Company Notes Digest 10.22.18

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.

It’s earnings season again and the overall outlook of the US and global economy is positive though laced with a layer uncertainty because of concern over tariffs.  Strong positive growth is expected to continue into 2019 despite the prevailing uncertainty. 

The Macro Outlook:

The economy is in great shape 

“the US economy remains in great shape by nearly any measure. Growth is strong, confidence is high and there aren’t any signs of the excess we saw ahead of the last down cycle” – The Blackstone Group (BX) CEO Steve Schwarzman

“The continued strength of the U.S. economy is the primary catalyst for our earnings growth. Tax and regulatory reform, along with a robust domestic energy sector, are driving this economy.” – Nucor Corp (NUE) CEO John Ferriola

“The economy is really strong, consumers are in great financial shape and companies are optimistic and growing.” – The PNC Financial Services Group (PNC) CEO Bill Demchak

“The economy is strong still, two days in the market notwithstanding” – First Republic Bank (FRC) CEO Jim Herbert

Credit quality has never been better

“overall what we are seeing is that because of the economic growth here in the U.S., in particular, but around the world, the credit quality for our customers in the commercial, corporate world has never been better. Their balance sheets are strong. They have extended their maturities. Their interest coverage is higher than it’s ever been, because their debt service is lower”. – Wells Fargo (WFC) CEO Tim Sloan

Above-trend growth is expected to continue

“The economy could be strong for a while…wage is going up, participation is going up, credit has been written as pristine. Housing is in short supply. Confidence, both small business, consumer is extraordinarily high. And that could drive a lot of growth for a we look at the economy, we don’t see it slowing down. It seems to be continuing to grow pretty solidl.” – JPMorgan Chase (JPM) CEO Jamie Dimon

“Participants noted a number of favorable economic factors that were supporting above-trend GDP growth; these included strong labor market conditions, stimulative federal tax and spending policies, accommodative financial conditions, solid household balance sheets, and continued high levels of household and business confidence.” – The Fed

“that’s a snapshot of our markets, healthy and growing. And if you ask our customers they’ll tell you that things look good and our branches feel the same way. We’re confident about the fourth quarter and believe the cycle has plenty of gas left in the tank..” – United Rentals (URI) President Matt Flannery

But uncertainty remains

“considerable uncertainty remains in our markets, driven by supply disruptions and policy and trade actions taken by governments in the United States, China and elsewhere. These dynamic conditions could have impact in the last quarter of 2018 and into 2019.” – Alcoa Corporation (AA) CEO Roy Harvey

“The market backdrop has become more turbulent recently as everyone knows, with risk assets around the world impacted by growing concerns around macro issues. These include rising interest rates in the United States, trade tensions, emerging markets weakness and geopolitical risks in Europe. Taken together, these issues add up to more uncertainty and volatility in an already complex investment environment.” – The Blackstone Group (BX) CEO Steve Schwarzman

“there’s a great deal of uncertainty around the tariffs and around the Brexits of the world which we are seeing some impacts of that” – Textron (TXT) CEO Scott Donnelly

“a number of contacts cited factors that were causing them to forego production or investment opportunities in some cases, including labor shortages and uncertainty regarding trade policy” – The Fed

Tariffs are are impacting prices

“the tariffs are having their intended impact by curbing unfairly traded imports…The tariffs are providing leverage to get other countries to the table to negotiate fairer trade agreements for the U.S.” – Nucor Corp (NUE) CEO John Ferriola

“several participants reported that firms in their Districts that were facing higher input prices because of tariffs perceived that they had an increased ability to raise the prices of their products. – The Fed

The labour market is tight

“Contacts in many Districts reported tight labor markets, with difficulty finding qualified workers…recent data suggested some acceleration in labor costs, but that wage growth remained moderate by historical standards, which was due in part to tepid productivity growth.”- The Fed

“I think labor is tight in any business in the US today. And we were certainly no exception of that with unemployment now under 4% for a while… labor pressures are certainly on the minds of our franchisees.On the flip side of that, the one of the things that yes, or the thing that drives sales of pizza as much as anything is having people gainfully employed and earning good wages out in the marketplace. So as the number one player in the pizza business, we also get a nice top size benefit from a strong labor market.” – Domino Pizza (DPZ) CEO Ritch Allison

Rising interest rates are impacting valuations

“cap rates are beginning to adjust a little bit for the rising rates. And that is slowing down, the velocity of turnover. And that’s really what I was getting at. Commercial real estate, per se, from the cash flow point of view is still quite strong” – First Republic Bank (FRC) CEO Jim Herbert


Loan growth is a little slower than expected

” While we did see modest growth in the quarter consistent with industry data, our corporate loan growth came in below our own expectations. We attribute the shortfall to a combination of several factors, including elevated competition, meaningfully higher payoffs this quarter and paydowns and overall lower line utilization.” – The PNC Financial Services Group,(PNC) CEO Bill Demchak

“So, I think the fact that we have got very buoyant capital markets, very liquid capital markets and we have high credit quality for our customers means that loan growth is a little bit slower than we would have all imagined in an economic growth level that we are seeing right now”. – Wells Fargo (WFC) CEO Tim Sloan

Companies are finding alternative funding sources

“Alternative funding sources such as the capital markets and companies own cash balances are limiting the clients’ need to access the loan markets, but to a lesser extent, than during the last several quarters. we expect commercial loan growth to continue to improve.” – U.S. Bancorp (USB) CFO Terrance Dolan

Corporates are flush thanks to tax reform and so they’re not borrowing as much

“corporates are flush. The lower tax rate has basically increased cash flow in companies. And all else equal, they’re not spending the incremental difference in totality on CapEx. And so they’re dropping their line utilization” – The PNC Financial Services Group (PNC) CEO Bill Demchak

As the Fed shrinks its balance sheet, that’s going to come out of deposits 

“I’ll just make a macro point too. As the Fed reduces balance sheet – just say by $1 trillion over the next 18 months or whatever, which they indicated they’re going to do, that’s $1 trillion out of deposits. That will have an effect kind of macro competition and stuff like that.” – JPMorgan Chase (JPM) CEO Jamie Dimon

Now that some banks are not subject to CCAR, they can return more capital to shareholders

“Now that we are no longer subject to CCAR, our board is able to more efficiently and effectively take capital actions with a focus on reducing our robust capital ratios to a level that is reflective of our business strategy.” – Comerica Inc. (CMA) CEO Ralph Babb


Caution in global auto OEMs, soft OEM market

“there is just caution right now in the global auto OEMs. And that’s coupled with I think just an overall softening a bit of the global auto OEM manufacturing. And I say Q3 is always the most susceptible because most of the guys do shutdowns during the summer months anyway and so one of the ways they – easy for them to regulate output is to extend some of these shutdowns and again that’s something that generally manifest itself in Q3 and we certainly saw that at Caltech. So it’s not a huge reduction in volume but there had been some modest declines” – Textron (TXT) CEO Scott Donnelly

Steel demand to continue to grow

“Based on strong underlying domestic steel demand fundamentals and customer optimisms throughout all market sectors we believe steel consumption will continue to be seasonally strong and grow into 2019” – Steel Dynamics (STLD) CFO Theresa Wagler

we still see strong demand. There is strength in the marketplace…so the 24 end markets that we serve, 23 of them are either stable or on the uptick”.- Nucor Corp (NUE) CEO John Ferriola

Materials, Energy:

Aluminium supply is likely to reduce

“you’re at a point where half of smelters outside of China are now cash negative and under water. And that simply means that there is very little incentive to continue to operate many of those plants and certainly no incentive to invest… there really isn’t a lot of room unless aluminum prices to go up for raw materials to continue to increase without starting to see a significant supply reduction. Because plants can’t continue to operate at these types of cash losses.” – Alcoa Corporation (AA) CEO Roy Harvey

and the high prices may not persist

“the current dynamics, which have pushed world ex-China alumina prices above Chinese alumina prices may not persist..” – Alcoa Corporation (AA) CEO Roy Harvey

Delta expects to be able to pass higher fuel costs along

“I can tell you that the economy is healthy, demand is very healthy for the Delta product and to the extent oil prices were to continue to rise, we expect to be able to pass along the cost of that.” – Delta Air Lines (DAL) President Glen Hauenstei

Miscellaneous Nuggets of Wisdom:

Better to have a failed idea than none

“the great tragedy for an entrepreneur is NOT a failed idea. You will have other ideas! No, the great tragedy for an entrepreneur is a zombie idea, a business that has no chance of growth and vibrancy, but is kept alive through some witch’s brew of too much friendly capital and too much misplaced hope”  –  Second Foundation Partners CEO Ben Hunt

Spotting great opportunities 

“the focus is on where is there a large scale opportunity. And when you look in the life science area, what we’re seeing is there is a very large pipeline of drugs that it costs an awful lot of money and resources to bring them to market, particularly as they get towards the phase 3 trials later on in their process. So, we said, gosh, wouldn’t it be terrific, if we had more operating capability. So, we identified the opportunity, we talked to a lot of people in the space, we found a world class organization in Clarus that has terrific people, expertise and a great track record.” – The Blackstone Group (BX) CEO Steve Schwarzman

Full transcripts can be found at