Company Notes Digest 11.17.17

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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.

Ordinarily we would focus on retail in this week of the earnings cycle. There are a number of quotes in this week’s piece from traditional brick and mortar stores, but companies like Macys no longer feel relevant to the broader economic picture. It feels like that alone speaks volumes about the state of the industry.

Instead this week, the headline macro discussion is about housing. Following years of under-building we now find ourselves in a supply constrained environment. This is favorable for homebuilders and home-owners, but frustrating to anyone who hopes to buy. Political gridlock and rising prices are leading to a great migration of millennials from coastal markets to southern and midwestern cities with a lower cost of living.

The Macro Outlook:

Homebuilders are jacked up on housing markets

“I will tell you, Bob, the market feels really good. The positioning of this company with its people and its communities – never been better. So yes, we are pretty jacked up.” —DR Horton (Homebuilder)

There’s a lack of supply, especially on the coasts

“Especially in highly competitive coastal markets, it has become extraordinarily hard for customers to buy a home…even though buyer anxiety about rising home prices remains a concern, the number of homes for sale is once again the overwhelming issue” —Redfin (Online Broker)

Political gridlock makes it impossible to build

“There is so much political gridlock in a place like San Francisco around building new homes, especially high-density homes…So I don’t really see that inventory crunch getting much better in most of the coastal markets. I just see it starting to become a problem in markets where we never thought it would be. Hearing that there’s a bidding war in Pittsburgh, who would have thought?” —Redfin (Online Broker)

Housing markets could stay tight through 2020

“As we think about housing broadly and fears of slowdown, we don’t see that for 2018, 2019 and 2020 for a number of reasons. We’ve talked about an aging housing stock, household formation and home price appreciation, and you may say, well, home prices are really hot, haven’t they fully recovered peak to trough? Well, yes, they have, but on an inflation basis, they’re still down double digit.” —Home Depot (Retail)

Tax reform probably won’t have much impact

“candidly, we don’t subscribe to the fact that…the mortgage interest deduction elimination would have much of an impact…in large part because the majority of households wouldn’t have an impact from what’s described today…Our research shows that only 23% of tax filers actually use the deduction. And then of the people who have mortgages, only 5% have mortgages in excess of $500,000.” —Home Depot (Retail)

As a result there is a great migration of buyers

“The larger long-term trend is a great migration from expensive coastal markets to more affordable Midwestern and Southern cities. This has already happened in places like Austin, Denver and Portland, and it is now transforming places like Charleston, Detroit, Nashville and Salt Lake City.” —Redfin (Online Broker)


Growth has accelerated in developing markets

“We do see some acceleration in growth in developing markets. I mentioned our results in China. Those were both market and share driven results. We see the categories in India moving past all of the policy interventions, the tax intervention and the demonetization intervention and resuming very nice growth. Russia is also getting better sequentially quarter by quarter. Brazil…in general some pick up in developing markets and to the extent that commodity cost continue to move which they have been I would expect that developing market dynamic to improve since many of those economies are commodity based and funded, Russia is an example.” —Procter and Gamble (Packaged Goods)

Activity in China has been better than people expected

“I think we are seeing signs of progress and in China…So domestic activity is being better and then anybody is really anticipated early in the year. And so there is a signs of progress and capacities identified has been removed again probably more than people anticipated earlier in the year.” —Arcelor Mittal (Steel)

Visa is bullish on India

“We definitely are bullish on India for a variety of reasons…We’ve had a good constructive conversations with the central bank and the government all the way through this demonetization. We really are 100% behind the government’s desire to move to more of a cashless society.” —Visa (Payments)


Consumer credit may be deteriorating some

“there has been an increase in bad debt expense driven in part by the growth in uninsured revenue.” —Tenet (Hospitals)

“As it relates to credit…we are seeing a little bit more of a normalization as we move forward…we actually have seen a little higher level of reserves that need to be put in place, as well as some financing charges that have been recognized” —JC Penney (Retail)

Will reinsurance prices react to recent catastrophes?

“the million dollar question is, how will reinsurance market react to the recent losses…We believe the deterioration of pricing and terms and conditions has ended, but the magnitude of any improvement is uncertain… Historically it has taken up to two years for pricing to peak after big events.” —Third Point Reinsurance (Insurance)


No one is opening brick and mortar stores today

“People are not thinking about opening bricks-and-mortar stores if they don’t need to, right? So anybody who has a concept of being a merchant and selling your goods and services, initially, almost anywhere in the world today thinks about doing it in the digital world rather than in the physical world.” —Visa (Payments)

People want stuff delivered

“Delivery is one of those things that will grow over time, it doesn’t spike immediately. It’s a change in consumer behavior. So, it’s something that we’ll see grow over time…We’re excited about that business.” —McDonalds (Restaurants)

Particularly in concentrated urban environments

“If you look at the markets that have grown the fastest…one is Korea, one is China and they’re both…highly concentrated urban populations. And so, both from a consumer standpoint, traffic congestion, et cetera, e-commerce becomes a preferred shopping experience for some households, but also the economics work including the challenging dynamic of the last mile.” —Procter and Gamble (Packaged Goods)

Marketing is fundamentally changing to adapt

“I think that where we’re headed is mass one to one marketing. I mean historically our industry has been mass marketing, push a large volume of content out and hope it cuts through the clutter and I think we’re getting very close to a point…where the content is more pull versus push and again we refer to that as personal mass marketing and that, the return on that becomes much higher than a lot of very inefficient mass push.” —Procter and Gamble (Packaged Goods)

But price is really what matters most

“one thing we’ve learned this year is that price really matters to our customer. That sounds like an obvious statement, but it’s easy to convince yourself that other components of retail matter more” —JC Penney (Retail)

It should be another fiercely competitive holiday season

“In the fourth quarter, we expect the retail landscape to be fiercely competitive. With excess inventory still in the supply chain, broadened distribution strategies from some key vendors and a lack of newness and innovation, the fourth quarter and 2018 will continue to be promotional and pressure margins from last-year levels” —Dicks (Sporting Goods)

At least retailers feel like they are in a good inventory position

“We really entered the third quarter in a good inventory position…So, we are not anticipating having to liquidate a lot of unplanned inventory walking into the fourth quarter.” —Macy’s (Retail)

“For five straight quarters, sales growth outpaced inventory growth, and we exited the third quarter in a relatively clean inventory position.” —Nordstrom (Retail)

“We’re in really pretty good shape from an inventory standpoint… There’s still some stuff that needs to be cleaned through. But from an apparel standpoint, we’re really in very good shape” —Dicks (Sporting Goods)


There’s tremendous competition in OTT television

“There is a tremendous amount of competition in the OTT space. I mean, there is probably approaching a dozen companies…And so what’s going to happen is that the market’s going to get more fragmented. And as a result, that’s consumers will have some choices. And not only will they have choices, but they can move between packages with a click of a button on the Internet.” —Dish (Television)

That could lead to more fragmentation and lower prices

“I can say that our plan on the Disney side is to price this substantially below where Netflix is. That is in part reflective of the fact that it will have substantially less volume…It is our goal to attract as many subs as possible as starting out.” —Disney (Media)

AI is a paradigm shift in computing

“AI is really one of these – once in a decade kind of transition. It is going to be a demand driver that really rises the entire market.” —Intel (Semiconductors)

Thousands of AI startups are cropping up

“There are thousands of startups now that are in – are startup because of AI. Everybody recognizes the importance of this new computing model. And as a result of this new tool, this new capability, all these unsolvable problems in the past are now interestingly solvable. And so you can see startups cropping up all over the west, all over the east and there’s just – there are thousands of them.” —NVIDIA (GPUs)

Miscellaneous Nuggets of Wisdom:

Stay focused on your product

“I remember, almost 10 years ago, when everybody went and invested in texting…And they took their eyes off the quality of the food. And I will tell you, many chains that I know, that became so tech savvy and then almost shrunk where they become irrelevant because they did not take care of the food consistency of the meals coming out quickly, and they neglected the kitchen. The kitchen at the end is the one that can keep a restaurant relevant. I don’t care what you – it’s about food” —Middleby (Restaurant Equipment)

Full transcripts can be found at