Company Notes Digest 11.8.13

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

CVS continues to see a cautious consumer:

“We have discussed in the past that we continue to see a cautious consumer. We did see some pullback in consumer spending that began in the spring timeframe. It’s manifesting itself in fewer trips. At the same time, we have seen the promotional environment intensify in both the drug and mass channels.” ($CVS)

General Cable not seeing any pick up in late cycle industries:

“Overall, our second half volume is expected to be weaker than we anticipated. Utility, mining and construction-driven spending has been generally below expectation.” ($BGC)

EOG says North American oil growth has slowed in 2013:

“Regarding oil, we believe that absolute 2013 total U.S. oil growth will be less than 2012 and this trend will continue in subsequent years. Through August, the EIA monthly data indicate 2013 oil production is on trend to increase 600,000 barrels per day on an annualized basis compared to 1 million barrels per day in 2012. We continue to be pragmatically bullish regarding oil prices, partially because we don’t expect any large international shale oil plays to impact global supply for at least five years.” ($EOG)

Natural Gas prices may not recover for five more years:

“I believe the gas prices will stay depressed until the 2018 timeframe…we again plan to drill zero North American dry gas wells in 2014 because we see no light at the end of the gas oil supply tunnel until 2018…2018 is when we will have the first significant impact of the of gas exports in way of LNG from these converted former LNG import terminals.” ($EOG)

Consumer

Whole Foods acknowledges increased competition in healthy foods:

“Yes, food retailing is more competitive than ever and with the growing demand for fresh healthy foods, it seems like everyone is adding to or expanding their offering of natural and organic products.” ($WFM)

A profitable grocery delivery model is tough to execute:

“I do think it’s even in the UK, which is significantly more developed than United States, [home delivery] is only 5% or 6% share after significant more developments. So I think it’s growing incrementally, but I think the majority of business ultimately even 5, 10 years are still done in physical stores or in the integrated sense either through the mobile platform or the click and collect sort of model…I’m just simply saying in terms of us actually being the delivers I’m not sure I see that as something that we need to do right now. We haven’t see a business model that really works. A lot of people have tried in this area and I haven’t seen anybody come up with a business model that is profitable and successful.” ($WFM)

Whole foods leverages scale to buy better quality merchandise:

“So we will view sometimes to our increased buying power to actually improve or raise the standard for our customer without raising the price. So sometimes you get those investments as well which we think over the long term gives us the real competitive advantage, it continues to differentiate us from our competitors.” ($WFM)

Disney leverages scale to secure higher quality shelf space:

“when you consider that we’ve got Disney, Marvel, Pixar and Lucas products in the marketplace that the scale that that generates, creates margin expansion and general growth opportunities, some of it comes just from gaining access to more shelf space, some of it comes from basically being able to cut better deals as well. It’s just a healthy collection of assets that retailers and licensees around the world are really interested in.” ($DIS)

Disney and Netflix partnering up to create original content:

“our unprecedented deal to create multiple live action series and a mini series event exclusively for Netflix, beginning in 2015.” ($DIS)

Facebook isn’t the only one selling mobile ad space:

“TV Everywhere, is something that actually is adding to our subscription revenue because they’re making it available to their customers and it is a rather compelling product…the customer is no longer basically confined to just having watch the multichannel service in the home. They can really watch it everywhere…at some point presumably in around the year we’re going to start getting consumption measurements from Nielsen on these apps and that will allow them to generate more advertising revenue than they’re generating today…I think it is safe to assume that at some point in, sort of, 12 months or so, we’ll start seeing even more growth in advertising revenue from Disney, ABC and ESPN mobile consumption.” ($DIS)

Technology

Tesla is has some production challenges:

“we really are production constrained not demand constrained” ($TSLA)

At 500k vehicles (~25x current production and 0.6% of global auto sales) Tesla would consume all current lithium-ion production:

“when you produce 500,000 vehicles, from a new plant then we need self capacity that’s commensurate with that which is maybe bigger than all the lithium-ion production in the world today or at least on par with it.” ($TSLA)

Apparently lithium isn’t an insurmountable problem though:

“I wouldn’t worry about say lithium supply, or there is a lot of lithium out there and the main constituents really in the cell are, by weight or actually nickel and cobalt, aluminum then lithium. Lithium is like maybe 1% of the cell in that. Maybe 2%.” ($TSLA)

But they’re going to need to build a big factory:

“when it comes to the high volume third-generation vehicle it’s clear that there is going to need to be incremental production capacity created at this existing look today, so we are in the process of figuring that out and there is going to need to be some kind of giga factory built.” ($TSLA)

A really big factory:

“it is going to be a really giant facility, like say we are doing that something that’s comparable to all lithium-ion production in the world in one factory.” ($TSLA)

Demand remains strong:

“We saw a pretty solid increase in reservations in Q3 in North America compared to Q2. The fact that we delivered less cars is a not an indication of demand.” ($TSLA)

Healthcare

Employers are taking wait and see approach to private health insurance exchanges:

“the fact is that less than 1% of covered lives are expected to move to private exchange products in 2014. And based on conversations we have had with our PBM clients and private exchange partners, we believe that most large employers are taking a wait and see approach to private exchanges, particularly with their active employees.” ($CVS)

Some reasons why companies consider moving to a private exchange for healthcare:

“Certainly, to give their employees…a wider range of choice as to how they design their specific benefits…Second…clients are looking for the opportunity to…structure programs for better cost control as time goes on and time goes into the future…moving from a defined benefit type of a health offer to defined contribution…[third] there are a lot of requirements under the new ACA for administration and considerable cost associated with that. And they want to make sure that they can put themselves in a position where they can rely on someone who already has the experience to do that, and hopefully, more efficiently and more effectively, for them and their employees.” ($MMC)

Yes, things are changing with the ACA, but in the end it still comes down to providing a quality service for your customers:

“the most successful and sustainable strategies to participate efficiently over the long run in the ACA will be those that emphasize comprehensive patient access points, state-of-the-art and well-capitalized facilities and clinical technologies, a proven and transparent track record of providing high-quality care and service and the ability to leverage the cost structure to provide better value for the consumer.” ($HCA)

Materials, Industrials, Energy

Oil companies still finding ways to improve drilling efficiencies:

“Year-to-date we reduced our drilling and completions costs by $1.5 million per well in Tonkawa play in the Anadarko Basin and over $1 million per well in the Wolfcamp and Cline Shale plays in the Permian Basin…We are well under $7 million, the mid to high 6s right now. And so – and that’s for the 7500 foot laterals.” ($APA)

More advances to come:

“I would say, we are probably in the fifth or sixth inning, if you had put in baseball terms, on where we are on the completion technology process. We continue, quarter-by-quarter, to make advances and we are learning all the time.” ($EOG)

Apache is bulled up on the Permian basin:

“not just for Apache, I mean truthfully with the number of zones and the amount of oil in place in the Permian basin, we just scratched the surface. I mean I truly believe that. I think the Permian is going to have years of surprises in it, most of them are going to be good.” ($APA)

EOG not pointing fingers, but reminds analysts that not all reserves are created equal:

“Our view is that the industry has just been a little bit flippant with numbers. Reserves had been just floated about on essentially all plays. Billion barrels, 5 billion barrels, BOEs and it is just numbers that we think is just keep in the reserve estimating system a little bit but people just throwing number that offhand and EOG has not really joined that party. We, on the other hand, have been very cautious, very judicious in the numbers that we have given and we like to think we set our standards a little bit higher than most other companies have done when they issue reserve numbers” ($EOG)

It takes several years to develop the right techniques to drill in a new area:

“It’s a process that it will take some time. It will take several years really to figure out the most optimum way to do it just like it has been in the Eagle Ford, but the recovery factors for the total Wolfcamp at this point are very low. Our goal would be to hopefully increase those recoveries as we go along, so, we have got a lot of work to do” ($EOG)

Likely a little less corn to be planted in 2014, but still elevated historically:

“We forecast that 92 million acres of corn will be planted in 2014, below the estimated 97 million acres planted this year, due to lower expected corn prices in 2014. However, to provide a bit of context, that 92 million acres would be equal to the most recent 5-year average.”($CF)

Miscellaneous Nuggets of Wisdom

Building a factory to produce a product is like building a product of its own:

“So a way to think of this is like a factory is the machine that works for machine and that itself has a version, just like you have a version of a product. It’s like a version of the factory. So we are trying to figure out what’s the right way to do version one at this giga factory” ($TSLA)

Some noteworthy CEO departures:

Steve Wilson of CF Industries:

“a few lines that sum up Steve’s philosophy include: We are going to do things the right way, and we are going to do what we say and we’re not going to say it until we’re ready. He has created a culture with ethical standards that are a very bright line. Steve has always treated the company’s shareholders, resources as though they were his own and given his Pennsylvania Dutch tendencies, those resources were never in safer hands” ($CF)

And Mark Papa at EOG:

“Well, in my remark, I would say, I am going to miss you all. Thanks for everything.” ($EOG)

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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