Company Notes Digest 10.23.15

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:

The industrial economy probably slowed further in Q3

“what really changed during the quarter was order entry levels weakened more than we anticipated and September was much more worse than we had expected…September is always a key month…it’s a really good indicator for what the rest of the year potentially is going to look like.” —Parker Hannifin (Industrial Equipment)

“North America [construction]…This year we’ve kind of seen it slow down a bit as the year wears on.” —Caterpillar (Construction Equipment)

“Overall, we have seen some incremental slowing in the macro.” —Danaher (Industrial Equipment)

“We saw parts of the U.S. economy soften further, notably in the manufacturing sector.” —Manpower (Temp Staffing)

“we’re ending out the year I will say at the lower global growth rate in the economy versus what all of us anticipated as we went into the year” —3M (Conglomerate)

More importantly though, many companies are looking for continued weakness in 2016 and beyond

“we have to factor in that the likely recovery in our activity levels now seems to be a 2017 event.” —Schlumberger (Oil Services)

“2016 will likely be another challenging year. Earnings in three of the four segments – Otis, Pratt, and UTAS – will be flat to down even with the pension benefit.” —United Technologies (Conglomerate)

“We think 2016 is going to be about 5% below 2015. Now this would be our fourth consecutive down year and that’s never happened to Caterpillar in the history of the company.” —Caterpillar (Construction Equipment)

“Overall, the ag market continues to be challenged…We do expect ongoing weakness to continue over the next 12 to 24 months” —Dow Chemical (Chemicals)

A negative outlook could affect 2016 CapEx budgets and exacerbate underlying weakness

“Given the uncertain environment, we are taking a hard look at our capital spending for next year…we do currently expect that it will be somewhat less than this year” —Union Pacific (Railroad)

“Most of our customers haven’t completed or just barely started our budgeting process for 2016. But the general feedback is very consistent. And that is, they expect, the vast of them that spend will be lower.” —Schlumberger (Oil Services)

“I for one have a concern that we may find ourselves set [ph] into another downturn before we see the economy strengthen a great deal again, I mean. So we’re trying to be very careful.” —Zion (Bank)

Not all companies were so gloomy though

Honeywell’s CEO doesn’t think there’s a chance of recession because we never really had a recovery

“At least from my perspective, it feels like markets really think there is a chance of a recession here…I really don’t see that. This feels a lot different than it did in 2001 or 2008 to me, just because after a great recession we’ve never really had a recovery.” —Honeywell (Industrial Conglomerate)

Texas Instruments saw weak demand, but not as weak as expected

“our revenue declined 2% from a year ago, and we obviously would describe that as a weak demand…But, inside of that, certainly it was stronger than what we had expected.” —Texas Instruments (Semiconductors)

Kansas City Southern said business demand still feels good

“business demand still feels very good to us, with the obvious caveat about the uncertainty in energy markets, which you have seen across the entire rail sector, have made it more difficult to forecast demand and provide guidance.” —Kansas City Southern (Railroad)

GE says it’s seeing as much activity as ever

“On balance, Scott, we see as much activity as we’ve ever seen. The quoting activity, the deal activity, things like that, is still quite robust. Business for us in China is still pretty good, which is a big market.” —GE (Conglomerate)

Labor markets may actually be one of the strongest areas of the economy

“I guess we would observe it’s still a candidate short market. The wage rate inflation is accelerating not decelerating in the U.S. and we think that speaks volumes about the health of the labor markets as it relates to the white-collar professions where we specialize….from where we stand the labor markets are still solid they are very solid.” —Robert Half (Temp Staffing)

Hasbro sees labor inflation is in the double digit range

“The single biggest cost input to our cost of goods is labor. And we continue to see labor inflation rates in the double-digit range.” —Hasbro (Toys)

There was some foreshadowing of potential layoffs though

“there are some questions regarding potential outlook due to the recent news about companies reducing their workforces and cutting costs. We’ve seen some slight impact already and will continue to monitor our customer base closely.” —Brown and Brown (Insurance Agency)

“We have therefore decided to proceed with a further round of capacity and overhead reductions, which will result in a restructuring charge in the fourth quarter.” —Schlumberger (Oil Services)

One piece of good news is that currency headwinds will start to go away in Q1

” the major headwind we have experienced all this year from currency will go away in the first quarter if exchange rates remain where they are today” —Manpower (Temp Staffing)

However hedges will also roll off next year

“Depending on how you hedge, if you hedge your currencies at all, it’s good for one year. It’s not necessarily so great the following year as your hedges expire and so on.” —Abbott Labs (Healthcare)

Another piece of good news is that eventually excess inventories will be liquidated

“We do continue to see destocking in the channel. Our best bet is we’ll continue to see that destock through [Q4].” —Parker Hannifin (Industrial Equipment)


Europe may actually be doing better than the rest of the world

“Europe is actually kind of stable and positive…the news is no longer totally doom and gloom…Our numbers don’t reflect all of that yet. But I’d say…QE now I think [is] finally starting to kick in there.” —Caterpillar (Heavy Machinery)

The French manufacturing sector is rebounding

“We’re seeing some nice recovery in the French market in September after little bit more lackluster in August. And it isn’t – we can see that the manufacturing is coming back and if you followed the French PMI, you saw that that’s actually moved up a little bit as well.” —Manpower (Temp Staffing)

Brazil is seeing a profound slowdown though

“I was just in Brazil two weeks ago. It’s a profound slowdown there.” —Caterpillar (Heavy Machinery)

It may be challenged for the next two years

“Brazil today will still, in my view and I think in most of our views, be a challenge maybe for the next two years.” —3M (Industrial Conglomerate)

The Brazilian Real was devalued by 22% last quarter

“There are not too many months you have a 22% devaluation in the currency anywhere in the world and that’s certainly what happened in Brazil, in the third quarter.” —Caterpillar (Heavy Machinery)

RMB devaluation probably hasn’t been enough to move the needle on the Chinese economy

“the movement in the renminbi has been fairly modest. We’re not seeing a movement on that…we do see it as a positive development for that portion of the business, but minor at this point.” —3M (Industrial Conglomerate)


The global economy has slowed but valuations have not changed

“in general, I think there’s been a slowing, but not so much a change in valuation expectations in some of the businesses out there.” —Abbott Labs (Healthcare)

With stable markets, investment banks have another opportunity to bring deals to market

“I think things will get done more this quarter than they did last quarter if things stay stable. And based upon what I see in terms of our pipeline, I feel good about our pipeline” —Suntrust (Bank)

Comerica has seen elevated chargeoffs in loans to VC/PE backed tech companies

“its unusual for us to see all bigger charge-offs in technology and life sciences, they have been up for the last couple of quarters, they’re above where we’d like to see them frankly. But we’re not seeing any systemic issues there, we’re not seeing any patterns to the charge-offs. I really don’t think we’re going to see further deterioration in the portfolio. But we felt it made sense to increase our reserves and we’re watching it carefully.” —Comerica (Bank)

Insurance markets continue to grow more competitive

“I want to now say a few words about current commercial P&C market conditions. The underwriting environment continued to grow more competitive in the quarter for our commercial P&C business globally. With some exceptions, price declines accelerated modestly. They were varied by class of business and geography.” —ACE (Insurance)


McDonalds attributes its turnaround to efficient operations

“we are running better restaurants than we were a year ago…and that is ultimately what customers respond to…as we innovate around the menu and have promotional activity and have fun with that, that would increment the sales, but…any market that’s successful around the world is because they are focusing on the day-to-day operation and just delivering at that moment of truth for the customer.” —McDonald’s (Restaurants)

2/3 of Chipotle’s meals are taken out, but only 7% are ordered before hand

“about two-thirds of our business is eaten outside of a restaurant, but only 7% of our business is ordered outside of a restaurant…So kind of makes sense for us to provide the convenience to order outside of a restaurant.” —Chipotle (Burritos)


Verizon says that consumers are not adopting phone leasing programs

“I am not interested in a rental program. We are not seeing any impact from those programs from the competitors in our base…f you speak to the rating agencies, they are becoming very concerned with the balance sheet risk of some of the industry on putting up rental phones on the balance sheet with what the residual value will be with those rental phones.” —Verizon (Telecom)

IBM is seeing the storage market shift rapidly to flash

“The growth in our high end servers was more than offset by a double-digit decline in storage hardware driven by weakness in the high end disc and tape. This market is shifting rapidly to flash where we again had very strong growth.” —IBM (Enterprise Technology)

Products are being electrified that never were before

“the amount of electrification in the world, the amount of smart products in the world that are going into what’s not typically electronic products that are now moving forward, whether it’s anything from a shoe to a shirt to a door lock is tremendous.” —Flextronics (Electronics Manufacturer)

Materials, Industrials, Energy:

Oil prices may start to rebound as supply and demand balance

“we believe that the worldwide crude oil supply and demand markets are well on their way to balance by year-end or in early 2016….Core continues to see a V-shaped recovery getting underway in 2016.” —Core Labs (Oil Services)

However, exploration & production companies have been significantly weakened by a year of low oil prices

“four quarters into very low oil prices, the financial strength of many of our customers has significantly weakened and their appetite to invest is also a bit down.” —Schlumberger (oil services)

Activity will probably drop substantially towards the end of the year

“Based on current feedback, we believe most operators have exhausted their 2015 budgets, and will take extended breaks, starting as early as thanksgiving. Therefore our activity levels could drop substantially in the last five weeks of the year” —Halliburton (Oil Service)

Even if the situation improves E&Ps will likely have to recover strength before they can start investing again

“Any I think – any improvement in oil prices, I think will be to initially – is going to go towards the strength in the balance sheet and then the oil companies will likely assess how sustainable are these increases in oil prices before they start investing.” —Schlumberger (Oil services)

But they are facing a drill or die circumstance

“with the high decline curves that exist on these unconventional plays. They are really are in drill or die mode. So if you go a year without drilling a well, and your production starts to turnover, you are going to have to start drilling or you are going to have to take your infrastructure apart that you’ve built up as a company.” —Halliburton (Oil Service)

And, like good wildcatters, if they have cash they are going to spend it

“I think one of the things that our customers demonstrate, and believe me, we love all our customers. If they have cash they are going to spend it.” —Halliburton (Oil Service)

Miscellaneous Nuggets of Wisdom:

When you hire fresh college grads you will have to train them in more than just job skills

“When you hire somebody right out of college, you are teaching them not only insurance, but about life.” —Brown and Brown (Insurance Agency)

Different people have different trajectories of success

“It’s not as easy as saying, we hire somebody and one year later you have X. It’s not that easy. And I know you’d like that, there’d be more like manufacturing, but it’s not like that. You hire a new person and some people are successful more quickly, some people, it takes a little longer for them to launch in their career.” —Brown and Brown (Insurance Agency)

Don’t fight what your competition is today. Prepare to fight what your competition could be tomorrow

“our team is preparing for isn’t what’s the next shoe coming from one of our current competitors, what we’re thinking about is what are we going to do if Apple or Samsung decided to make a shoe, how are we going to answer that. So that’s the type of I think leapfrog mentality and that moon-shot thinking that we are challenging our team with, let’s not fight with where people are today, let’s think about where they’re going in the future and what we can do to be great” —Under Armour (Apparel)

Full transcripts can be found at