Company Notes Digest 10.27.17

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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.

It’s increasingly obvious from conference calls that inflation pressures are building in the economy. Management teams in a wide variety of industries are talking about rising input costs and a “very, very positive pricing environment” in 2018. For whatever reason, securities prices suggest that most people don’t believe that the inflation will sustain itself, but at some point the weight of the anecdotal evidence should make its way into economic figures. If that surprises the market and policy makers, there could be a very significant reaction.

Note: raw quotes are now being posted to a streaming feed on tumblr and twitter (@avondaleam)

The Macro Outlook:

The global industrial economy is enjoying a broad based boom

“we’re seeing broad-based sales increases across a number of industries in all regions. We continue to see strength in China construction. Onshore oil and gas in North America is also strong. Construction activity in North America was up compared to last year, and we’re seeing increased order activity by mining customers.” —Caterpillar (Construction Equipment)

“Industrial demand remains strong…I would say that certainly the demand was broad based. If you look across our product lines, we’ve got 65 to 70 different product lines, and the demand was very strong across those as well as strong across the region. So we had revenue up in three of the four regions year on year in Europe, Asia and the U.S., and it was about even in Japan.” —Texas Instruments (Semiconductors)

“clearly we’re seeing clients starting more new projects. They’re spending more money. They have more sense of urgency. Their existing staff has a lean because they’ve held a line so far during this recovery. So, there’s some pent up demand that results from that.” —Robert Half (Temp Staffing)

Even the mining cycle has started to turn

“As we have stated previously, the mining cycle has started to turn. The parked fleet has come down from its peak and stabilized for several months” —Caterpillar (Industrial Equipment)

But commodity inflation is becoming more obvious

“I mean obviously we’re in a bit of an inflationary environment for some of the commodities…overall we’ve probably been more challenged on the cost side this year than we’ve seen in a while.” —Honeywell (Industrial)

“The core underlying market we’re facing for raw materials is certainly toughening.” —3M (Industrial)

“our commodity inflation estimate has increased somewhat from 3 months ago… In terms of the inflationary pressures that we see…it is stronger inflation than we were expecting” —Kimberly Clark (CPG)

“Lumber was on an upward trend even before some of the catastrophic natural disaster events that we’ve seen over the last 60 to 90 days. So that’s the one that I think we all need to be paying attention to for 2018. I think the premiums that are being paid for labor in Houston and Florida that will subside in time. the lumber impacts could be longer lasting.” —Pulte Home (Homebuilder)

“We knew we’d see higher pulp cost going into year, these costs have continue to increase beyond initial forecast ranges. Ethylene, propylene, kerosene, and the polyethylene and polypropylene resins have increased recently” –Procter and Gamble (CPG)

Even oil prices could start to rise

“the reduction in global oil inventories in the third quarter clearly demonstrates that the oil market is now in balance, which is creating the required foundation for a further increase in the oil price and the inevitable growth in global E&P investments.” —Schlumberger (Oil Service)

Wages too?

“There is some commodity inflation, but the biggest drag that we’re facing right now is related to the labor investments that are being made.” —McDonald’s (Restaurants)

“The labor market in the U.S. is extremely tight, hard to find people.” —Manpower (Temp Staffing)

For now, higher input costs are being absorbed by margins

“we’re now estimating about a $300 million profit hit from higher commodity costs.” —Procter and Gamble (CPG)

“scrap price has moved up and we were unable to move plate prices up with scrap prices. So we started to see a margin compression and that’s where we live now. We’re living in a margin-compressed world today.” —Nucor (Steel)

But those prices will start to get passed on to customers

“we continue to have a positive view on domestic steel consumption…This will be a solid foundation for a strong pricing environment as the macro market drivers continue to be persuasive…These dynamics could create a tight market and lead to significant price appreciation as we saw at the end of last year…I just see it setting up a very, very positive pricing environment for the first quarter of 2018 and all the way through 2018.” —Steel Dynamics (Steel)

Consumers usually don’t love higher prices

“we are seeing a little bit of resistance at the higher price points because of affordability and I think that’s a broader concern that affects the entire business.” —Pulte Home (Homebuilder)

Except when it comes to the stock market

“fairly broad based retail engagement overall commensurate with literally everybody seems to like new highs” —TD Ameritrade (Broker)

International:

China’s economy is also booming

“This revision includes a higher demand forecast in China, driven by strong growth in ultra-high voltage electrical applications, as well as growth in China’s two largest aluminum consuming sectors, transportation and construction.” —Alcoa (Aluminum)

Wealthier Chinese consumers are demanding higher quality goods

“I think what is happening as we speak is that the consumers in there and the OEMs, they’re becoming more demanding on performance, on quality, and functionality and brands” —3M (Industrial)

But higher standards lead to a higher cost of doing business

“China has started to really fight pollution as we have said several times that they would do…once the Chinese start to control pollution, one of their most unfair competitive advantages goes away.” —Cleveland Cliffs (Iron Ore)

Brexit has made Britain a global laggard

“When we say that we don’t think Brexit is a good idea, in this world of – in this future of work, having access to skilled talent is what’s going to define the competitive advantage for nations and organizations alike, and any country that appears to give the impression that they’re not really interested in people coming to their country and contributing to the growth of their economy and prosperity, that’s not a great sign.” —Manpower (Temp Staffing)

Financials:

The credit cycle began to soften at one point, but then recovered

“We saw trends actually flagging over the last year-and-a-half…Since then, we’ve subsequently seen some pullback…So, it feels like it’s settled out a little bit and something that would be consistent more with the middle of the cycle” —Capital One (Bank)

New regulations could lead to a significant contraction in sell side research

“I think the effects [of MiFID II] are going to be a significant contraction and sell-side research providers…We think that especially for some of our larger teams it’s going to end up being a competitive advantage as the amount of information and the amount of sell-side research declines.” —Cohen and Steers (Investment Management)

Insurance companies aren’t earning their cost of capital

“Loss trend has outpaced rate and exposure for a few years now to a degree that many others in the industry are probably not earning their cost of capital.” —Travelers (Insurance)

Disasters should lead to some firming of insurance prices

“given the level of destruction of capital give or take $100 billion vaporizing in a relatively short period of time…it is hard for us to imagine that given the loss activity it is not going to be a definitive wake-up call for market participants and capital providers to focus more deeply or to revisit what is an appropriate risk-adjusted return.” —WR Berkley (Insurance)

Consumer:

Consumer packaged goods companies are struggling to find growth in developed markets

“overall demand in Europe remains flat as it has been in for the past few years. And in North America, market growth slowed at the start of this year and has not yet improved” —Unilever (CPG)

“Overall, it’s challenging to find growth right now in several of our large markets.” —Kimberly Clark (CPG)

It’s hard to get consistent returns on digital ad spend

“The ROIs on traditional media TV advertising are what they are – this narrow band is quite predictable, the ROIs on today’s landscape of search investment, social investments, video, et cetera are – it’s much, much more wide.” —Unilever (CPG)

Technology:

Cord cutting isn’t really cord cutting

“we are not surprised by what we are seeing around the TV, but I would tell…when you move to over-the-top for your video entertainment, the quality of that broadband connection becomes more important than ever” —Verizon (Telecom)

Smartphone units are still growing 6% worldwide

“We forecast world smartphone long-term unit growth to be 6% compound annual growth rate from 2016 to 2021.” —Taiwan Semiconductor (Semiconductors)

But upgrades have slowed

“Revenues continue to be pressured by slow equipment sales and what were legacy services. We’ve had about 2 million fewer phone upgrades so far this year when compared to a year ago” —AT&T (Telecom)

AI is moving to the edge of the network

“AI and ubiquitous computing will be important drivers for long-term world semiconductor growth…AI will continue to proliferate from the cloud to broad based client devices such as smartphones and ADAS in cars, DTVs, set-top box, gaming, surveillance, robot and drone.” —Taiwan Semiconductor (Semiconductors)

Some older industries are adopting leading edge technologies

Travelers used drones to evaluate insurance claims

“We conducted more than a thousand inspections with drones, which significantly accelerates the speed and reduces the cost of handling those claims. Again, a better outcome for our customers and more efficient outcome for us” —Travelers (Insurance)

TD Ameritrade is launching AI chatbots

“We launched an AI powered Chatbot on Facebook’s Messenger, a first in our space. Initially the bot was an extension of our client’s service capabilities but this week we’ve enhanced it to include equity and ETF trading, account deposits and additional education capabilities as well…just yesterday I bought 100 shares of Apple on Facebook Messenger” —TD Ameritrade (Broker)

Healthcare:

Illumina expects to be able to map a genome for $100

“From a $100 a genome perspective, we continue to believe that that is attainable with the architecture that we have in NovaSeq.” —Illumina (Genetics)

Materials, Energy:

The oil industry may be stabilizing

“Oil and Gas end markets are beginning to stabilize and we expect them to return to growth over the medium term.” —Baker Hughes (Oil service)

Production companies are ready to drill again

“the only people that probably talk to more customers than me is my BD group and I talk to the BD group every day. And so, we’re having constructive conversations about 2018 and encouraging discussions. I think the $50 oil through the planning cycle is a great thing…And so, they are absolutely planning to work next year, hedges are getting in place.” —Halliburton (Oil Service)

Oil demand continues to be strong

“the growth in oil demand continues to be very strong and importantly the upward growth revisions in 2017 were primarily seen in the OECD countries. The demand growth outlook for 2018 is again expected to be north of 1.4 million barrels per day” —Schlumberger (Oil Service)

What are the long term prospects though?

“we are committed to an all-electric future, and we have announced plans for at least 20 new all-electric vehicles by 2023, including two in the next 18 months.” —General Motors (Automobiles)

Miscellaneous Nuggets of Wisdom:

Just keep growing

“In this business, you are growing or you are dying” —BB&T (Bank)

Small returns compound over a long time

“you can be a lot richer if you hold an asset for 10 years earning 12% than if you hold an asset for four years earnings 25%.” —Blackstone (Private Equity)

Spend on product over promotion

“As you know, we’d rather spend a dollar on innovation or equity every day the week before we spend money on promotion….And the reason is very simple is because there is nothing proprietary and promotion whereas we can build proprietary advantage with those innovation and equity investments.” —Procter and Gamble (CPG)

Full transcripts can be found at www.seekingalpha.com