. We are focused on those things we can control and drive, these includes delivering for our clients and customers within our risk framework and driving those things we know will result in sustainable profits and returns.” —Bank of America (Bank)

It’s no fun for them to look at interest rate futures

“I looked at the futures this morning for the 30-day LIBOR as they go out the end of 2016, the end of 2017 and they are not fun to look at.” —Private Bancorp (Bank)

Everyone is ratcheting down their expectations for a rate hike

“we will be sitting here a year from now we think with one, two or three, 25 basis point moves under our belt at probably best case with respect to how far things might move” —Wells Fargo (Bank)

“we’re going to put into our plan an expectation for very, very nominal number and size of rate increases which much less we’ve had in the years past” —US Bank (Bank)

“we’ve called this wrong, we continue to expect that interest rates would be going up, say 12 months down the road and we haven’t seen that yet. And so we’ll continue to reassess and we have the flexibility to manage that overall rate risk position fairly quickly with the change in interest rate swap position.” —Keybanc (Bank)

This is a generational low in terms of charge offs

“we’re already had a generational low in terms of charge-offs which means that credit performance can’t really improve meaningful from where we are today. It’s already that good.’ —Wells Fargo (Bank)

Credit quality should turn at some point

“the spreads in the marketplace continue to tighten. I keep asking our lending folks when is it going to get better and they say, well, as of yesterday it hadn’t gotten better…I mean that market, I keep waiting for it to turn…but it hasn’t turned yet” —BB&T (Bank)

Big banks are getting more aggressive in mortgage lending

“Yes, Erika, they are getting more aggressive. They are cutting both pricing and to a modest extent, standards. Their loan-to-value advanced ratios up to $2 million or $3 million have climbed into the 80% range. We are not following them. And that’s the cause for us losing some business.” First Republic (Bank)

We may be in the later stages of the real estate cycle

“we think we are getting in the later stages of a real estate credit cycle here, so we are being very defensive in what we are doing.” —Bank of the Ozarks (Bank)

Will there be growth to match the increase in capacity?

“there are some places that I could name where you had a lot of apartments constructed and one has to ask if the demand and employment growth or population growth are there to absorb that supply.” —Bank of the Ozarks (Bank)

Consumer:

Netflix has a lot of competition racing to make their own apps

“everybody has got to get into streaming. It’s been our main message for several years, that what is known as channels is going to become apps…the next couple years, when you have this new phase of the market, I think everyone is just racing to make a great app like Netflix, like HBO Now, those things.’ —Netflix (SVOD)

Consumer taste in media is relatively the same around the world

“it turns out that tastes are rather global too. So it’s actually really well lined up.” —Netflix (SVOD)

Technology:

A couple of companies were singing the praises of Amazon Web Services

“We added new capabilities including Natural Language Processing and others. And we have great partnerships including Amazon with IIP running on Amazon Web Services.” —Infosys (Business Process Outsourcing)

“AWS has been a great supplier to us. They demonstrated again and again strong market leadership, strong attentiveness to our account. We could not be happier with AWS. And they’ve always kept that separate from Amazon retail.” —Netflix (SVOD)

Healthcare:

5 billion people lack access to safe surgical care

“The World Health Organization estimates that nearly a third of the world’s global disease burden could be addressed through surgery. Yet nearly 5 billion people continue to lack access to safe, timely and affordable surgical care.” —Johnson and Johnson (Healthcare)

Johnson and Johnson addressed political scrutiny on pharmaceutical companies

“I think every time we talk about drug pricing, we unfortunately miss the balance of the other side of the coin which is of course the innovation that comes from the pharmaceutical industry and the improvement in the health and well being lives of many people around the world.” —Johnson and Johnson (Healthcare)

United Health is raising rates on health insurance exchanges because buyers have required more medical services than originally expected

“Like others we observe market-wide data this past spring that suggested the risk pool served by public exchanges would require more medical services than original expectations. Rather than wait for our own experience with our new members to fully developed, we increased rates and repositioned certain products market by market for 2016, and we expect improved performance next year…Average increases across the country are in the double-digits” —United Health (Insurance)

Industrials:

Alcoa continues to see strong demand from aircraft manufacturers

“Aerospace we continue to see an 8% to 9% growth rate for this year and that of commercial aircraft growth of 8.3%, strong demand continues.” —Alcoa (Aluminum)

But Delta seems to believe that markets are over-supplied with aircraft

“we’re seeing a huge bubble in excess wide-body airplanes around the world…we think that that weakness in that aircraft bubble in wide-bodies is going to spread to narrow-bodies and that there will be some huge buying opportunities because low interest rates really have created a huge wide-body bubble in the world…we get calls all the time. There is no deal. Prices are going to get lower; you wouldn’t strike a deal now.” —Delta (Airline)

Short term trucking rates are down

“There is no doubt, though, that at least on a spot basis right now that the truck rates have come down. But on the contractual side continues to have, as far as we can see, a pretty good rate increase on the contractual side, because I think people are cognizant of what will happen longer term, both in terms of driver retention and some of the negative productivity initiatives that the trucking industry is facing.” —CSX (Railroad)

Materials, Energy:

Blackstone does not believe that spot energy prices reflect long term prices

“our conviction that as I say that this is not – today’s spot prices are not long-term energy prices ‘ —Blackstone (Private Equity)

Most banks sounded like they had their energy exposure under control

“I’m not saying that there may not be any net incremental reserve build, but we’re not expecting them to be significant. A lot of companies have tried to adjust their expense basis and otherwise help their position. So if energy prices stay around these levels and recover slowly, we’re expecting net not to have material incremental reserves in the next quarter. We may see some.” —JP Morgan (Bank)

More challenges may lie ahead though

“the fall redeterminations and reserve-based energy loans are performing as expected. We believe the energy services sector will incur greater challenges in the near term as it adjusts to lower commodity prices and this view was reflected in our reserving process.” —Wells Fargo (Bank)

Infosys saw energy sector spending take another step down during the quarter

“if you look at Energy segment, now, given the oil price and the volatility, we are also now started seeing the second wave of price cuts and cost reductions, postponements and so on. So we will see some impact there as well.” —Infosys (Business Process Outsourcing)

Miscellaneous Nuggets of Wisdom:

A good bank must be prepared to lend to clients in tough times

“That’s what we’re here for, to lend to clients, particularly in tough times. You can’t be a bank that every time something goes wrong you run away from your client.” —JP Morgan (Bank)

Our perception of the present is heavily influenced by our expectations of the future

“our present state of mind, our happiness, our sense of security is fundamentally a function of how we view tomorrow or the future.” —Wynn (Casinos)

The job of a leader is to create a positive and stable outlook for his or her constituencies

“My job is to create a stable environment in terms of human resources, job security and a better future for people..And the job leaders are to do everything and anything in their power to create a happy and positive outlook to the future for their constituencies” —Wynn (Casinos)

Leaders have to have vision

“whether you’re a CEO of a company or you’re the head of a government, you have to have a little bit of ability to look around the corner and see what’s coming ahead of you. And if that’s not good, turn away from it, amend your policies, learn from experience and come to a more sound conclusion.’ —Wynn (Casinos)

Full transcripts can be found at www.seekingalpha.com