Company Notes Digest 3.24.17

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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.

It will be another few weeks before earnings season begins to pick back up. Until then we’re picking up scraps of information where we can.

Lennar’s CEO features prominently in this week’s digest. The underlying fundamentals for the housing industry are arguably stronger than any other industry in the economy. We’ve massively under-built since the bubble and there is a huge demographic wave of millennials who want to buy homes. Still, pricing has been so distorted by low interest rates that it’s tough to say how these forces will balance out.

Unfortunately, my expectation is that millennials will likely end up buying houses at inflated prices and have a similar experience that we got from our college degrees. Societal pressures will cause us to lever up to purchase an asset with an extremely low return on investment.

The Macro Outlook:

Housing market conditions are stronger and strengthening

“market conditions certainly feel like they are strong and strengthening. The slow and steady, though sometimes erratic, market improvement that we’ve seen for the entirety of this recovery seems to be giving way to a more definitive reversion to normal.” —Lennar CEO Stuart Miller (Homebuilder)

There’s clearly a sense of general optimism in the market

“As our traffic has increased, we’re getting some very direct feedback from our customers as they tell us what they are looking for, their timing and, sometimes, their motivation. There’s clearly a sense of general optimism in the market. There’s a perception that jobs are being created and that wages are actually starting to move upward. There’s a solidifying sense that the government has adopted a business-friendly posture and that will result in real changes to tax rates and to the regulatory environment. The banking world is making more overtures to small businesses and to mortgage borrowers and there’s a sense that borrowers can make their way through the process.” —Lennar CEO Stuart Miller (Homebuilder)

People want to buy before rates go up

“Additionally, the upward direction of interest rates has encouraged some to get off the fence and consider purchasing a home rather than renting. Rents have risen and the prospect of higher purchase prices and higher interest rates makes a compelling case that today’s opportunity might be the best opportunity to leave those annual increases in monthly payments behind.” —Lennar CEO Stuart Miller (Homebuilder)

60% of 18-35 year olds are living with parents, relatives or roommates

“Interestingly, the front page of U.S.A Today reports today that 60% of millennials ages 18 to 35 are living with parents, relatives and roommates and that is a 115-year high.” —Lennar CEO Stuart Miller (Homebuilder)

Pricing power is on the horizon

“Limited supply and production deficits are now intersecting with land and labor shortage and this suggests, though not yet seen, but suggests, that pricing power is on the horizon as we move through the year.” —Lennar CEO Stuart Miller (Homebuilder)

You can only be positive when you see such momentum

“to put it very simply we feel very good for the second half of the year…We have very good bookings, we have good pipeline. We have great momentum in most part of our business…So you could only be positive when you see such momentum.” —Accenture CEO Pierre Nanterme (Consulting)

International:

The UK and Europe are benefitting from weak currencies

“I think the currency situation particularly in the UK is very favorable and they are benefiting from a significant amount of European tourism into the UK as well as Asia and U.S. tourism into the UK. And I can say the same thing about Continental Europe where we are seeing from the credit card data that we look at every month that particularly Chinese stores given the euro’s lack of strength is also a place that there is a lot of tourism going on and a lot of shopping going on, so really benefiting from that.” —PVH CEO Manny Chirico (Apparel)

Financials:

Tax reform will create winners & losers

“I will say that I’ve had a recent opportunity to listen to Steve Mnuchin, the Treasury Secretary…And the two things that I take away from listening to him is that he’s very smart, very thoughtful in his approach…The other thing that I walked away with is a sense that he and this administration are listening carefully knowing that there will be winners and losers, there will be ups and downs, in any configuration of the tax revamp and so there is, virtually, no ability to draw certainty today from what pieces and in what proportion they are going to be woven into a new tax program.” —Lennar CEO Stuart Miller (Homebuilder)

Food inflation remains modest

“we see a bit more modest inflation outlook versus what we saw a year ago in the fourth quarter” —General Mills CFO Don Mulligan (Packaged Foods)

Consumer:

The Retail environment is not in a steady state

“The retail landscape is particularly in the U.S. is not – is in a steady state…I think the important thing to point out is that these changes are really being driven by the consumer, and consumer demand at the same time remains quite strong. But we know that consumer expectations are quite high in terms of product, the type of product they want, the innovation, the style. They want the product fast, they want it easy, they want personal service.” —Nike CEO Mark Parker (Apparel)

Third and fourth tier locations will struggle to stay open

“the trend is now that A&B super centers are going to be open and the C&Ds are not. If you happen to be in a center that’s not A&B, you have a very large percentage of probability that you will not be making money and if you’re in A&B, the more developers are trying to balance their loss of income by increasing their rents on the A&B. That’s why so many specialty store business are going out of business” —Perry Ellis Chairman George Feldenkreis (Apparel)

The US has overbuilt retail

“I think you know brick and mortar in general is under pressure, but I think one of the benefits that exist in Europe and in Asia even to a greater extent is the level of retail square footage on a per capita basis is just significantly lower, 50% lower than it is in the United States. So I think some of the challenges with — the challenges that we’re facing in brick and mortar in the United States has to do with there is too many stores. I don’t believe that issue to the level that it exist in the United States exist in Europe and in Asia.” —PVH CEO Manny Chirico (Apparel)

Retailers are aggressively cutting inventory

“I think the retailers have done a very good job in department store sector in particular about keeping inventories clear. We came out of the fourth quarter, I think they reacted strongly to some of the softer sales trends…Whatever they’re planning be it flat sales or slightly negative comps sales, the buy plan is even lower than that.” —PVH CEO Manny Chirico (Apparel)

Customers are asking FedEx for more pickup locations. Maybe there is a role for omnichannel after all…

“FedEx On-Site is a nationwide network of alternate delivery locations, which is a direct response to our customers telling us they want access to more choices for package delivery and drop off. FedEx On-Site locations include some Albertsons and some Kroger grocery stores as well as select Office Depot, OfficeMax and FedEx authorized ship centers.” —FedEx EVP Rajesh Subramaniam (Delivery)

Technology:

Office layouts have changed

“Day-to-day business continues to be considerably softer likely because of the ongoing decline in demand for traditional private offices and open plan cubicles…[customers] want offices that practically support creativity and innovation by helping their people do their best work.” —Steelcase CEO James Keane (Office Furniture)

Steelcase listed healthcare and technology as weak sectors

“we experienced growth in six of the 10 vertical markets we track including five with double digit percentage growth rates. This growth was dampened by declines in the technical professional, education, healthcare and information technology sectors” —Steelcase CFO David Sylvester (Office Furniture)

Industrials:

There’s more to the economy than mobile phones

“Amazon is a wonderful company and they certainly have revolutioned the e-commerce world and we’re not sure what Amazon is going to do one way or another. But the FedEx system that consists of thousands of facilities and the ability to pick up transport and deliver it in one to two business days between any two addresses in the United States has been decades in the making and we think that we have a not great risk of being disrupted…people focus on e-commerce because everybody looks at this from their mobile phone forward where the real story is everything behind the mobile phone and that’s what FedEx has in enormous quantities; airplanes, trucks, facility, team members.” —FedEx Chairman Fred Smith (Delivery)

Full transcripts can be found at www.seekingalpha.com