Company Notes Digest 2.10.17

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.

For most of this bull market bearish sentiment has been consensus. Even while the market has risen, it’s been easy to hold a negative view, and most people did (including me). Recently those negative voices have been fading though. In fact, they have been so drowned out that when I saw a CEO warn about the state of capital markets this week it actually felt genuinely contrarian. That doesn’t mean that the bull market is over, but it does mean that one of its greatest assets, pessimism, is slowly melting away.  For now though, animal spirits are running strong.

The Macro Outlook:

The industrial economy has some momentum

“I think that what we’re seeing is the increased investments going on from a – just from pent-up – a situation for many years. We’re starting to see some of that flow … So I see a pretty steady recovery here. I don’t see a snap. As I’ve said, I’ve always felt that 2017 would be a good year of building that foundation and see a improvement. I see a much stronger 2018 than I see 2017. But I see right now, based on what I’m seeing from the customer base, based on what I’m hearing from some of our customers and what they’re saying they’re going to spend on capital next year, overall, I think the pressure is upward.” —Emerson CEO David Farr (Industrial Components)

Some manufacturers can’t keep up with orders

“Our inventories definitely on the lighter side…But every quarter we have been kind of beating the numbers and honestly not been able to build the inventories we set a target where the inventory would slightly grow and then we ship it all and the inventory does not grow. ” —Microchip CEO Steve Sanghi (Semiconductors)

This has now become a truly contrarian perspective:

“I’ve been around long enough to have lived through all sorts of markets. I’ve learned to respect markets, while at the same time being skeptical of conventional wisdom. I’ve lived through a bond bear market and a gargantuan bond bull market. I’ve seen bond yields above 15% and below 2%. I’ve seen inflationary spirals, I’ve seen deflationary threats, I’ve seen deregulation and reregulation. I’ve seen the S&P 500 trade as high as 30 times earnings and I’ve seen the S&P trade as low as 7 times earnings. With all this experience, that comes with age I might add, here is what I’m seeing in the markets today. In the credit markets, spreads on the high yield securities are approaching historically tight levels, while key credit metrics such as leverage and coverage ratios are showing signs of weakening. The leverage loan market has been overrun by such massive inflows of capital that you could probably get a loan to buy a fleet of zeppelins at this point in time. With respect to rates, the 10-year treasury note is currently trading at around 2.5%, up from its recent lows, but still well below historic norms. In my view, the mood of these markets is in stark contrast with the many unknown from our current economic and political landscape, both here and abroad. For me, it’s a major disconnect, and it concerns me…The S&P 500 is trading at roughly 19 times earnings, 3 turns higher than the 50-year average of 2016. These valuations make me uncomfortable, especially given the unknowns in taxation, foreign trade, regulation and more…To sum up, in my opinion, the markets are priced for perfection, and they have been that way for quite some time, complacency reign supreme. However, my experience has shown me that this state of affairs won’t go on indefinitely. So why am I sharing these thoughts with you? Because I know that some of you have wondered why we brought back relatively few Loews shares in 2016 or why Loews hasn’t made an acquisition…It’s a tough market in which to be a disciplined buyer.” –Loews CEO James Tisch (Insurance)

But should it be contrarian?

The world is still unusually uncertain

“Looking forward, our continuing view is that the world is unusually uncertain, and perhaps even more so given the regime change in Washington and the questions surrounding the administration’s proposed agenda. ” —Oaktree Chairman Howard Marks (Asset Management)

The consumer isn’t showing the same pep as industry

“I think October was a little slower and then early November was good and it kind of leveled out again. So it’s kind of up and down by weeks. Some of it’s the way the calendar falls for us this year with the coming off the 53-week year, but I would just tell you it’s a little slower out there right now” –Sysco CEO Bill Delaney (Restaurant Supplier)

The downturn in CRE in the UK is exceeding JLL’s worst expectations

“it is fair to say that the Brexit vote, in particular, hasn’t created an environment which encourages our clients to take long-term decisions around their real estate portfolios…Now we are staying very close to the situation in the UK, but though the development has been clearly exceeding our most negative expectations which we got for the Brexit but at the end of the day, we are very hopeful that pragmatism will take over and that things will play out fine for the UK going forward.” —Jones Lang LaSalle CEO Christian Ulbrich (CRE Broker)

Tax reform may take longer than expected

“So I’m looking for clarity by late summer, early fall and that gives me time, as I get into execution later this year, early 2018 based on if I have to change anything.” —Emerson CEO David Farr (Industrial Components)

Companies are looking before they leap

“I honestly just think it’s too early to start to speculate. And we’re certainly not building anything into our plans positively or negatively for that matter related to any policies that might come out. But I can assure you that we’re watching it very closely.” –Visa CEO Alfred Kelly (Payments)

Excitement can quickly turn to animosity

“Obviously the President has said that his top priority is to stimulate growth and get people working and expand the economic pie…I can’t say what the President’s view is going to be in the future…So I can’t – I can only – I could only speculate but I don’t have obviously the crystal ball that permits me to give an accurate answer to that question. Reinforces my view that I’ve long held that I hate politicians.” —Kilroy CEO John Kilroy (REIT)

If trade stops, war starts

“If trade stops, war starts…We have to actively prove that trade helps people to communicate. And we should have fair trade, transparent trade, inclusive trade.” —Alibaba CEO Jack Ma (E-commerce)

Invariably there will be another down cycle someday

“Every year that goes by logically increases the probability, but there are times, like today, when people say, oh, you know, we’re in a virtuous circle. We have an accommodative Fed, we have expanding – well, the Fed’s accommodative, but not too much, and the economy is expanding, but not too much that it has to be reined in, and corporations are doing well in piling up cash, and debt has been refinanced and paid down, and they’ll give you a hundred reasons why there’s not going to be another down cycle again, but invariably there is.” —Oaktree Chairman Howard Marks (Asset Management)

Not necessarily in the near term though

“There is a tremendous amount of leverage paper in the world. There is a business cycle and we feel very good about the restructuring group and what the next three years look like. But that’s not to say that I characterize it as growth in the very short-term.” —Moelis and Co CEO Ken Moelis (M&A Advisory)


On the one hand, Mario Draghi sounds slightly more optimistic

“On the one hand, the evidence suggests that the acute deflation risks have disappeared and that inflation is set to pick up over the coming years. And contrary to a widespread perception, euro area economic conditions have also been steadily improving…And in the last quarter, the recovery has been broadening across sectors and across countries.” —ECB President Mario Draghi (Central Bank)

But on the other, not much has changed

“Looking ahead, risks to the euro area outlook remain tilted to the downside and relate predominantly to global factors. Our current monetary policy stance foresees that, if the inflation outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council is prepared to increase the asset purchase programme in terms of size and/or duration.” —ECB President Mario Draghi (Central Bank)

Central bankers are on their way out anyways

“In many respects we’re coming to the last seconds of central bankers’ fifteen minutes of fame which is a good thing… In general it’s a much better balance than the only game in town being central banks and monetary policy. This is positive.” —Bank of England CEO Mark Carney (Central Bank)


M&A thrives in loose regulatory environments

“There’s a feeling that you can achieve the goals you set out that the government will not get in your way if you have a strategy to implement something and I think that’s rifling through all industries, people call it animal spirits but I think it’s the optimism that they can envision a creative way to create value and that the government might not get in their way and that’s going to motivate people to attempt and try things that will be exciting for everyone. That’s what I think is going to drive the M&A market.” —Moelis and Co CEO Ken Moelis (M&A Advisory)


Amazon is opening more physical stores

“Probably more advanced and further along are the Amazon Bookstores. We have three physical stores; Seattle, San Diego, and Portland right now. We see adding five more this year. So we’re still in that phase where we’re testing and learning and getting better, even on the bookstore. I would say there’s other things that are physical in nature, the pop-up stores and college pickup points that we learn from as well, and think creates a great value particularly at the college pickup points.” —Amazon CFO Brian Olsavsky (E-Commerce)

Nobody really worries about Wal-Mart anymore

“we were ignored for most of our history. Nobody paid any attention to us. And – but we continued to expand and grow and we got more and more successful, and then kind of the conventional supermarkets, they were – I think they were really pre-occupied with Walmart, and trying to be competitive with Walmart for a long time…” —Whole Foods CEO John Mackey (Grocery)

Over-the-top video packages could be at a tipping point

“it seems like we’re on the cusp of some significant growth for new entrants in the multi-channel marketplace. And what we like about them is they are mobile friendly or mobile first, their user interfaces tend to be very strong, and their pricing is priced substantially lower than the expanded basic bundle that most of the MVPDs are offering…we think that this wave that we’re seeing is really a signal of what is to come and what the future will be” —Disney CEO Bob Iger (Media)

Content creators benefit from more downstream competition

“we think that that proliferation of downstream competition is really, really healthy for content creators and for brands like ours that robust, that are differentiated, that can really deliver content that works for customers…we do believe that it can reverse some of these overall declines in subscriber trends in the total MVPD universe and have that go forward.” –21st Century Fox CEO James Murdoch (Media)

OTT hasn’t really exploded yet though

“I’d say OTT is growing at a very solid pace. It hasn’t exploded. At times people think that might happen, but that’s not taken place.” —Akamai CEO Tom Leighton (Content Delivery Network)


China has adopted digital payments faster than anyone

“I have not, from the experience around the world, seen a single country where the adoption of digital technology is at a higher level than China. It’s extraordinary how people’s lives revolve around digital technology. And particularly impressive is the transition of almost over two years from zero credit card or anything other than cash to suddenly, in some stores, cashless payment being a majority of our sales…you go to stores in China now and regularly, you will see people paying with their cell phones in a variety of retail formats.” —Yum China CEO Micky Pant (KFC)


Drug companies are pointing fingers at others for high prices

“If you look at the University of [California] Berkeley data showing that of $100 paid to an innovative drug company at list, only $63 on average makes it through to the company. That’s $37 out of the $100 are being paid to non-innovators in a system which thinks it’s paying high prices for innovation. So that’s really, that’s something that’s going to have to start to be addressed.” —Glaxo Smith Klein CEO Andrew Witty (Pharmaceuticals)

Drug distributors are taking issue with that

“any suggestion that PBMs are causing drug prices to rise is simply erroneous. We are the solution and not the problem. And that’s why both public and private payers continue to count on PBMs as indispensable partners that help to manage their drug trend.” —CVS CEO Larry Merlo (Pharmacy)


The best application of the internet of things is in the industrial marketplace

“So I think we’ve always believe that the industrial market is where the true strength of a IoT fits. It’s where there are very strong business models for the investments that are required in the IoT infrastructure that’s going to be put in.” —Microchip CEO Steve Sanghi (Semiconductors)

Materials, Energy:

The oil industry is optimistic that the worst is behind it

“Frankly, I’m glad 2016 is behind us…we still have challenges ahead. Nevertheless, $50 oil has been a welcome relief. I attribute my gray hair to the many previous downturns I’ve been through, 1986, 1991, 1999, 2002, and 2009. They all required difficult decisions and cost reductions, but this one has been unusually grim and painful.” –National Oilwell Varco CEO Clay Williams (Oil Service Equipment)

Miscellaneous Nuggets of Wisdom:

Downturns are an opportunity to become better

“downturns are an opportunity to become better…The downturn of the 1980s was also particularly severe. E&P operators faced the very same challenges they always do when oil prices plummet, how to improve cost per barrel, again, a necessity to survive and again invention followed. I credit the downturn of the 1980s with the inventions of measurement-while-drilling [MWD] systems, logging-while-drilling systems, top drives, rotary steerables, horizontal drilling technology, and PDC bits technologies that frankly enabled the shale revolution. It’s not a stretch to say that the seeds of this amazing new source of oil and gas from shale are a direct result of the downturn of the 1980s.” –National Oilwell Varco CEO Clay Williams (Oil Service Equipment)

Full transcripts can be found at