Company Notes Digest 12.18.15

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.

This week’s post: Liftoff

The Fed raised rates by 1/4 point this week. In Yellen’s words this marks “the end of an extraordinary seven year period.” It’s not clear what happens next. The Fed expects to move gradually, but there is growing softness in the US economy.  Can an economic expansion re-ignite with the Fed tightening? Yellen seems to think yes.

This will probably be our last post of 2015, so we’d like to wish our readers a Merry Christmas and a Happy New Year. See you all in 2016!

The Macro Outlook:

This was a historic week

“This action marks the end of an extraordinary seven-year period” —Federal Reserve Chair Janet Yellen (Central Bank)

The Fed moved for two reasons: 1) they see deflation as transitory 2) monetary policy operates with a lag

“With inflation currently still low, why is the Committee raising the federal funds rate target? As I have already noted, much of the recent softness in inflation is due to transitory factors that we expect to abate over time, and diminishing slack in labor and product markets should put upward pressure on inflation as well. In addition, we recognize that it takes time for monetary policy actions to affect future economic outcomes.” —Federal Reserve Chair Janet Yellen (Central Bank)

And while the Fed recognizes that global growth has slowed, the US has stayed strong

“We have been concerned, as you know, about the risks from the global economy. And those risks persist, but the U.S. economy has shown considerable strength. Domestic spending that accounts for 85 percent of aggregate spending in the U.S. economy has continued to hold up. It’s grown at a solid pace.” —Federal Reserve Chair Janet Yellen (Central Bank)

Is there something the Fed isn’t seeing though?

Restoration Hardware’s CEO thinks that the performance they’re seeing should get the Fed’s attention

“the areas that are affected by oil…the Texas markets specifically…In the first half of the year, they were pulling down total Company sales a little under 2 points…In Q3, that accelerated to 4 points, and that’s meaningful, right? It’s not just meaningful to us, I’d say it’s meaningful to anybody who’s thinking about what the US economy ought to look like…It makes me think hey, should we be calling Yellen…and saying, let us tell you what we are seeing” —Restoration Hardware CEO Gary Friedman (Home Furnishing)”

Damage from falling oil prices and strong dollar continues to creep across the industrial economy

“oil has fallen even further than what most people thought was the bottom, that is now having a significant impact into what we’re seeing into the electrical distribution channel around industrial…we now have an industrial challenge that we were fearing and now we know.” —Pentair CFO John Stauch (Industrial Parts)

The industrial slowdown has become broad based

“I will more categorize it maybe broad based versus saying there was one specific area that’s slowed more than the other. So, I think it was broad-based, generally speaking” —3M CEO Inge Thulin (Conglomerate)

There has been a slowdown in consumer electronics too

“we see a slowdown, what I think is more of a global phenomenon in consumer electronics. And I think we all have seen some reports coming out lately that if you go the whole way from smartphones to tablets and TVs” —3M CEO Inge Thulin (Conglomerate)

Economic weakness isn’t acute at this point though

“When you go back six years ago, the economic downturn was pervasive it’s unlike anything any of us who are in business have seen in our career…I think what we are facing now is just is a mixed low growth environment with some areas that are experiencing some pockets of growth and other areas that are flattish” —Wesco CEO John Engel (Industrial Distributor)

There’s still growth in healthcare and consumer

“You still see good growth in, generally speaking, in healthcare and consumer around the world. So, those domestic markets are growing well and we capitalize on that. So, health care is one of the highest growth rates for us going into next year with a highest margin that we say as well.” —3M CEO Inge Thulin (Conglomerate)

E-Commerce is booming ahead of Christmas

“we’ve experienced record-breaking demand during this peak season largely driven by the rapid growth of e-commerce. Our busiest days during peak have exceeded our forecast and more than double our average daily volume and should be noted that our busiest days this year are approximately double what they were just about eight years ago.” —FedEx EVP Mike Glenn (Package Logistics)

And there are benefits to falling commodity prices too

“clearly we have benefited from commodities we mentioned that in the prepared remarks. Commodity pricing has been a big benefit for us…steel and steel component parts are big driver in our overall cost of goods sold and those levels are at levels that we haven’t seen since the early 2000s” —Herman Miller CFO Jeff Stutz (Office Furniture)

Even if the economy is slowing, policy still remains accommodative

“As I have often noted, the importance of our initial increase in the target range for the federal funds rate should not be overstated: Even after today’s increase, the stance of monetary policy remains accommodative” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen doesn’t believe that expansions die of old age

“I think it’s a myth that expansions die of old age. I do not think that they die of old age. So the fact that this has been quite a long expansion doesn’t lead me to believe that it’s one that has, that its days are numbered.’ —Federal Reserve Chair Janet Yellen (Central Bank)

They die because of “shocks”

“But the economy does get hit by shocks, and they were both positive shocks and negative shocks. And so there is a significant odd, you know, probability in any year that the economy will suffer some shock that we don’t know about that will put it into recession. And so, I’m not sure exactly how high that probability is in any year but maybe at least on the order of 10 percent. So yes, there is some probability that that could happen and of course we’d appropriately respond, but it isn’t something that is fated to happen because we’ve had a long expansion” —Federal Reserve Chair Janet Yellen (Central Bank)

Central banks may kill expansions, but only when they don’t tighten early enough and let inflation get out of control

“when you say that central banks often kill them, I think the usual reason that has been true is that central banks have begun too late to tighten policy, and they’ve allowed inflation to get out of control. And at that point, they have had to tighten policy very abruptly and very substantially, and it’s caused a downturn, and the downturn has served to lower inflation. So, if you don’t mind my flipping the question on you, I would point out that it is because we don’t want to cause a recession through that type of dynamic at some future date that it is prudent to begin early and gradually.” —Federal Reserve Chair Janet Yellen (Central Bank)

That theory didn’t work out well for Marriner Eccles in 1937 though. He thought he was staying accommodative too.

“I have been and still am an advocate of an easy money policy…The Federal Reserve System has exerted the greatest possible influence to bring about and maintain easy money conditions as a necessary integral part of the recovery movement. An ample supply of funds at reasonable rates exists and will exist after the increased reserve requirements take full effect on May 1.” —Marriner Eccles, Federal Reserve Chair, March 1937 (six months before the start of “Depression II”)


The Fed is watching financial developments closely

“we have been and will continue to track developments in financial markets very carefully. I would say that I think we have a far more resilient financial system now than we had prior to the financial crisis” —Federal Reserve Chair Janet Yellen (Central Bank)

They sound prepared to accept some short term volatility

“what we’re looking at here is the longer term economic outlook, are we seeing persistent changes in financial market conditions that would have…a significant bearing, on the outlook…but it’s not short-term volatility in markets…if they move in persistent and significant ways that are out of line with the expectations that we have, then of course we will take those in to account” —Federal Reserve Chair Janet Yellen (Central Bank)

They also don’t sound too concerned about developments in high yield markets

“Third Avenue Focused Credit Fund was a rather unusual open-end mutual fund. It had very concentrated positions in especially risky and liquid bonds, and it had been facing very significant redemption pressures” —Federal Reserve Chair Janet Yellen (Central Bank)

The Fed still anticipates eventually being able to shrink its balance sheet

“in our normalization principles which are in effect, the Committee stated that we eventually want to operate with a much smaller balance sheet than we have at present. We would reduce the size of the balance sheet to essentially whatever size we needed to manage monetary policy effective– in an effective and efficient way.” —Federal Reserve Chair Janet Yellen (Central Bank)


In retail, the fourth quarter is war

“From a tactical short-term view, right, is every fourth quarter a war? Absolutely…you have got to be ready to fight the fights, and you have to be into the details, and if you want to win in Q4, you have got to be highly engaged, and you’ve got to be willing to improvise and to adapt” —Restoration Hardware CEO Gary Friedman (Retail)

Restoration Hardware said this was the most promotional environment that they’ve seen

“we track all the competitors’ promotions, and we know what everybody’s doing…when we look at the data internally, it is the most promotional environment we’ve seen, meaningfully so.” —Restoration Hardware CEO Gary Friedman (Retail)

Traffic patterns between Thanksgiving and Christmas have unfolded as usual, but at a lower base

“Starting really with the Thanksgiving weekend, our results over that weekend were pretty much what you heard people report in the industry, which was very good business online…and a pull back in store traffic. What’s happened since then is from that sort of lower base if you like, the Christmas cadence is pretty much what we normally see. We’re getting day-over-day, week-over-week growth as we approach the biggest weekend of the year, which is coming up, but it’s still right below last year.” —Pier One CEO Alex Smith (Retail)

We hope you got your e-commerce shopping done because the deadline to ship by Christmas has almost passed

“tomorrow I think or today is the last day we ship for Christmas. So the eCom participation does fall now for the next little while until after Christmas and then it will pick up again in January and that’s obviously just factored into our sales.” —Pier One CEO Alex Smith (Retail)


GE anticipates that digitally connected equipment will help drive productivity for their customers

“as these sensors and systems generate more data, that data is going to…go to our customers achieving what we call the power of 1%. If you can generate 1% fuel performance on GE’s installed base of jet engines that gives our customers $2 billion to $3 billion of profit every year. Small changes mean a lot. It’s all about the data.” —GE CEO Jeff Immelt (Conglomerate)

Materials, Energy:

Energy companies may be pulling back spending on shorter term projects, not just longer term ones

“we’ve now seen short cycle really pull back. So what was a capital spending cuts of our customers on the longer cycle projects we’ve seen now a fairly significant pullback in the short cycle orders here in the end of 2015.” Pentair CFO John Stauch (Industrial Parts)

2016 will probably be another tough year for the mining industry

“The mining industry in 2016 will be defined by strained cash flows, further austerity measures and asset consolidation. The net effect will be the third consecutive year of double-digit decline in capital spending.” Joy Global CEO Ted Doheny (Mining Equipment)

Miscellaneous Nuggets of Wisdom:

The highest bidder doesn’t always win a deal

“when we compete with a private equity firm that buys and sells buy the pound every three to five years, managements really find that very stressful. So when they have a say as some input we are always preferred buyer. When a seller who wants to have a liquidity event wants to protect his employees continue running the – very often continue in the position of presidency of his company, we are definitely the preferred buyer.” —HEICO CEO Larry Mendelson (Aerospace Parts)

Good partners stay transparent even when the news is disappointing

“I don’t mean to make anybody too worried about this stuff, right? But sometimes maybe I tend to be overly transparent, because look, we’ve got shareholders and supporters on the phone, and I think it’s important to know how we’re playing the game…We can speak less about stuff and pretend like everything’s just always great. I don’t think – I don’t think that’s the right way to build partnerships. I think, we tell you when things are working, we tell you when things are not working, we tell you when we make changes, we tell you when the changes are working, we tell you when the changes are not working.” —Restoration Hardware CEO Gary Friedman (Retail)

Full transcripts can be found at