Company Notes Digest 10.2.14

posted in: Notes | 0

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

Auto sales ticked down slightly in September but Ford feels they were still pretty solid

“the month of September got off to a little bit of a slower start, but still very strong in the mid. We expect to be in the mid to upper 16 million as our range. So, again, it might be a little bit of a switch in terms of the tempo between the two months, but bottom line the fundamental looks very sound. And again, the six-month growing average is closer to that 17 million as our range. So as Emily shared, we believe the industry is quite sound.’ ($F)

Pickup truck sales were strong, a good sign for industrial activity

“Taking a look at some industry details, full-sized pickups had a very good month at almost 13.5% of the overall industry. This is over a 4-point higher than a year ago” ($F)

Auto sales may have hit a plateau, but a high and stable one

“on previous calls we have also noted that, we are certainly reaching a point where the rate of growth in industry sales is beginning to moderate. So we are getting closure to what would be likely plateau in terms of the industry sales space. But at the same time we think at those levels the industry does remain very well supported, again when we look at the physicals underlying the sources of new vehicle demand and particularly the fact that the latest Polk data just came out within the past week or so. The average age of vehicle on the road is still by 11.4 years.” ($F)

Private label isn’t taking share from branded spices this year. Is this a sign that consumers are feeling more flush?

“So, what we’ve actually seen in the more recent period and actually for the year, private label share in spices has not grown in the U.S. It’s been pretty flat. And in more recent periods, we’ve seen private label share flattening and actually declining a little bit.” ($MKC)

Currency fluctuations are probably going to have some impact on companies’ financials, but we’re all not sure how much quite yet

“Well, certainly, there’s going to be downward pressure. We haven’t quantified the exact impact in the quarter, but I’d say we’re definitely going to be experiencing downward pressure, and that’s incorporated in the full year guidance that we’ve given you” ($MKC)

Financials

Demand for non-traditional unsecured loans is coming from middle income consumers who are having trouble accessing credit

“we think that’s because of limitations that have been placed on…commercial bank’s ability to lend on an unsecured basis…whether it’s the CARD Act and the credit card reform activities. Again, more and more customers seeking unsecured loans, which is classic middle market America…So, that customer seems to have found a solution in the Internet as a convenient access to capital and one that has driven significant growth in our U.S. business.” ($CSH)

Gold prices don’t dictate demand for pawn loans

“I tell people, gold prices don’t dictate demand. The need for money dictates demand. The ability to pay the light bill, the need to make – to finish out and make the final rent payment or the mortgage payment is what drives demand. So higher gold prices gives you more collateral value but it doesn’t drive your need.” ($CSH)

Insurance is a pretty sticky product at the household level

“I do think it’s sticky. We have done a lot of research going into it, but think of your car insurance or homeowners insurance. I know I can get a better deal if I go to Priceline and bid it this year, but I don’t bid it every year. Some of us stick as long as your year-over-year increase is rational.” ($WLP)

Consumer

It seems like QSRs are constantly battling food-safety concerns in China

“as you’ve probably seen from our QSR customers, a report about a supply issue, which has impacted foot traffic again.We still that business as being pretty resilient over time, and the Chinese consumers tend to come back, but when they have this well-publicized quality issues in the store it erodes confidence and impact short-term traffic. And we’re seeing some of that like our customers have reported’ ($MKC)

The average consumer makes 67 trips per year to the store for refrigerated groceries

“Our research suggests that value channel shoppers make 67 trips per year in refrigerated items. So, more than one trip per week. And in the top 10 trip drivers, Food represents the first five” ($BIG)

Big boxes are out of style

“I would say, a lot of folks are shifting to smaller format retail as you probably hear all the time. They don’t like shopping. The big box, it’s big and it’s hard to navigate.’ ($BIG)

You need to take food stamps if you want to stay relevant to the low income consumer

“our belief is that over time, that customer is one that candidly we might have turned away in years gone by because we didn’t offer coolers and freezers, and the ability to take SNAP and EBT. So as that population of consumers grows, we kind of stood still. So, we’re in a catch-up mode with that customer.” ($BIG)

Technology

McCormick is highlighting TV ad spending to build brand in 4Q. This is something to keep an eye on because the company had been an early champion of social media spend on Facebook.

“Another action under way to strengthen our U.S. brand equity is increased investment in brand marketing, and we’re planning an increase of approximately 20% in the 4th quarter. These additional funds will boost our holiday campaigns with new television ads for Thanksgiving and Christmas.” ($MKC)

Healthcare

Many small businesses probably will move their employees over to health insurance exchanges

“given that 80% of the people on our exchanges are subsidy eligible, if you’re a small employer group that is struggling to pay insurance costs and realizes if I put my people into the exchange 80% of them will get some sort of government subsidy, they see that that might be the right business decision for them. So I do think we’re seeing a transition.” ($WLP)

Exchanges will be more competitive next year than they were this year

“I would say going into next year, it’s important to know and we know that there will be more competition. In our markets, competition will be up 20% in number of carriers. Half of that will be the national carriers. So you referenced the U [United], but I would say there will be more carriers involved. There will be more product involved in our markets right now. There will be 50% more product being offered next year’ ($WLP)

Generic drug inflation has put pressure on Walgreen’s margins

“The primary drivers for the pharmacy margin decrease were…pronounced generic drug inflation on a subset of generic drugs [listed other things here too]” ($WAG)

Inflation is being driven by the supply side. Manufacturers appear to be taking price opportunistically

“Well, we continue to see the price inflation being driven by supply shortages and of really a couple of flavors, either where the FDA is taking some action around enforcement; that is shutting down a line or a plant to particular manufacturer; or the other flavor really being where a manufacturer has for their own financial return reasons, their own resource allocation priorities, elected to do likewise, to shutdown a plant, maybe a line, maybe reduce capacity on a line, some flavor of that sort of activity that reduces the overall supply of a drug from that one source, providing opportunity to other sources to raise prices.’ ($MCK)

The inflation is being driven by large price increases in a few molecules

“This change is caused by very large price increases and a small percent of molecules because these supply constraints and other factors are continuing, we expect a generic drug inflation will be with us for a while.” ($WAG)

“Well, we continue to see the price inflation being driven by supply shortages…it’s important I think to note that we continue to see this occurring on a really small minority of the generic pharmaceuticals with which we work.” ($MCK)

Walgreens thinks that inflation may persist without legislation

“I think it will probably end being both [better contracting and legislation]. I think certainly we do think that it’s going to persist based on our intelligence and all the industry intelligence that we’re seeing out there. It’s hard to predict.” ($WAG)

Broad healthcare costs may actually be stabilizing though

“I actually think the landscape is changing some. Trends are being more stable…The cost per unit is being negotiated quite well at a physician and hospital level either through value pricing or through just normal traditional pricing. But the price increases that facilities and medical groups used to see, they’re not getting any more on that front.” ($WLP)

Materials, Industrials, Energy

Some people are worried that a falling price of oil could impact drilling activity, but contract driller Patterson-UTI is not

“We’re actually excited still about the business we’re in right now. It’s still good times for us. I know there is a lot of challenges and people are worried about where the price of oil has come from, and where it could potentially go, but, I can tell you that our business still remain strong.” ($PTEN)

The Permian basin is the busiest in the country right now

“The Permian Basin is the core of our business right now, not only the busiest market for us but busiest market domestically for everyone in the oil and gas business.” ($BAS)

There’s room for consolidation among smaller oil service companies

“I still think that environment exist though. I think there’s – consolidation is something that’s ripe right now and is going to happen within our service space on all of our segments; Fluid Services, Well Servicing and these Completion/Remedial assets. I think there’s too many service providers and we should have ample opportunity to do some consolidation” ($BAS)

Chesapeake is in the midst of trying to turn its corporate culture 180 degrees from the Aubrey McClendon days

“The company has changed every aspect of how we do business and it starts with…our two key strategies are to have financial discipline and profitable and efficient growth” ($CHK)

Miscellaneous Nuggets of Wisdom

There are price leaders and price followers

“where that price opportunity comes, somebody then takes an increase and the others feel some confidence to follow up, sometimes later than others.” ($WAG)

We’re all consumers

“We’re all consumers. We all buy. And you buy by price and you buy by brand” ($WLP)

Full transcripts can be found at www.seekingalpha.com