Company Notes Digest 10.19.13

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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

Brian Moynihan says American business has gotten lean and is feeling good:

“I think if you look at our client base which ranges from small businesses through largest companies in the world, I’d say all of them feel very good about their operating position making money. Have done a tremendous job of keeping the cost structure in line. An example with a company that had 200 employees whose sales are going to go by 25% and they said, we’re only going to add five employees. So the American business has gotten very efficient.” ($BAC)

Credit losses are back to 2005 levels:

“In the credit area we continue to see asset quality improved and our net loss rates are at levels not seen since 2005.” ($BAC)

Parker Hannifin sees inventory restocking driven by real end market demand:

“I think that everybody has been managing their inventories pretty good, at least in that channel, for over this cycle. And I think now, they are really seeing end market demand, and I think that’s consistent with the overall order trend and the indices that I’ve kind of highlighted. I think that would be more end market demand than anything.” ($PH)

Schlumberger, similarly positive, sees the economy supporting $100+ oil:

“At this stage, we therefore expect continued support for Brent crude prices around $100 per barrel going into 2014. However, the makeup of the risk premium is likely to shift somewhat with lower supply uncertainty and potentially lower geopolitical risk, offset by more resilient demand and lower macroeconomic concerns.” ($SLB)

There are some segments of the economy that have lagged though:

“Mining, of course, is a negative. Power gen and oil and gas, but the land-based oil and gas part of the business. And then, residential air-conditioning, commercial air conditioning are all both negative as well. So that — and then anything that I did not mention would be kind of flat, which would include like process industries, heavy-duty truck, off-highway construction, industrial trucks and so forth, those kind of markets.” ($PH)

And just because the economy is strong doesn’t mean prices aren’t ahead of themselves:

“on the M&A front, it remains an opportunistic world. I would tell you that there is a lot of things that we have looked at and turn down, or decided that they weren’t economic to pursue. I would describe the deal market in terms of attractive opportunities right now is limited and where there are businesses that might be available, I think some of that price expectations or value expectations are frankly out of line with reason” ($ABT)

IBM saw a huge pause in China as the government assesses its economic strategy:

“China was down 22%. We experienced a slowdown in demand across the board, but most significantly in hardware, which was down about 40% and which makes up about 40% of our business in China…we were impacted by the process surrounding China’s development of a broad based economic reform plan, which will be available mid November. In the mean time, demand from state-owned enterprises and the public sector has slowed significantly as decision-making and procurement cycles lengthened. We believe the changes will take time to implement and do not expect demand in China to pick up until after the first quarter of next year.” ($IBM)

Abbott, which also had a tough quarter in China, noted that Chinese consumers may be particularly mercurial:

“I would say [China is] an intensely competitive market, share can move, share can change. It tends to change the most when there is some adverse event” ($ABT)

Citi mentioned Mexico as another country that is working through a change in administration:

“Mexico is also going through a period where they’re still absorbing the change in administration and a lot of the reform work that is going on with the new administration, so we think that long term that’s beneficial, but it’s certainly had a slowdown in growth in the near term in Mexico.” ($C)

Financials

The story for banks in 4Q13 is general stability in revenue except for in the mortgage business:

“Turning to the revenue side, we experienced relative stability this quarter. But of course we got the impact of the industry wide headwinds on a slower refi business and mortgage and slowdown in the capital markets from a typical summer slowdown as well as the investor concerns of a political and monetary uncertainty.” ($BAC)

Banks have already flipped the switch on loan growth, companies just need to come and get it:

“overall Mike the loan utilization rates, they haven’t moved around a lot, but they’re at low levels historically across the board whether it’s our business banking segment, the middle market segment and the large corporate not — don’t really use their lines other than as Bruce described and they’re doing something inorganic, but they’re very low which gives you two things. One it indicates that they have got lots of cash and have lots of room for investment, but secondly as the economy picks up moving back with thousand basis points or so we are from sort of more normal levels like a better term is a lot loan growth within — without new customer relationships, or any more work” ($BAC)

Five years later, BAC finally swallows Merrill Lynch’s holding co:

“on October 1 of this year, we completed the legal entity merger of the Merrill Lynch holding company into Bank of America Corporation as part of our continued efforts to both simplify the company and reduce costs.” ($BAC)

BAC may have already taken its lumps on litigation reserves. $40 Billion expensed!!

“this is not a number we’re particularly pleased with, but if you go back to the beginning of 2010 and look at the combined litigation of rep and warrant expense that we’ve had in this company, it’s been over $40 billion which I think is quite a bit higher than the number that [JPM] quoted. Obviously those numbers are particularly to each institution but I think as you look at what we’ve tried to do that those numbers have been significant and I think at this point relative to our peers, we’ve tried to be out front and get through some of the larger settlements that we have and we think that $40 billion plus number reflects that.” ($BAC)

Citi says they’re not interested in providing it, but subprime customers need access to credit:

“subprime consumer lending businesses. Not a business, as we’ve said, that fits long term with us. But again, I think things that have gone on from a regulatory and credit dynamic, there’s a real part of society that needs to be served” ($C)

Citi also seems to be spending a lot of time planning for a transition to a higher rate environment:

“it drives a lot of our thought as far as what level of reserves that we need to have [in the home equity book]” ($C)

“any time in particular out of the U.S. you’re transitioning into a higher rate environment, the EM economies don’t come through that cleanly.” ($C)

“again, I just think a transitioning U.S. interest rate is certainly going to have an impact on trading volumes, capital flows, new issuance calendars. And so I think we’ve got to try and strike a balance between those things” ($C)

In insurance, rate increases may be moderating thanks to a mild cat season:

“I’d say that all carriers want rate increases, but the rate increases that they want are moderating. If there’s not a wind event this season, which we don’t believe there will be, cap property rates will start to go down on 12/01, more so than they currently are, and then definitely go down 01/01 of ’14.” ($BRO)

Consumer

Mothers are a unique type of consumer:

“Mothers are acutely aware of what they feed their babies and they follow infant formula and so forth closely and with social media and other things. They are just an often informed consumer base…if the mother is in any way lacking in confidence about a brand or a product, she switches to something else and it take some time to get her back…And the damage tends to last a while as you cycle out the consumer who has switched away and new consumers cycle in.” ($ABT)

Technology

Intel admits it is a quarter behind schedule on rolling out 14 nanometer:

“Broadwell, the first product on 14-nanometers is up and running as we demonstrated at Intel Developer Forum, last month. While we are comfortable with where we are at with yields, from a timing standpoint, we are about a quarter behind our projections. As a result, we are now planning to begin production in the first quarter of next year.” ($INTC)

Intel argues that it’s nice that Apple’s A7 chip is 64 bit, but not a differentiator compared to the transistor density that will be enabled by 14 nanometer:

“If you take a look at things like transistor density and you compare, pardon the pun, apples-to-apples and you compare, say, the A7 to our Bay Trail, which is the high density 22 nanometer technology then our transistor density is higher or more dense than the A7 is. So it’s a good product. I am not in any way trying to deface that, but we do see the Moore’s Law advantage from 28 to 22 nanometer as an example, when you compare dense technologies to dense technologies. We believe 14 nanometer it just an another extension of Moore’s Law. So it will have that same roughly twice density that you will see between 28 and 22 nanometer. You will see that same kind of increase or improvements as you move to 14. It is a true 14 nanometer technology.” ($INTC)

Speaking of Apple, Verizon says iPhone was supply constrained:

“We did encounter iPhone supply constraints that created a backlog at the end of September which resulted in some carryover to the fourth quarter.” ($VZ)

And notes that most customers are getting a real upgrade in experience from 3G to 4G:

“we are coming up on the anniversary dates of the 3G, when the iPhone was launched and those customers now are upgrading to 4G phones and moving into share price plans. If you look at 3G usage and the customers moving into 4G, and they start to utilize this LTE network, they are starting to realize the benefits of that and their usage significantly goes up from where they were in 3G” ($VZ)

Yahoo says native advertising may be the most effective form of online advertising:

“Well, the way we define native advertising is advertisements that match the content. They feel like they are part of the experience, they add to the overall experience. Search advertisement has been like this from the very beginning. And what we’re seeing is when you have native advertisements you can get much better performance” ($YHOO)

Brand advertisers are finding a home online at YouTube:

“Moving over to brand in YouTube. You’ve seen that our CPG and entertainment clients have moved online at greater speed with our efforts that are on brand. Spend by our CPG clients on displaying YouTube has grown over 75% over the past two years…We found that YouTube is our brand torch bearer. It offers brands valuable engaged audiences, terrific reach and compelling context. Smart brands are really loving their engagement with YouTube” ($GOOG)

Healthcare

The affordable care act has created angst and confusion for employers and opportunity for insurance brokers/benefits consultants:

“the confusion around health care exchanges or just health care in general, ACA, has created great concern and anguish and yet great opportunity for us…we say 3 things with certainty: Healthcare is expensive, it’s utilized and it’s confusing. And so, therefore, that creates an opportunity for us to work to the benefit of our clients, and so we think it’s an opportunity.” ($BRO)

But Brown and Brown sees the economics of a private exchange as relatively neutral to an insurance broker:

“the carriers are going to continue to pay us on primarily on a per person, per month basis…And so that’s why the exchange right now is more of a net neutral” ($BRO)

And the importance of exchanges may be overstated:

“I look at [the exchanges] as kind of a glorified enrollment front end.” ($BRO)

Intuitive surgical says that it saw weakness because hospitals are in a holding pattern:

“Right now some of the anecdotes are that hospital administrators are trying to project what their revenues will look like as the elements of the ACA get implemented and that revenue uncertainty on their side just flows through into the capital decision making uncertainty and down the line.” ($ISRG)

Materials, Industrials, Energy

Schlumberger sees another year of steady growth for E&P spend in 2014:

“In terms of E&P spend, the second half of this year is unfolding in line with expectations. Visibility of 2014 is still limited, as our customers are in their planning process. but at this stage, we foresee a continuation of the overall trend seen in 2013, which should yield another year of steady activity growth” ($SLB)

Both Core Labs and SLB highlighted deepwater as an opportunity:

“I think if you just look at the deepwater drilling schedule in the deepwater Gulf of Mexico that is going to suggest activity levels are going to be pretty robust there next year. We’re going from something like 33 deepwater assets to the end of next year getting up into the high 40s might touch 50.” ($CLB)

Activity in Brazil may not improve until 2015:

“I would say that, our view on 2014 overall in Brazil is that it’s going to be another challenging year. And it’s mainly down to the activity levels that we see at this stage, which is relatively flat from where we stand now. That’s a function of obviously of what Petrobras is planning to do, but also there is some impact in this in lower activity projected for both the Brazilian independents as well as on the IOCs in Brazil in 2014.2015 is likely to be higher when the exploration work linked to the last license round is likely to kick in, but the majority of the activity in Brazil next year for us is going to be centered around Petrobras who are not looking to significantly grow activity at least from what we can see at this stage.” ($SLB)

The Middle East is going to have to start spending a little more on maintaining its production:

“looking at the Middle-East I think lot of clients there now do realize that their reservoirs are not exempt from the laws of physics and thermodynamics and that they won’t have a continuous oil flow into millennia. So they are looking at the reservoirs in determining that maintenance CapEx has to be put to work to read that, some enhanced oil recovery projects that we think will grow in size as they struggle to maintain their productive capacity.” ($CLB)

Up against overcapacity, the name of the game for oil service is to continue to innovate:

“the market dynamics that we play in will continue to see steady activity growth, but competitive basic pricing. But as along as we can get a premium for new technology and the quality of our execution, we are comfortable that we can continue to generate solid incremental margins without a inflection in the pricing.” ($SLB)

Oil production technology sees a similar adoption curve to any other type of tech:

“if you look at some of our most technologically sophisticated clients they are employing the technology today and they are some of the I think very progressive companies that have done a very good job are not just looking at well costs but looking at total return on their investment. And these companies, these best practices certainly should be followed by all companies across the spectrum.Whether they will or not I would say probably not, just from our experience but a majority of them no doubt will.What inning we are in, we are very early in this baseball game. When we look at the way that we complete horizontal wells now, I think when we look back in five years we’ll see that, that whole methodology will change” ($CLB)

Miscellaneous Nuggets of Wisdom

People drive products drive revenue:

“Great teams build beautiful engaging products, those products drive increase traffic. The increase traffic generates greater advertiser interest, which ultimately results in revenue growth.” ($YHOO)

The impact of technology is overestimated until it’s underestimated:

“people tend to overestimate the impact of technology in the short-term, yet underestimate the scale of change longer term. For years everyone talked about the multi screen world. Now it’s arrived, but on a scale few imagined” ($GOOG)

You can be the 11th richest man in America and still have a chip on your shoulder:

“We delivered outstanding growth in revenue, cash flow, net income and earnings per share this quarter…Take that you guys who underestimated us.” ($LVS)

When buying companies, focus on people and culture:

“We focus on high quality people that run good businesses that have a cultural fit. So people say, “Well, what’s the cultural fit, as an example?” And there are 3 or 4 things that jump right out, which is how do people treat their teammates? How do people treat their clients? How do people treat their carrier partners? And how do they think about growing their businesses and investing in their businesses? All of those are kind of basic 1-2-3-type things we think about.” ($BRO)

Sometimes the biggest home runs come from doing something that’s not at all obvious:

“When android was still a skunkworks project I used to feel kind of guilty visiting the team. We are a search company and building a new operating system wasn’t an obvious move to most people” ($GOOG)