Company Notes Digest 2.26.16

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: Glass Half Full

Everyone is watching the market’s volatility, but most CEOs continue to say that the market isn’t reflecting the reality that they’re seeing.  Consumers appear to be especially healthy and aren’t showing signs of slowing down.  Credit markets are troublesome though.  Defaults are certain to rise among energy companies and more and more credit focused firms are citing concerns in unrelated industries like restaurants and retail.

The Macro Outlook:

Everyone is focused on the volatility but no one is frozen by it

“We are all like you looking at the opening of 2016 and seeing the volatility…we find in our client dialogue that while everyone is focused on it, no one is frozen by it” —Heidrich and Struggles CEO Tracy Wolstencroft (Executive Search)

In fact, most CEOs seem to disagree with the market’s perception of reality

“The reality sometimes of what’s going on versus the market’s perception are completely different. This is one of those times.” —Stifel CEO Ronald Kruszewski (Investment Bank)

They don’t see the doom and gloom that others do

“I guess there’s a bit of a bearish tone…coming from the press…I’m pretty bullish about our position in the marketplace…So the glass is half full, and I don’t see the doom and gloom that a lot of people are and I guess your question kind of leads us towards.” —Fluor CEO David Seaton (Engineering and Construction)

Many are seeing positive momentum in their businesses

“The stock market seems to be pricing in a steep decline in the economy, and along with it, our sector. We on the other hand, are seeing signs that reflects strength and positive momentum in our business” —Toll Brothers Chairman Bob Toll (Homebuilder)

Consumers have a similar outlook. They see their own finances as stable but perception of the economy has declined

“the results of our most recent consumer sentiment survey [showed] favorable perceptions around personal finances remains stable even though respondent’s assessment of the national economy declined slightly.” —Lowes CEO Robert Niblock (Home Improvement)

Consumers are actually pretty healthy

“On the bright side, the U.S. consumer may come to the rescue as we are nearing full employment, wages are slowly rising and there is an effective tax cut in the form of low energy prices.” —Greenlight Capital Re Chairman David Einhorn (Reinsurance)

Which is probably why consumers continue to spend

“Peter, we’re not seeing [consumers pull back]. Our business was good and continues to be good.” –Home Depot CFO Carol B. Tomé (Home Improvement)

“Yeah, the U.S. consumer, we could spend the next 30 minutes on that. We are pleased with the mind and the spirit of the U.S. consumer, certainly compared to many other geographies outside of the U.S.” —Best Buy CEO Hubert Jolie (Electronics Retail)

So is it time to take advantage of nervousness?

“I go back to what Buffett says…he’s nervous when people are greedy, and he’s greedy when people are nervous. Well, right now people are nervous.” —Fluor CEO David Seaton (Engineering and Construction)

“in terms of crisis in some countries, that’s when we feel even more excited about investing, because that’s when competition normally takes the foot off the pedal.” —AB Inbev CEO Carlos Brito (Beverage)

Valuations are still high

“I would say, the market is fairly richly valued at this point in tim…Ultimately, we want to do deals that we know we can get very good returns on long term…We’ve seen this cycle before. It does come and go, and we’re going to be very, very careful while we’re in a frothy environment.” —Ecolab CEO Doug Baker (Sanitation Services)

And deflationary pressures could make it tough to generate returns

“And deflation is a very difficult environment to make a return in. You’re seeing interest rates in Japan, ten year rates are negative. German rates are below – ten year German rates are below 0.3%…in that environment it’s very difficult to make a return…with interest rates at zero for sometime and in many case, it’s going negative and a ton of debt in the system, we think that the possibilities on the downside are significant.” —Fairfax Financial CEO Prem Watsa (Insurance)


Credit markets are showing signs of distress

“I, for one, but I think, we as a team, have a pretty strong view that 2016 is a transition year for the credit markets. We see a lot more stress and distress just as we look across credit business” —Ares Capital Corp CEO Kipp deVeer (Business Development Company)

The problems that energy companies pose for the high yield markets are not fully appreciated

“I think that the problems that the oil and gas markets in particular are going to present…for the high yield market is misunderstood…We expect defaults will go up this year. They’re already going up.” —Ares Capital Corp CEO Kipp deVeer (Business Development Company)

And credit markets are increasingly spooked by industries other than just oil and gas

“markets continue to be spooked…by oil and gas, by mining and metals, and increasingly by industries that are cyclical, whether it’s retail, restaurants, manufacturing, specialty chemicals, et cetera.” —Ares Capital Corp CEO Kipp deVeer (Business Development Company)

There are some indications that loan delinquencies are turning very slightly in the wrong direction

Macys is closely monitoring a rise in delinquency levels

“we are closely monitoring a rise in delinquency levels that could generate some increase in losses in 2016.” —Macys CFO Karen Hoguet (Department Store)

TD said losses are normalizing from unsustainably low levels

“U.S. portfolio losses have largely normalized from unsustainably low levels in 2015” —TD CRO Mark Chauvin (Bank)

BMO saw delinquencies tick up but it may just be because the quarter ended on a Sunday

“the difference between this quarter and the last quarter was that this quarter was on a Sunday…And that explains the difference, because right after the weekend, the delinquency rate did go back to normal levels.” —BMO CRO Surjit Rajpal (Bank)

Toll Brothers is seeing encouraging traffic early in the spring selling season

“I think we’re very encouraged by the increase in traffic, in numbers and even more importantly in quality…It’s early in the spring season, we’re about three weeks in. And so we’re encouraged by the traffic numbers and the quality of that traffic.” —Toll Brothers CEO Douglas Yearley (Homebuilder)

Americans still believe that their homes are great investments

“Roughly half of homeowners believe the value of their home has increased…we saw a significant increase in future home value expectations. And while most homeowners indicated their spending levels are saying the same, they’re more likely to allocate funds to home improvement compared to other areas.” —Lowes CEO Robert Niblock (Home Improvement)


Retailers are struggling to adjust to a fundamental change in their business models

“I think one of our slides indicated by the end of this decade that we’re going to have a large proportion of our business about 30% being done online. That’s all the way from 5% that it was back in 2005 and that is a model that behaves enormously different than the mall-based model. And so we have a lot to learn about that and we have to keep our lens on as it relates to how the customer sees us and how the customer wants to be served, but at the same time, we have to do it effectively.” —Nordstrom CFO Michael G. Koppel (Department Store)

“It’s clear, though, that we need to move at greater speed and agility, accelerate plan changes in our business model more quickly, and focus our resources on the most productive assets and projects while moving away from those that are not delivering results. We need to embrace the evolving behaviors of our customers and take actions to support the long-term health and success of our business.” —Kohls CEO Kevin Mansell (Department Store)

Most retailers believe that their store base is a competitive advantage

“I think is our talent in the whole fashion arena, from picking, editing the assortments, presenting it, and the vendor relationships. I think that is a huge competitive advantage to date, vis-à-vis, Amazon. But I think it starts with the store base, and our understanding of the fashion customer, which is different.” —Macys CFO Karen Hoguet (Department Store)

TJX argued that there’s plenty of room for off price retailers to expand

“sometimes there’s a concern, there’s going to be a lack of goods as we continue to growing out all these stores. It just, as you know – I think I said it like 20 minutes ago. We actually have to hold the merchants back still. There’s so much merchandise out there. We’ve never not had it be that way.” —TJX Cos CEO Ernie Herrman (Off Price Retail)


Mobileye said that an open architecture system makes sense for autonomous vehicles

“when you talk about autonomous driving, it’s really a multi-player game. It’s very, very hard to think about it in terms of a closed system. Sensing alone, it’s okay to think about it as a closed system, but once you start adding mapping, you start adding your driver policy, you start adding differentiation between different players; an open architecture makes more sense.” —Mobileye CEO Ziv Aviram (Auto Supplier)

Mobileye also said that it thinks consumer electronics companies are underestimating how difficult it is to make a car

“our belief is that consumer electronics companies today underestimate the challenge of automotive…when you look at consumer electronics, the kind of product that we are used to have lots of imperfection…We are not tolerant to imperfection with cars…And when you think about autonomous driving, where there is safety involved, the level of perfection is really foreign and unparallel to the consumer electronics world.” —Mobileye CEO Ziv Aviram (Auto Supplier)

Materials, Energy:

This energy downturn is about as tough as they come

“This particular downturn, which will be about the fifth of my career, makes others pale in comparison both in severity and longevity.” —DistributionNow CEO Robert Workman (Distributor)

Apache’s 2016 CapEx will be down 80% from 2014

“With this in mind, we announced in this morning’s press release a 2016 capital budget of $1.4 billion to $1.8 billion, the midpoint of which represents over a 60% decrease from 2015 and over an 80% decrease from 2014 levels.” —Apache CEO John Christmann (Oil and Gas Exploration)

Apache still expects well costs to come down even further this year

“In terms of our Permian well cost, we see things coming down and even further this year. As a rule, we’re looking at mile-and-a-half laterals. We have seen the intensity of the frac concentrations going up. So those are the types of parameters we’re going to use or using in those estimates.” —Apache CEO John Christmann (Oil and Gas Exploration)

BHP Billiton says that buying assets has now become more attractive than building them

“this is an environment where in many respects buy rather than build is more attractive and I think doubly so, one because buy is potentially cheap and Peter referred to that a little bit and saying it’s not quite a war chest, but who knows what might come under distress in this sort of environment. ” —BHP Billiton CEO Andrew Mackenzie (Mining)

Investment opportunities are good but may get even better

“we believe that, especially in North America, the opportunities for investment are going to be better in the future than they are now. There are some good ones now, but we believe they’re going to be even better.” —Apache CEO John Christmann (Oil and Gas Exploration)

Full transcripts can be found at