Company Notes Digest 11.6.15

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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 Macro Outlook:

We are in a global industrial recession

“It’s been a very challenging year. And as we know, we are in a global industry recession for our businesses right now. We just incurred our third negative underlying sales growth and we will have two more” —Emerson (Diversified Industrial)

But just because we’re in a recession doesn’t mean that the economy has to fall apart

“we don’t see this very slow grinding recession that doesn’t have a monetary crisis attached to it, we don’t see a reason why that goes dramatically negative. But it is a difficult, frustrating, grinding environment” —Eaton (Diversified Industrial)

In fact, there may already be some signs of stabilization

“we’re starting to see the stabilization of some of the markets.” —Emerson (Diversified Industrial)

Usually inventory recessions last 5-6 quarters

“it’s not unusual to see historically a company like Emerson…have a little bit of recovery coming in that sixth type of quarter.” —Emerson (Diversified Industrial)

And we may be nearing the end of this inventory correction

“we began this inventory correction earlier than most companies and believe that we are nearing the end of it.” —Microchip (Semiconductors)

“My inventories in Europe are – I look at our channel and it’s pretty good…I look at my channel in North America, I would say it’s in decent shape right now” —Emerson (Diversified Industrial)

There may be a little more work to do before inventories are optimally sized

“Our feedback is they’ve got little bit more to do before they’re going to really feel optimally sized.” —Eaton (Diversified Industrial)

But by spring/summer of ’16 companies should be ready to re-stock

“just like we see the effects of the industry events earlier and began this correction earlier, we can also see that we are ending this correction earlier, and we are now poised to resume growth in the March quarter.” —Microchip (Semiconductors)

“I anticipate as we get into the spring and early summer of 2016, some of the companies that have been cutting back on capital and cutting back on…necessary investments are going to have to let the money go.” —Emerson (Diversified Industrial)

This is all assuming that the broader environment doesn’t get worse, but no one expects that it will

“the risk would be if we truly went into a global broad recession, then you clearly say okay, the industrial space will be a little bit weaker than I’m thinking. But I don’t see any indication we’re going to go to a global broad recession at this point in time.’ —Emerson (Diversified Industrial)

Banks have been well behaved this cycle. There haven’t been significant bubbles created

“We don’t see significant bubbles having been created out of this very long, low grinding growth rates. The banks are in awfully good shape and a lot of the regulations are ensuring very fulsome capital ratios in that regard. We have not yet seen any form of inflation and the prospect that we could get a couple of quarter point interest rate increases doesn’t feel like the thing that will derail an economic growth at this point.” —Eaton (Diversified Industrial)

But capital markets do feel like they’ve entered a late cycle phase

“In terms of quality, late in the cycle it tends to be low. I mean, my own personal view I am sure if you looked around our investment table, people might disagree a little bit. I perceived the quality would be pretty low today.” —Ares Capital (Business Development Corp)

Skyscraper construction is a classic late cycle indicator

“the construction market in New York is inflating aggressively and cost are rising. And even more important than that is there is there are enormous number of cranes in the sky…which are exceeding the capacity of the construction industry to deliver services. So there are handful of contractors who are expert in each traits and those guys are running out of capacity. So there is a bidding premium to get timely delivery of products and services.” —Vornado (Commercial REIT)

Is there another shoe to drop?

“does it get any worse than that? Is there another shoe to drop or driven by anything. That we don’t know. That kind of view we don’t have. This is based on what we are able to see today.” —Microchip (Semiconductors)

For what it’s worth, Stan Druckenmiller thinks the dollar will start strengthening again

“I”m shorting the euro again…I have never seen a currency move of this intensity last 11 months. the nice thing about currency moves is that they tend to last 2-3 years. But they usually take a timeout somewhere in the middle. If you remember the yen went from 80 to 105 and then took a timeout for 8 or 9 months. I have thought we’re in a timeout like that for the Euro and now look at what’s happening…” —Stan Druckenmiller (Broke the Bank of England)

And the strong dollar is what started all this in the first place

“let me just say that exchange rates wreaked havoc on our 2015 results. Currency driven price erosion had a huge impact on our imaging components business.” —Varian (Medical Capital Equipment)


The worst may be behind us in China

“We are planning for a down 2016 in China…I fundamentally believe there has been a destocking going on. Basically what we can tell…I think the worst of that is behind us. I do believe we will have a challenging first quarter…But I personally don’t think it’s getting worse. I think that they are trying to reposition.” —Emerson (Diversified Industrial)

The consumer side of China is doing very well

“the reported numbers that what we see on both fuels and chemicals tells us that the consumer side of China is doing very well.” —Phillips 66 (Chemicals)

As China attempts to move from a “manufacturing” to a “consumption” economy, global brands could benefit

“I think what’s happening in China at this point is that there is a big change from an economy that was all lead by exports and heavy investments in fixed assets…to now an economy that’s…more consumption, more consumer spending…the segments that are more high priced are growing ahead of the ones that are lower price. And that’s exactly where we have most of our business and most of our brands position. So I think this change, while it may be bad for the industry, is not bad for us.” —Anheuser-Busch (Beer Conglomerate)

But it’s important to remember that China has formidable local competitors too

“In regards to China, we are impacted by increasing local competition.” —Novo Nordisk (Pharmaceuticals)

And those competitors don’t always like to play by international rules

“the negotiations with a handful of these licensees are taking longer than we previously expected. In some of these cases, although the licensees acknowledged they need to pay royalties to QUALCOMM, we believe in connection with the negotiations they have stopped reporting certain of their sales and royalties or did not report their sales and royalties in a manner that allows us to record revenue.” —Qualcomm (Smartphone Components)

Europe continues to be a positive surprise

“So emerging markets turtled early this year if not late last year. U.S. economy has not been in any great shape, so I think the only positive surprise you could point to economically in the world would be Europe. And our Europe business is reflecting it.” —Ecolab (Facilities Maintenance)

“we will expect our business in China and Asia to be sequentially down. But we make up for that elsewhere with a very, very strong Europe’ —Microchip (Semiconductors)

All of Asia’s industrial base has slowed, not just China

“I’d say if you go down through Indonesia, Malaysia, wherever else, clearly the oil situation is acting as a depressant in that particular area. You get up into Korea and of course there’re not a whole lot of ships being built currently and you’re seeing this back up again.” —Eaton (Diversified Industrial)


International credit markets tightened up a lot during last quarter’s volatility

Asia and Latin America issuance decreased by 58% and 72%, respectively. This led to a 20% decline in global issuance overall. To put that in perspective, both Asia and Latin America had their lowest quarterly issuance since 2008…quarterly revenue from China experienced a decline for the first time in the last five years. In addition, this was Europe’s lowest issuance quarter since the third quarter of 2013.” —McGraw Hill

As spreads have tightened capital markets have opened back up

“So it is possible that with spreads coming back in and only being 5 bps up from August, that we could continue to see heavier issuance as we move into November out of the blackout period, and in fact the pipelines look pretty good for next week.” —Moodys (Credit Rating Agency)

Despite concern over VC capital, Vornado is still seeing good vibrancy in SF

“Listen there has been a lot of chatter in the marketplace that with some VC capital potentially drawing up and the IPO marketplace not being as open as it was that we’re seeing some pull back in terms of the tech tenancy and the San Francisco market. Our own experience has been that while there has been a lot of chatter and discussion about this we’re still seeing very good vibrancy in the marketplace.” —Vornado (REIT)

Companies can still borrow for 30 years at 3.5%

“we expect to issue $15 billion to $16 billion of debt with maturities from 2 years to 30 years. We’re putting in place a long-term capital structure. The weighted average cost of this debt could be around 3% to 3.5% depending on market conditions.” —Visa (Payments)

With low interest rates, it’s not hard to find an accretive deal, but returns are low

“with the low interest rates right now, it’s not that hard to have an accretive deal. I think what we’re trying to be is also very careful about what types of returns these businesses are going to generate over the medium and long-term. And we’re going be disciplined there.” —Ecolab (Facilities Maintenance)

Many companies find that accretion is easiest through share buybacks

“We think Whole Foods is a compelling buy at these prices. Stock buybacks are going to be accretive in the short-term and the long-term. And it doesn’t preclude us from making further stock buybacks in the future if necessary…It’s sort of a perfect situation…with interest rates being what they are and the long-term debt market being what it is and our trading metrics – stock price trading metrics, relative to history being what they are.” —Whole Foods (Grocery)

Acquisition candidates are priced for perfection

“I think right now, things are generally priced for perfection. And as I continuously say, we kick a lot of tires, but we just haven’t found the right thing.” —Loews (Investment Company)

Vornado says that the easy money has been made and it’s time to prepare for the next cycle

“Trees don’t grow it in the sky and pricing has – the easy money clearly been made, pricing is very aggressive, I don’t know which way interest rates are going but people think that they are going up. I don’t know which way cap rates are going but 50% they can’t go much lower. So it seems that this is the time to begin to think about prepared for the next cycle. If you are in a position like we are running company like ours and you don’t stop thinking like that you are not being responsible.” —Vornado (Commercial REIT)


TV networks were generally pleased with their performance despite cord cutting concerns

“I think we’re all seeing that the dire predictions of cord-cutting are overblown, but the good news for CBS is, no matter where distribution goes, no matter how or where you want your content, we are in a perfect position.” —CBS (Network Television)

“despite all the talk about domestic secular concerns, our U.S. Networks grew revenues an impressive 8% this quarter” —Discovery (Cable Network)

Everyone is investing in content

“Programming remains by far the most significant area of investment for the company. As you all know, we have plans to invest aggressively in content in 2016 and beyond.” —Time Warner (Media)

Les Moonves says that there can never be too much content

“we are a content company, we believe the world can have more content, we don’t believe the guy who says oh, there’s too much content. There never can be too much content and we want more of it.” —CBS (Network Television)

A benefit of OTT television is that advertising can be more targeted

“One of the great characteristics of an IP streaming TV business in the future is the ability to have that data, the ability to use that to improve your products and services and monetize the viewership and the audience in the right way with respect to pricing, the attention of the audience correctly either for them or for advertisers” —FOX (Media)

One in seven Americans received a Starbucks gift card last year for Christmas

“You may recall that last year, one in seven Americans received a Starbucks Gift Card over the holidays, generating over $1.6 billion in card loads in our first quarter of fiscal year 2015.” —Starbucks (Coffee Shop)

Retail is about detail

“I mean retail ultimately always comes down to how satisfied the customer is. So it’s about retail is detail is the cliché, and it’s a very appropriate one.” —Whole Foods (Grocery)

Prepare to hear retailers talk a lot about warm weather when they report earnings

“We saw accelerated growth in footwear, although the warm weather tempered boot sales in the quarter. The watch business continues to remain under pressure in retail and wholesale.” —Kors (Fashion)

There’s a lot of competition entering off-price retail

“If you look at the department store model, it’s completely changed. The off price concept has been a vehicle for growth. So a perfect example is Nordstrom. Nordstrom is one where the department store is still doing quite well but the vehicle for growth has always been the Nordstrom Rack and they continue to try to add store count and up their expansion plans. I think Macy’s and others are actually taking a page out of their playbook” —Kimco (Retail REIT)

But as the economy has gotten better, consumers have gotten a little less sensitive to price

“At the same time, we’ve seen a decline in private label shares in many of our categories indicating the consumers preference for branded products and respect of our equities.” —Colgate Palmolive (Soap)


Tesla’s autopilot cars have already logged several hundred thousand miles of live driving

“This has gone out to the whole fleet of Autopilot enabled cars, and those are racking up miles extremely quickly. At this point, I don’t have the exact number at the tip of my tongue, but it’s, I believe, several hundred thousand miles of driving.” —Tesla (Automobiles)

Within 15-20 years owning a manually driven car will be like owning a horse

” I think it will be quite unusual to see cars that don’t have full autonomy… in the 15-year to 20-year timeframe…It will be like owning a horse or not – you’re really owning it for sentimental reasons.” —Tesla (Automobiles)

Mark Zuckerberg tried to temper expectations for Oculus

“I can start off talking about Oculus and virtual reality. So the first thing that I want to stress here is that these kind of new platforms take a long time to develop. So we’ve said often that we think that virtual reality and augmented reality could be the next big computing platform. But just to put that in perspective and compare it to the development of previous computing platforms like phones and computers, I think the first smartphones came out in 2003, and in the first year, I think BlackBerry and Palm Treo were the initial smartphones that came out. And I think they each sold in the hundreds of thousands of units. So just to kind of give a sense of the timeframe that we’re thinking about this and how we expect this to develop, that’s how we’re thinking about that” —Facebook (The Social Network)

Ginny Rometty had an interesting analogy for the new architecture of cyber security

“There is a different paradigm to think about security…the days are over…where you could think of a castle with a moat around it and you could keep bad guys out…the way we have approached it is it’s a big data analytics problem, just like your body has an immune system” —IBM (Big Blue)

AIG sees a lot of its workforce eventually being replaced by automation

“I think that there will be fewer people, because a lot of those jobs will eventually be replaced by automation…our technology would be a bigger part of the spend and the scalable infrastructure that gives us, will lower our unit costs substantially.” —AIG (Insurance)

Materials, Industrials, Energy:

This may be the worst energy decline since the 1980s

“Regarding the market environment, we are in a decline like no other I have experienced, not only in my 24 years in this business, but also as a kid growing up in the energy industry. I was born and raised in a small town in the Permian Basin where my parents owned an oilfield service company. I never thought the market could decline again as sharply and severely as it did in the 1980s while I watched my parents struggle to make payroll, but I have clearly been proven wrong. We continue to see rig counts being reduced, projects being canceled, budgets being slashed, and inventory being cannibalized.” —Distribution Now (Industrial Distributor)

The oil decline may finally be leaking into the broader Texas economy

“all of us are now being impacted in parts of Texas because of oil prices there” —Kors (Fashion)

We may be getting closer to seeing the real benefits of cheap natural gas

“we’ve almost all forgotten about is with natural gas dropped two-three years ago, people speculated on the reindustrialization in United States. We cautioned at that time that that’s going to take five years because designing these plants and building these plants and putting them into production is a five year cycle. Guess what, end of ‘16 and early ‘17 is when a lot of that starts.” —Eaton (Diversified Industrial)

Domestic Steel production has structural issues that have been building for decades

“Extremely high levels of imports, much of which we believe are unfairly traded, continue to negatively impact order rates for domestic steel producers…you have to realize that what we’re fighting here is a very well-structured approach that over decades has been improved on the part of the foreign importers into the U.S. And so, it’s nothing simple…We have structural issues in this industry that are not temporary but enduring” —US Steel (The Corporation)

Miscellaneous Nuggets of Wisdom:

Think of your investments like your children

“I love all my children, I love all our businesses, and I think each one of them is doing well within the context of their industry.” —Loews (Investment Company)

Building a brand is about building a story and an experience

“the customer wants something special, and it has to be unique and there has to be a story. And you hear a lot of brands speaking about story telling. And then you can look back at what Ralph and the team has done. It’s been years before anybody else in telling real stories, inviting customers into movie, sharing a dream of a better life.” —Ralph Lauren (Apparel)

“I think the equity of the Starbucks brand throughout our public life has been defined by the culture and values and guiding principles. I said from day one that we are in the experience business, and our brand is defined by the people who wear the green apron.” —Starbucks (Coffee Shop)

Full transcripts can be found at