Company Notes Digest 12.2.16

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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 Trump transition is still the most important story of this week and is likely to stay that way for at least the next few months. The policies set by the administration will have a big impact on the path of the economic cycle. Those policies won’t be totally clear until after inauguration; however, elements of the policies are starting to emerge. Trump’s most important economic cabinet members were chosen and emphasized pro-business policies in interviews. That has investors excited, but interest rates are also rising with inflation expectations. If interest rates normalize there will be big shifts in capital values.

The Macro Outlook:

There’s a lot of positive hype right now

“we’re pleased to see a lot of positive hype around what’s going on with the Trump expectations, but we were positive moving forward [anyways]…Are we optimistic? Yes. Do we hope all the stuff we read about happens? Of course. And we’ve seen what the Australian elections have done. And we hope that same thing happens in the U.S.” —Jacobs Engineering CEO Steve Demetriou (Construction)

But it’s all speculation at this point

“anything that’s being talked about in media and anywhere else is obviously speculation at this point in terms of what may or may not happen. And so certainly internally, we are evaluating different scenarios…[but] at this point, it would be premature to talk about that publicly just because it would be pure speculation” —John Deere Investor Relations Tony Huegel (Agriculture Equipment)

There’s optimism but no orders yet

“As we talk to our mining customers, we clearly see that they have some increased optimism certainly with commodity prices improving…Yet this has not yet translated into any tangible machine sale increases for Caterpillar.” —Caterpillar Resources Industries President Denise Johnson (Construction Equipment)

Change could come more slowly than expected

“I think we will make the assumption that 2017 with regard to patients and how they achieve their healthcare is probably stable. I don’t think you could disrupt it from where it is now without massively, without causing a massive amount of unhappiness across the US population…if you are going to unwind healthcare, it has to be a couple of year process of getting things ready to transition people to something new and I just don’t see how it could happen in 2017.” —Gilead CEO John Milligan (Biotech)

Challenged industries will stay challenged for the time being

“We expect challenging market conditions to continue into fiscal year 2017. Weak growth in developed markets, geopolitical issues and uncertain commodity prices will continue to impact some of our end-markets.” —Jacobs Engineering CEO Steve Demetriou (Construction)

“I think there is a basis to become very positive about the market after 2018, 2019. I think we will see a very strong market after that. But for 2017, I don’t see the reason to be that positive.” —Star Bulk CEO Petros Pappas (Dry Bulk Shipping)

“As expected, deflation persisted during the third quarter. And as we’ve said before, transition periods create a difficult operating environment. This is the third time we’ve had deflation in 30 years. And in previous instances, deflation lasted from three to five quarters in a row. We’re in the middle of the cycle right now and it’s not fun.” —Kroger CEO Rodney McMullen (Grocery)

But we do have some good things going for us

“the customer is still in good shape, consumer confidence is strong, interest rates, although a risk of increasing are still at relatively very low levels…you know these are all positive–gas prices still relatively really low that’s all positive for the industry” —Ford VP Mark LaNeve (Automobiles)

Tax reform looks like it will be favorable to corporations

“This will be the largest tax change since Reagan. We’ve talked about this during the campaign. Wilbur and I have worked very closely together on the campaign. We’re going to cut corporate taxes, which will bring huge amounts of jobs back to the United States…We’re going to get to 15 percent and bring a lot of cash back into the U.S.” —Treasury Secretary Designate Steve Mnuchin (Government)

The administration will likely try to keep rates low while it restructures the debt

“I think interest rates are going to stay relatively low for the next couple of years. We’re in a period time of low interest rates. I think we’ll stay there. And interest rates have come up a little bit, which I think makes sense. I think we’re going to be looking at the Treasury all different types of opportunities. We will look at potentially extending the maturity of the debt because eventually we are going to have higher interest rates, and that is something this country is going to need to deal with.” —Treasury Secretary Designate Steve Mnuchin (Government)

International:

Tariffs would be a last resort, not a first step

“Everybody talks about tariffs as the first thing. Tariffs are the last thing. Tariffs are part of the negotiation. The real trick is going to be increase American exports. Get rid of some of the tariff and non-tariff barriers to American exports” —Commerce Secretary Designate Wilbur Ross (Government)

Many companies may have already restructured to offset a strong dollar

“I think, that we sort of figured out probably three or four years ago is, we were probably in a strengthening dollar environment for the foreseeable future. And that was after 10 years, where currency was the wind that most businesses back. And three or four years ago that changed and it changed hard. So we have completely internalized that we have to have a cost structure that allows us to win in a challenging foreign exchange environment.” —Hewlett Packard Enterprise CEO Meg Whitman (Enterprise Tech)

Draghi: the European recovery is “robust”

“The recovery – albeit modest – is robust. We are growing and inflation is improving. Europe’s GDP has returned to its pre-crisis level, although this has taken seven and a half years…The main drivers behind this recovery have been low oil prices and our monetary policy. This recovery is stronger than past ones because it is based on the increase in consumption and domestic demand, and not only on exports.” —ECB President Mario Draghi (Central Bank)

Financials:

The administration wants banks to lend

“the number one problem with the Volcker Rule is it’s too complicated and people don’t know how to interpret it. So we’re going to look at what to do with it, as we are with all of Dodd-Frank. The number one priority is going to be make sure that banks lend.” —Treasury Secretary Designate Steve Mnuchin (Government)

Mnuchin sent mixed messages on Yellen

“You know, look. I think she’s done a good job at the Fed…I’m not going to comment on whether she should or she shouldn’t [serve out her term]…But I will say we do have two [Fed] governor spots to fill, and that will be high on the priority list” —Treasury Secretary Designate Steve Mnuchin (Government)

Companies that already pay low effective tax rates will still benefit from statutory tax decreases

“the tax rate is established by reference to statutory rates that are in place at the time and then there is deducts from that. So for example as an example we participate in various community reinvestment activities that are subject to tax credits etcetera and so those tend to be deductions that get you to your effective tax rate. So if the overall tax rate would reduce, then yes we would have benefits come up.” —Toronto Dominion CEO Bharat Masrani (Canadian Bank)

Consumer:

Retailers may step up promotions this Christmas

“We haven’t seen any pullback in the promotional environment. As Julie said, we think in fact because of some people having more inventory than they like, that it could get more promotional. The customers are smart, they are looking for the best value” —Williams Sonoma CEO Laura Alber (Home Goods)

Retailers’ margins are going up in e-commerce but down in brick and mortar

“as DTC increases, it does deleverage delivery expense and logistics expense but it does then provide for some offset opportunity in store property.” —Urban Outfitters CFO Frank Conforti (Apparel)

Technology:

Tech companies are focusing on data centers and automobiles over PCs and smartphones

“When you look at where our big investments are going right now, we’re going down in SOCs for things like phones; we’re going down in the PC segment of the business; we’re going up in the data center; we’re going up in IoT specifically and automotive” —Intel EVP Stacy Smith (Semiconductors)

A voice driven world could up-end internet business models

“one thing that we are all clear about is the days of three top text ads followed by 10 organic results is a thing of the past in the voice driven world. So we are very much keeping an open mind on what this needs to be and focusing much more on what’s the consumer experience, it’s scale, we’ll figure that as we talk about.” —Google SVP Sridhar Ramaswamy (Internet)

Data-sets are becoming so large that only cloud/AI can interpret them

“the amount of data that our clients have already and quite frankly the amount of data they’re creating everyday…is creating an opportunity for us where…nobody can any longer just program a computer to find relationships that you’re looking for. It’s just too much data and so in a world where a system has to learn about the data, you have to find a way to interact with it…cognitive will influence and affect every decision that companies will make over time….Now all of that requires an amount of compute and amount of power that is not available for everyone to invest in, but that’s where the cloud comes in and so there is obviously an economic element to moving into a cloud environment, but more importantly for our clients, we see an ability for access to these kinds of cognitive applications as well as an agility that you get from your business and running in a cloud environment.” —IBM CFO Martin Schroeter (Enterprise Tech)

AI algorithms have been around for a long time, but deep learning and neural networks are recent innovations

“machine learning has been an integral part of the ad system pretty much since the time I joined. And gosh that was like 2003. And as new ways of machine learning whether it is algorithm based on boosting or more recently algorithm based on deep learning and neural network have been developed. We are often either an early adopters of this technology.” —Google SVP Sridhar Ramaswamy (Internet)

Healthcare:

Some of Trump’s healthcare priorities:

“the President-elect has laid out a number of markers, as we talk about expanding HSAs, allowing folks to be able to buy insurance across state lines, administering Medicaid at the state levels.” —Trump Transition Team Communications Director Jason Miller (Government)

Industrials:

The Steel industry is confronting structural headwinds

“We do see clear cyclic silver lining but to be clear, you should not confuse cyclic improvement with structural weaknesses of an industry. The pressure from imports from raw materials, especially in coking coal, from excess capacities and from current and especially threatening cost decrease related to the European trading scheme, remains high.” —Thyssen Krupp CEO Heinrich Hiesinger (Steel)

Full transcripts can be found at www.seekingalpha.com