Company Notes Digest 2.21.14

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

David Einhorn’s goal for 2014 is just to protect capital:

“During the month of January our net exposure decreased about 10 points to 45% as we reduced our exposure on both long and short sides. We continue to hold macro positions in gold and in short sovereign debt. Our goal in 2014 remains to protect capital in an uncertain environment and define investment opportunities that will generate alpha on both our long and short portfolios.” ($GLRE)

2013 was primarily driven by multiple expansion. This can’t last forever (Did I mention how much I like David Einhorn?):

“The market ended the year on a strong note after a huge move that was supported mostly by multiple expansion as earnings growth was lack luster. In 2013 the market rewarded many companies repeating [ph] earnings after they had lower guidance. This trend is not likely to continue indefinitely.” ($GLRE)

Meanwhile in the economy…

Nordstrom says sales remained soft in January:

“Q1 looks like it’s roughly flat to 2% comp overall, the way we’ve calendarized that out. And in terms of the holiday period, we definitely had, I would say, better than trend sales in the month of November and in the first half of December. Sales started to soften up around the holiday and it continued soft post Holiday and through January.” ($JWN)

BHP Billiton’s CEO is emphatic that we’re not operating at the top of the cycle though:

“Can I just jump in? We’re not actually at the top of the cycle. Andrew, this result that you’ve seen is primarily driven by our own self-help and our own productivity…we certainly don’t feel that as things sit at the moment, we’re finished with our productivity gains and — or that we’re operating at the top of the cycle.” ($BHP)

Coke says the US is the best in the West:

“in terms of our flagship market in the United States, clearly the best right now as far as we can see, the best western developed economy in the world we think we will see slightly improved mobility in the United States in 2014 versus 2013.” ($KO)

Cummins agrees. North America is the best of the bunch, and China is turning the corner:

“North America is definitely feeling more positive than I think any other region of the world just now. China is turning the corner. China I think over the last year and a half we were maybe a little bit flat on it. We had a good year last year – some of that was artificial with the pre-buy ahead of NS4. This year we’re projecting record revenues in China including our joint ventures” ($CMI)

Which is good, because let’s be honest, we’re not worried about Turkey or Argentina, we’re worried about China:

“the main risk to growth will not come from instability in countries such as Argentina and Turkey but from…the size of the unofficial banking sector in China which appears to be responsible for just under $3 trillion in loans and debt obligations, and which accounted for 30% of all such debt obligations at the end of 2013.” ($DSX)

Financials

Someday the Fed will raise rates, even if it doesn’t feel like it will ever happen:

“When short-term rates increase and they will even though today it feels like they never will, just like a year ago or two years we thought loan rates would never increase and they did, but at some point they will. That would be a big benefit for us because our loan book is going to re-price faster than our deposit book.” ($WFC)

Deposit growth likely to slow:

“our best guess is that the rate of deposit growth in the industry will probably be slow a little bit because of the tapering that the Fed will do.” ($WFC)

Wells Fargo now overcapitalized:

“we’ve made a big point a couple of years ago saying that we thought we needed about 9% [tier 1 common ratio] and now we’re above that…We would like to get down to a 9%. We think that’s sufficient for the company. So we’re going to work toward that.”

Consumer

The promotional retail environment is still a problem:

“I think it’s fair to say that the increased promotional activity that happened in December was more than we had expected and an area of concern for us going forward.” ($JWN)

E-commerce makes the promotional environment worse:

“with the way that Direct works now and all the information available to customers, if something is online and it’s marked down and it’s available to everybody, then we got to be competitive everywhere, too, particularly given the fact that we’ve got a completely aligned and synergistic merchandise strategy between Direct and in-store.” ($JWN)

Coca Cola says that consumers’ belief that Diet Coke is unhealthy is a “misperception” and will defend its position with “meaningful facts”:

“Sparkling beverage volume fell 2%, largely due to softer diet coke volume. We have implemented a multi-faceted approach to address category headwinds and the various misperceptions that fuel them. This effort is targeting both obesity and ingredient concerns and increase aggressive sweetener innovation, transparent consumer communications, continued packaging evolution and new partnerships with credible third parties around the world who will use meaningful facts to defend and protect the sparkling category.” ($KO)

One analyst had harsh and direct criticism for Coke:

“I am hearing from many investors and a lot of questions on this call, is that there is a feeling that the Company isn’t doing enough to change itself despite that the world around it has really changed…should investors expect bigger bolder change that pay out to meet this truly different world and so what specifically should we be looking for to just kind of sharing your confidence about the story or should we just expect kind of same status quo going forward?” ($KO)

The potential Comcast/Time Warner merger is a big time consolidation:

“we’re still assessing some of the competitive implications. But certainly, if the deal is approved as proposed, it clearly represents an unprecedented media concentration in 1 company. I guess, I think the challenge in terms of what posture we take in Washington, D.C. we haven’t decided yet. But I think one of the challenges is to try and ensure that it is appropriately scrutinized in some kind of unique ways than you might traditionally look at. And I think it’s particularly around the effective broadband monopoly they might have in as much as 2/3 of the country and the implications of that” ($DTV)

4K TV may be a little bit slower to be adopted. Content companies have huge investments in HD equipment that they’re not going to walk away from:

“I don’t yet get a sense in my discussions that there’s some wholesale move to throw out all their HD equipment and get ready to start investing in 4K equipment. I think they’re all kind of looking at it, going to try some things and test and learn and we’ll see how differentiated the consumer experience is and how fast 4K TV takes off.” ($DTV)

Technology

Facebook isn’t going to worry about how to monetize WhatsApp until it has a billion or three users:

“Our explicit strategy is for the next several years to focus on growing and connecting everyone in the world. And then we believe that once we get to being a service that has billion, two billion, maybe even three billion people one day, that there are many clear ways that we can monetize” ($FB)

Zuckerberg doesn’t think that ads are the best way to monetize it:

“I don’t personally think that ads are the right way of monetized messaging services. And I know, Jan, shares this philosophy” ($FB)

Facebook’s explanation for how they came up with the valuation:

“In terms of valuation, as we discussed in the remarks, the primary thing that we focused on was just how healthy this network is and how well it’s growing. And our confidence that if you have a network of this size with people who are as highly engaged as customers are with WhatsApp, that they are really on a path to get to a network of a billion people or more in a relatively short period of time. So we looked at other networks that have achieved that kind of size and scale and what kind of value that they’ve created and what they are worth and that helps give us a framework for thinking through what might make sense here.” ($FB)

They make a good point–SMS is a $100 B business for carriers:

“And they are already at a place now where the messaging volume running through WhatsApp is nearly the same as the scale of the entire telecom SMS messaging volume. And that’s a $100 billion business for carriers in terms of direct messaging piece. So it’s a really valuable service that people are willing to pay for.” ($FB)

It sounds like Elon Musk may be getting ready to raise capital:

“Yes, I think [raising capital] is a good idea. I agree with that. I think that would be the smart move. We can talk more about that next week with — and also discuss the Gigafactory plans. Unfortunately, I can’t say anything right now, except that I agree. I think your advice is good” ($TSLA)

The PC is showing signs of life in the commercial segment:

“Overall the PC market contraction is slowing and we see signs of stabilization particularly in the commercial segment…I do think there’s also some net momentum in the long overdue PC refresh, and what I think commercial customers are understanding from their employees is well employees may want a tablet. They actually also need more traditional compute devices to do their real work in the everyday environment in their company, so that is helpful.” ($HPQ)

Businesses still trying to decide on the architecture of their cloud:

“There is movement around which are they going to make a bet on HP’s hybrid cloud or they are going to make a bet on someone else’s cloud, so there is a battle going on for architectural control in the enterprise” ($HPQ)

HP believes that they have the right answer–companies want a hybrid cloud:

“This hybrid cloud offering that we crafted well over a-year-and-half ago, it’s the right answer. I can tell you every single day customers say that is exactly what I want.” ($HPQ)

DirecTV is building a hybrid satellite/cloud

“our highway in the sky with 12 satellites, on a marginal basis, is a low-cost highway to provide a high — the highest quality signal out there. But with that said, we are embracing a hybrid satellite cloud infrastructure for our core business, which will give us greater variety and greater ability to move content through the cloud seamlessly for consumers’ own devices in the home.” ($DTV)

Materials, Industrials, Energy

BHP Billiton sees falling iron ore prices long term:

“in iron ore, we expect significant growth in low-cost supply that will exceed increases in demand from China and elsewhere. The cost curve, as you see, will flatten, as higher-cost margin supply is displaced, and this will lead to lower prices and lower volatility.” ($BHP)

Copper actually has strong fundamentals though:

“In the near term, copper inventories are expected to remain at reasonable levels. But in contrast to iron ore, the long-term fundamentals are attractive. Rising strip ratios and grade decline and the lack of high-quality opportunities ready for development now will steepen the cost curve.” ($BHP)

There may be a glimmer of hope on the horizon for Met Coal:

“There has been a lot of recovery in the market — or in the production I should say, from Australia because of the recovery from things like floods. That’s coming to an end. And as we look forward, there’s less growth in the next few periods. We’ve seen some announcements just overnight about some of the cost challenges that we’ve faced from competition in North America. Some evidence of that slowing. The pickup in markets, particularly in the developed economies and the growth in their demand for steel will almost certainly benefit metallurgical coal. And we started to see some quite good steel numbers coming out of India, which in the long term has no metallurgical coal and will have to import.” ($BHP)

That said, BHP not investing any more money in Met Coal:

“as you’ve heard me talking about it, because of the margins in coking coal and the returns, we’re unlikely to invest in further increases in production, but we’ll complete those underway, and we’ll ramp them up to the maximum extent possible.” ($BHP)

Diana Shipping still doesn’t see a recovery in the Dry Bulk market in 2014:

“the bottom line of what we have said is that we do not share the same view with most of the others. We are not so enthusiastic about the prospect of 2014.”($DSX)

The marketplace is not that excited about natural gas truck engines:

“The market wasn’t feeling it, and I think it’s going to come eventually but I don’t think it’s going to be this kind of light switch event that some people are going to want to promote. But we continue to make investments both on-highway and off-highway for natural gas products and we’ll continue to do so. We think it’s a good market over time. I would just caution that it’s not going to explode and be a terrific market tomorrow or early next year, 2016.” ($CMI)

Duke’s renewable portfolio will incrementally be invested in solar:

“We see opportunities to continue to grow our renewables platform over the two years and expect a greater mix of solar in our capital deployment.” ($DUK)

Miscellaneous Nuggets of Wisdom

Debt is cheaper than equity for a reason:

“We have to compare apples with apples here Mike and you know very well that a bank debt is not the same as preferred equity. You have different covenants, you have covenants, you have mortgages, you have amortization of debt and you have the loss. You have something which is not perpetual, you don’t have an option as a company does try to deem it after year, five or not. So basically comparing the two the 9% will be 3% or 2.5% of the bank loan is not the same.” ($DSX)

Think holistically about good customer service:

“On the customer service side, Frank, look, we think of it much more broadly than just purely service although service is an element. We think of the whole customer experience. We’ve got a simplified bill that we’re planning to launch later this year that we think will be more transparent and easier for customers to understand. We’ve added chat capability and self-care. We’ve got further enhancements in our self-care capability, we’ve benchmarked Zappos and Amazon, and I think that’s an area that we can do better with our customers. We continue to strive to even be better in terms of on-time performance, on-time arrival in the way we service our customers.” ($DTV)

In a competitive environment, focus on keeping the customers you already have:

“as the market gets competitive, it’s really important that we hang on to our customers…I’m probably a little more sober about the challenges of raising prices and the impact that, that has on the total churn metric in any given year.” ($DTV)

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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