Company Notes Digest 11.18.16

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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.

The end of the presidential election appears poised to unleash a huge amount of pent up demand. The end of uncertainty is a good enough reason for companies to put dry powder to work. Even better for the stock market, the business community appears to have adopted a favorable view of Trump. However, the business community’s gain could come at the expense of workers. Trump was elected in a wave of populism, and if he enacts pro-corporate policies, that could ultimately make the people even angrier.

The Macro Outlook:

The end of the election may have unleashed a huge amount of pent up demand

“There is definitely pent-up demand. I mean, I think we have seen a big recovery in the U.S. consumer. That story has not been as robust for small business and it really gets to like lack of management confidence, lack of Board confidence, lots of uncertainty, they face the Affordable Care Act, they face an onslaught of regulation across all industry categories. And so I think the election, the beginning of the election is just behind us and there is an outcome regardless of the winner. And now I think the big thing is, it looks like there’s going to be an orderly transition of power and then the devil’s in the details in terms of what the new President’s policies look like, but anything that brings certainty brings confidence and there is a lot of dry powder…And there is a tremendous cash built across corporate America and I think there is a lot of appetite to invest in R&D, Company expansion, M&A” —JP Morgan Commercial Bank CEO Douglas Petno (Banking)

Business leaders are viewing Trump as a positive

“Post-election I think that, most CEOs that I talk to we are pragmatic about the result…I think that President-elect Trump appears to be very business oriented and is very focused on driving the US economy and anytime the US economy improves, that’s certainly good for us” —Cisco CEO Chuck Robbins (Switches & Routers)

Disney is already building statues in his likeness

“It’s also a good thing I think for the market and for most businesses that the transition is already off to what appears to be a fairly smooth start…I think smooth transitions are good. I will say on the smooth transition front, we’re going through a smooth transition as well. We’ve already prepared a bust of President-elect Trump to go into our Hall of the Presidents at Disney World.” —Disney CEO Bob Iger (Media)

Optimism alone can boost economic activity

“I do truly feel that if the optimism we’ve seen this week in the stock market continues giving that feeling of optimism in the economy I would expect that to raise all boats in our campus switching side.” —Cisco CFO Kelly Kramer (Switches & Routers)

Even a normalized environment would be a big improvement

“large parts of the world have been in negative interest rate territory for a while and in very low rate policy…we don’t want to view that policy…as normal and so to the extent to which we can get back to a more normalized rate environment…that should positively correlate for us. And we root for growth…the extent to which the policies are supportive of growth, it should translate quite well.” —Goldman Sachs CFO Harvey Schwartz (Investment Bank)

But are the expectations of Trump’s policies accurate?

Trump rode a wave of populist anger into the White House

“I think we find ourselves in the midst of populism. It makes complete sense, because the middle class – whether it is in the US, Europe, or almost any democracy – has not had a good experience, particularly since the financial crisis. As a result of that, they’re unhappy, they’re angry…When half the population can’t marshal $400, one pay check, they should be scared. They should feel insecure, they should be unhappy with their government that has failed them – which is what they think – it is all logical.” —Blackstone CEO Steve Schwarzman (Asset Management)

Trump’s expected policies are not populist

“The Trumpian Fox has entered the Populist Henhouse, not so much by stealth but as a result of Middle America’s misinterpretation of what will make America great again…in voting to deny Hillary Clinton the Henhouse, they “unwittingly” (lack of wit), let Donald Trump sneak in the side door. His tenure will be a short four years but is likely to be a damaging one for jobless and low-wage American voters. They were the force for Trump’s flipping the Midwest into a Republican Electoral College victory. But while the Fox promised jobs and to make America great again, his policies of greater defense and infrastructure spending combined with lower corporate taxes to invigorate the private sector continue to favor capital versus labor, markets versus wages, and is a continuation of the status quo.” —Janus Portfolio Manager Bill Gross (Formerly PIMCO)

That could make the people even more angry

“Unless the worker’s share of GDP reverses its downward trend, and capital’s share peaks, then populists worldwide will reject establishment parties in almost every future election – initiating in some cases growth-negative policies revolving around trade, immigration, and yes, in Trump’s case, lower taxation that may lower GDP growth, not raise it.” —Janus Portfolio Manager Bill Gross (Formerly PIMCO)

It’s still too early to tell what changes will come

“I think it’s really too early to speculate about what the changes in Washington are going to mean for our business or for businesses. We have, though, been exhorting Washington both the executive and the legislative branches to take a look at the current tax policy of the United States, particularly the corporate tax rate, and to close more loopholes but lower the corporate tax rate. We are no longer competitive with the rest of the world in that regard and that must be addressed.” —Disney CEO Bob Iger (Media)

But big changes are coming

“You have to look at the election of Donald Trump, given his comments about immigration and comments about trade policy, as a major step in another direction from the policy of the G20 over the last 70 years. This is a very major move whether you think it’s positive or negative. The establishment has failed to articulate a narrative that free trade and global integration is good for them.” —Barclays CEO Jes Staley (Bank)

Meanwhile, nothing has changed in Janet Yellen’s world

“The FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability. This assessment is based on the view that the neutral federal funds rate–meaning the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel–appears to be currently quite low by historical standards…gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.” —Federal Reserve Chair Janet Yellen (Central Bank)

Legacy policymakers are still fighting the ghost of the financial crisis

“It is clear that the financial crisis has had a long tail and that the world economy remains in a precarious state. Many people are struggling with unemployment or low paying jobs and are concerned about broader changes in the economy. These concerns demand a concerted response from governments and the international community.” —WTO Director-General Roberto Azevêdo (GSE)

International:

Currency shifts will have some impact on corporate results

“clearly in the last two weeks we have seen the few big shifts. I wouldn’t say big shifts but we have seen some shifts and the bulk of the shifts have been in currencies as it relates to our business. In a week the world’s economy can’t change but currencies did move and that does have an impact on our business.” —Visa CFO Vasant Prabhu (Payments)

UK consumers remain optimistic

“there is actually a fair degree of optimism in the country at the moment and there was a big bounce back after the Brexit vote. It tailed off and then came back…We talk to lots of customers…And they’re saying they feel optimistic and they’re looking forward to a good Christmas.” —Marks and Spencer CEO Steve Rowe (UK Retail)

The Chinese government has acted to cool real estate markets

“In early October, when the Chinese real estate market was experiencing a meaningful development, the local governments in about 20 cities announced the tightening measures designed to cool a market with escalating prices…we believe the goal of the government’s restriction policy is to maintain healthy and stable development of the market by cooling down escalating prices in certain cities” —Xinyuan Real Estate CFO Yuan Zhang (Chinese Real Estate Developer)

It’s very difficult for foreign companies to compete in China

“remember that we don’t operate in China today. We have a nice business in China that is a cross broader business, but we have no real domestic business in China. Visa cards are really not prevalent in most of China, because there was a government monopoly there and we’re not allowed to participate in the domestic market.” —Visa CFO Vasant Prabhu (Payments)

Financials:

Home equity has increased by 95% since 2011

“Since 2011, homeowners have seen a 95% increase in their home equity. That’s come about because of rising prices as well as if you have a mortgage, you’ve been making mortgage payments since 2011.” —Home Depot CFO Carol Tome (Home Goods)

We are definitely at the later stages of the real estate cycle

“Look, there’s no question, we are at later stages of the real estate cycle. I mean we watch it very, very carefully. We look at every component of every geography…at very granular level and there are parts of the United States where there’s been a tremendous amount of new construction. I think multifamily specifically, I think what you should be most worried about is construction financing for high-end luxury condos.” —JP Morgan Commercial Bank CEO Doug Petno (Banking)

Consumer:

Expect the holidays to remain promotional

“is the promotional environment this year likely to be more subdued, short answer is no. I think it’s always promotional and our category as we all know is used by certain players as a way to attract traffic.” —Best Buy CEO Hubert Joly (Electronics Retail)

Unseasonable weather hurts retailers

“the third quarter was clearly challenging from a top line perspective given the headwinds we faced primarily from the unseasonably warm weather in September” —JC Penney CFO Edward Record (Apparel)

But retailers are starting to extend their seasonal windows

“We sold short sleeve product all the way through, I would say, the end of October, to be honest with you. And we are seeing more and more retailers are looking at carrying short sleeve product much longer than they have in the past.” —Perry Ellis CEO Oscar Feldenkreis (Apparel)

Technology:

Target said that Apple product sales have improved

“in the third quarter, we were encouraged to see a meaningful improvement in sales of Apple products driven by their introduction of several new product innovations.” —Target CEO Brian Cornell (Retail)

NVIDIA says that Tesla is 5 years ahead of the competition in self driving cars

“self-driving cars is probably the most single most disruptive event – the most disruptive dynamic that’s happening in the automotive industry. It’s almost impossible for me to imagine that in five years’ time, a reasonably capable car will not have autonomous capability at some level, and a very significant level at that. And I think what Tesla has done by launching and having on the road in the very near-future here, a full autonomous driving capability using AI, that has sent a shock wave through the automotive industry. It’s basically five years ahead. Anybody who’s talking about 2021 and that’s just a non-starter anymore.” —NVIDIA CEO Jen Hsun Hwang (Semiconductors)

The key to AI is having unique data

“when people tell you they do AI, the first thing you’ve got to wonder is do they have unique data, do they have unique signals. In Office we have billions and billions of data points…They are signaling us. When I share a document with you, Brent, that’s a signal. If I e-mail if somebody sends me e-mail and I dwell seven or eight minutes on that e-mail versus my typical minute or two, that’s a signal…Then we bring in machine learning and AI techniques and natural language processing to give back the end user or the customer unique insights.” —Microsoft Office EVP Rajesh Jha (Enterprise Software)

IBM sees blockchain as transformational

“blockchain to me is a great technology to embrace, because it in of itself is transformational…specific use-case I’ll give you is one around supply chain. And I see a lot of the logistics in the supply chain capabilities being transformed by blockchain. Anything that takes a long time to do settlements today and takes multiple players and where I can benefit from having this audit trail and being able to do faster hand-offs, I think is a great example of what we can do with blockchain.” —IBM Systems SVP Tom Rosamilia (Enterprise Tech)

Industrials:

Kitchen equipment maker Middleby raised prices to offset rising steel costs

“we did institute some price increases on the commercial side…we talked about the impact of 0.5% to 1% on margins and you saw margins come down slightly relative to the second quarter, but I think as we go into next year, I believe we think that pricing will largely offset that.” —Middleby CFO Tim Fitzgerald (Kitchen Equipment)

Miscellaneous Nuggets of Wisdom:

If you don’t re-invest in your business, you’re borrowing from the future

“No, when I go in front of Jamie, it’s more of a conversation about like what’s not in your investment pipeline that should be in there and tell me why you took it out, and I think our point of view is that self-disruption innovation is all about bringing more value to our client. We have the financial wherewithal to do it…So, his point of view is, if you’re taking it out to dress up your P&L, you are borrowing from your future and you better be explaining to me why you’re doing it, and those are not the easiest conversations to have because you obviously are mindful of near term performance, but as I said, it’s very often the case that you’re going to borrow from your future if you under-invest today.” —JP Morgan Commercial Bank CEO Doug Petno (Banking)

Full transcripts can be found at www.seekingalpha.com