Company Notes Digest 12.13.13

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

At Goldman’s Financial Conference, banks sounded extremely positive:

“I think we’ve had some pivotal positive changes that are kind of unfolding” ($BBT)

Credit quality issues are behind them:

“the difference for us in ’14 if you can go to one thing which is the legacy assets servicing side has come down…You can’t under-estimate, not only does that mean money because the run rate is $1 billion less year-over-year per quarter, but not doing that helps our brand, helps the spirit of the company” ($BAC)

Borrower’s balance sheets are repaired:

“certainly today our customers are in a better financial position than they have been in years on both the business side and the consumer side of our balance sheet.” ($RF)

Rules have been clarified:

“We’re seeing a number of the rules get to be clearer in the banking industry today. And while you may not like exactly what a particular rule is, I think all of them, by and large have been reasonable, and the clarity of having them laid out gives you a lot more confidence as you try to make decisions going forward” ($BBT)

And congress is playing nice:

“I think a not so small event occurred yesterday as we see the beginnings of an agreement into Congress with regard to the budgets. So I think that’s kind of a water shed event.” ($BBT)

The consumer is loosening up:

“I think ever so gradually you have seen the consumer step out a little bit and certainly we have seen spending pick up. And I don’t see any reason to think that that gradual trajectory wouldn’t continue into next year.” ($COF)

And businesses are feeling “frisky”:

“I think that the average business person we talk to is getting incrementally more frisky and they want — if they can see the window for it they’ll start to make activities and they’ll draw on their lines I think” ($BAC)

BB&T sees CRE returning to the pipeline including hospitality, shopping center and office:

“I think we’re going to see a relatively stronger pickup in CRE…We’re beginning to see shopping center growth activity again. Office is still relatively weak. Hospitality is strong, medical is strong. So I think CRE in general will grow rapidly.” ($BBT)

Toll Brothers has seen housing demand slow a little but is optimistic for the spring season:

“We still feel like pent-up demand is building, demographics are on our side, affordability is in place, and we are cautiously optimistic about the spring season, which begins the end of January…The limited supply is a very real thing. You’ve got a market that fell apart, basically, in ’07 and stayed apart until ’11. And during that time period, of course, there is no land being put in for approval” ($TOL)

Perhaps only the Fed poses an impediment to this suddenly white hot economy, but Brian Moynihan is optimistic that even tapering can’t stop this freight train ‘comin down the tracks:

“If the tapering is done because of why we think it’s being done and then why it is being done and why it’s being debated is the economy is growing and that’s always good for us.”($BAC)

Financials

There’s been some talk of over-aggressive auto lending, but Capital One doesn’t see cause for concern:

“The auto business, while we worry about the competitiveness, it is really not about crossing the inflection point. It’s about going from a probably once in a lifetime situation in the auto business where everything lined up” ($COF)

Banks really need LIBOR to move in order to benefit from rising rates:

“if LIBOR moves you start to get the assets re-priced that are LIBOR based which is substantially part of the floating rate assets in the company are LIBOR based” ($BAC)

The big guys prepared for the Volcker rule years ago:

“[in regards to Volcker rule] from a prop change definition that went out two years ago we stopped doing that” ($BAC)

Small banks, exhausted by the environment, are looking to sell:

“I think — and they’re looking very rationally at the economics of the new world and they’re recognizing that it’s going to be very difficult to generate the kind of returns to the shareholders that makes sense. And so a combination with a good institution makes a lot of sense as they go forward. But this appetite for sellers, is increasing. Today, the buyer appetite when I talked to my colleagues is not very strong because people are concerned about can it get — approved…I think that’s quickly moving to the side lines and so as the seller appetite increases, buyer appetite I think will increase. I think economics will be reasonable…we’re going to have consolidation in the industry, we had a lull. It will continue, and it will be good for the industry, it will be good for the clients. And it will be really good for the shareholders.” ($BBT)

Consumer

E-commerce is all the rage in in a variety of industries:

8% of all check deposits now mobile at BofA:

“Our mobile banking platform…continues to grow. Last year we had 11 million customers. This year it’s 14 million customers are active mobile users…In the third quarter, 8% of all the checks deposited at Bank of America were deposited through mobile devices. That’s 13 million checks. It’s a major change in activity” ($BAC)

Even home-buyers are researching first on-line:

“virtually every buyer is spending some time on our website. That’s one of the reasons why our conversion ratio from visitor — physical visitor to the sales center to agreement is at a company high because of the prequalification, prescreening the client does online.” ($TOL)

Home Depot says e-commerce is an important part of an integrated distribution platform:

“This blending of the channels is what we call interconnected retail. And in the past, e-commerce has been viewed as a separate and distinct channel. That’s no longer true. Moving forward, e-commerce has simply become commerce…a customer in Minnesota, who recently bought a house about 12 months ago…has spent over $20,000 with us over the last 12 months…over the course of the year she’s had 22 transactions, 14 physical in-store transactions, 8 online transactions, 6 of those from a PC and two from the mobile device…inside of those transactions, we can count literally hundreds of interactions with our company and our brand…rarely can you find a purely online order or a purely in store order” ($HD)

Brick and Mortar is an important piece of the puzzle:

“We know that actions like offering our customers refreshments, putting the tool in their hand so they can try before they buy or having personalized training during a workshop, our activities of a pure online competitor cannot replicate. And it reinforces the importance while making an emotional connection is part of our customer service strategy.” ($HD)

Technology also continues to transform retail’s back-end:

Big data helps manage the business more efficiently:

“leveraging Big Data…It can help us better understand the customer and market to them; adjust assortments to trends and demographics; control costs and better manage our stores.” ($HD)

More price transparency is leveling the playing-field:

“pricing is an area where the retail landscape has changed drastically over the last several years. Pricing is increasingly becoming more and more transparent and dynamic…In today’s multichannel world with pricing data for end stores and online readily available, there is more information available to help understand the pricing landscape. We believe understanding the competitive environment is an imperative for any retailer who wants to win.” ($HD)

However, Capital One warns that if you’re not careful the costs of multi-channel can overwhelm the benefits:

“I will make a prediction to you, and that is that the tendency of banks is going to be to add digital as a channel….And customers are offered all channels and if you don’t watch out it becomes more costly not less.” ($COF)

And argues that you have to work hard to refine the digital experience:

“Any of you who do digital stuff probably know that you try to do it and then you get stuck. And I think a number of times I get stuck on my digital journeys just as a consumer it’s striking to me.” ($COF)

Technology

Rackspace provides a great discussion of the architecture of the Cloud:

The Software makes the magic happen:

“if you think about building a cloud, there is a data center, there’s a bunch of servers, a bunch of storage, and then there’s some software. The software is the magic of making the cloud into a cloud. The software pulls those resources together. It makes the — computing a pool of computing, it makes the storage a pool of storage that can be even carved up and served to a customer via an API. An API is a programming interface that the customer uses to control the cloud or write or read from the cloud. Without that software, a cloud is just a bunch of servers.”

In the cloud computing capacity is rented by the hour:

“And that’s what we used to do. We used to dedicate individual servers to a customer. They will put one operating system on that server and they would build a website. Now what we do is we rent capacity by the hour.”

Rackspace’s software platform is open-source, called “OpenStack”:

“OpenStack in our case is the software that does that orchestration of all those computing resources. It’s what tracks which customer is using which virtual machine. It’s what gives us the ability to automate the provisioning of servers rather than having individual technicians go out and do it by hand. It’s what allows us to scale horizontally on our — on a lot of the platforms and automate that scaling, rather than having individuals go copy data from server to server by hand.” ($RAX)

Rackspace’s competitors Amazon, Google and Microsoft run proprietary software:

“Now Amazon and Google and Microsoft have all built their own proprietary cloud software technology. They — Google probably had it ever since their days as a search engine company from the early days. Amazon built it for their own purposes and then turned it into a service offering…Rackspace took a little different perspective on things and took a different path. We being open source guys from the early days, we believed in open source from our early routes, we decided that we would build our cloud platform in an open source way. So we donated all of our original cloud code that we built to a project called OpenStack.” ($RAX)

And to varying extents they have focused on the “public cloud”:

“A lot of our competitors, you know, Amazon is obviously the biggest, Google, Microsoft, others in the market, are really only public cloud. They’re only offering virtualized multi-tenant cloud services.” ($RAX)

Which may or may not be the right solution for enterprise:

“If a customer tries to run all of their application in a public cloud, there are some trade-offs they have to make. Sometimes they have to over-provision, sometimes they have to make performance trade-offs. But when you can blend dedicated bare metal servers and the control that you get of a private cloud with the scalability and the elasticity of a public cloud we believe, and we’ve seen many cases, that you actually get a better overall total cost and much better reliability in performance.” ($RAX)

Amazon in particular is running a low service model:

“fundamentally, what Amazon has done is built an infrastructure-as-a-service offering that is the most — I guess the leader in the market, certainly. What they haven’t done is really taken that to the next level and offered customers a service wrapped around that.” ($RAX)

Which is good for developers, but maybe not the large guys:

“there are different buyers in the market. There are buyers who value the cheapest possible cost. Sometimes if you’re a startup, and Amazon has thrown a huge startup program kind of offer at you and said, free cloud for the first year. It’s attractive, you know, and developers sometimes need that. But other times when they grow up a little bit, as the companies evolve and have expanded, they find that sometimes Amazon’s incremental posted price on the website doesn’t necessarily translate into the overall cheapest price or the overall best value.” ($RAX)

Meanwhile a Qualcomm SVP had a good discussion on mobile chip dynamics:

The focus of mobile isn’t the CPU, which is why PC chip manufactures (i.e. Intel) have had such a hard time competing in smartphone and tablet markets:

“The point is that a phone unlike a computer, the CPU was the focus in the computer, CPU and a phone for us is less than 20% of the actual silicon content. So in wireless, in phones and in tablets, it’s about doing the whole thing well. You can’t just be good in CPU, you have to bring this whole solution together very elegantly…I think its why some coming from the computing space to try to compete with us have been challenged, is they really looked at the modem as a commoditized peripheral and that the heart of device was the CPU.” ($QCOM)

Qualcomm is preparing for us to consume 1000x more data than we already are:

“we need to be able to support a 1,000 times the data coming to the device than comes to at today” ($QCOM)

The solution will dramatically reduce the cost of data-plans:

“what happened with voice pricing when you think about in the early 2000s, we want to see the same thing happen with data pricing” ($QCOM)

Achieving that goal will take re-designing the network. Cell towers soon coming to your closet:

“much like today you probably have a broadband access point sitting in a closet or in the computer room in your house somewhere that provides Wi-Fi, vision is you’ll have a device that will broadcast wide area coverage as well.” ($QCOM)

Phones are getting smart. Maybe a little too smart…

“if you look at what the phone is capable of today, it knows where it is, it knows whether it’s moving, it can see, it can hear, it will be able to smell soon” ($QCOM)

Healthcare

The market for Health Insurance is going retail:

This is a huge change because, consumers make choices differently from employers:

“we believe that the marketplace is going to retail…And that retail marketplace is going to have individuals making the buying decision. And what they value is fundamentally different than the people we have dealt with in the past as benefit managers.” ($AET)

Health insurers are going to need to change the way their products are packaged:

“when you get to a retail marketplace where the individuals making the decision based on the subsidy they get from either the employer or the government, their view of what is important changes, and it needs to be a system where the consumer gets what they want or finds what they want, value.” ($AET)

The system is way too complex for consumers to navigate because it was built for a different era:

“if you’re one of those people trying to navigate the health care system, you’re looking in a system that was originally built in 1945…to create a health care system that takes care of people and to employ people after they came back from the war…this model has to change. This is too complex for consumers to figure out. The incentives are all wrong in dealing with an individual consumer. And so moving this payment model will get all of these parts of the system to work together.” ($AET)

Exchanges are going to be a big part of the solution:

“all the tools that we invest in, the ACS investments we made, the retail exchange, private exchange models we will build and our public exchange participation is all aimed at having the system work for the individual versus having the individual trying to find their way through the maze.” ($AET)

Private exchanges will be important:

“And now if we can make that happen on an individual basis, then what happens is private exchanges allow us to take this across the country.” ($AET)

Public exchanges aren’t going anywhere:

“Public exchanges are struggling. The enrollment is lower than everybody expected. But my view is that by 2015…nobody will remember it. I think it’s just going to continue. I’m saying public exchanges are here to stay.” ($AET)

The Affordable Care Act has changed more than it initially intended:

“the system’s evolving. And while the intention [of the Affordable Care Act] wasn’t to have that all happen, it’s happening anyway, because the private sector is reacting to it.” ($AET)

Investors should expect some turbulence through 2016:

“in 2016, it’s a completely different game. The ACA pressures abate…longer-term revenue growth opportunities begin to mature and we’ll return to longer-term operating EPS growth dynamics.” ($AET)

Materials, Industrials, Energy

There are signs that mining equipment may be turning more positive:

“We think the U.S. aftermarket is now through most of its correction period…we’re probably getting to the end of the miners’ ability to stretch these maintenance intervals. We’re beginning to see our process list stabilize. We’re seeing selective projects moving forward that can achieve acceptable returns in the current pricing environment.” ($JOYG)

Thermal coal may have bottomed, Met coal still needs to see more supply come off market:

“Thermal coal is what we talked about is bouncing around the bottom. We see some opportunities probably more in thermal coal in the second half of the year. And then, met coal, as I highlighted, we still see some production has to go offline. We know where we put in a lot of our longwall systems around the world. And so we know we have some high productivity, low-cost production coming online in 2014.” ($JOYG)

Copper currently has the best fundamentals of any commodity:

“Global copper markets continue to see the strongest commodity fundamentals. In 2013, global consumption is expected to increase 3.6%. Pricing level should remain above the marginal cost of production and should attract continued investment in additional production capacity.” ($JOYG)

Miscellaneous Nuggets of Wisdom

Change is constant:

“the only constant is change and change brings opportunity” ($AET)

When things change for the negative you can either ignore it or deal with it:

“Well, you have 2 choices. You can admit you’re a commodity. And when you do that, you put your thumb in your mouth, you get in a corner in a fetal position and you wait till it all goes away…The other option is to take a look at the things you do as a company and decide which of those things that you do are of value to other parts of the value chain and create a different business model that makes you relevant in powering the rest of the value chain so that you’re no longer a commodity.” ($AET)

One anecdote that combines the perils of listening to consultants and long term forecasting:

“there was that famous McKinsey study that really caused AT&T a divestiture to let the wireless licenses go to the Regional Bell Operating Companies. And McKinsey forecast that by the year 2000 there would be 900,000 wireless users in United States. They were off by a little bit. It was about a 109 million. And that was a key decision for the phone company at break up, as I said to let those licenses go to the Regional Bells.” ($QCOM)

Creating a successful business takes perseverance, faith and luck:

“like every other startup, we have stories of people mortgaging their homes and literally we got to the point where we were at risk of not making payroll. And so it was the legal team, at that point in time we have been issued I think 50 patents, and they said, well maybe we could go out and drive some license revenue from a couple of these patents and keep the company going…And it was actually our first licensees who said, we know you’re the only ones working on this. I think they handicapped the chances of it ever seeing the light of day as very low. So they said we don’t want to deal with you and your patents again, why don’t you just license them all to us. So that was a grand birth of the portfolio licensing program. So not a well thought out business plan on how to capitalize the company, one of just being opportunistic.” ($QCOM)

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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