Company Notes Digest 4.18.13

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Throughout the week (and particularly during earnings season) I spend a lot of time reading conference calls, SEC filings, etc and leave summaries of quotes in the company notes section which can be found here. Below is a digest of some of the best insights that I’ve gathered from the calls during the last week.  This is a lot of info because it’s earnings season, but I’ve tried to arrange the calls first by sector and then in the order that I found them most useful.


Wells Fargo Earnings Call

Regulation is a major complaint:

  • “We do not need additional legislation aimed at big banks. Important and significant regulatory changes have been made since the financial crisis, and we need to give existing regulations a chance to work”

Housing is improving:

  • “But remember, housing is improving every day. More people have more equity in their homes. Americans have not lost their emotional attachment to home ownership.”
  • “if anything today there’s probably a shortage of housing on the market.”
  • “the housing market is as much driven by confidence and by improvements in values as it is with rates. I don’t know of many people are on the sidelines and say, “I’ll only buy a house if the rate’s 3.25%, and I won’t buy at 4.25%.” I think it’s about jobs, about confidence, about feeling good about where things are going. Think about when you buy a house, it’s what you make, what the house costs, and what your financing costs are that are the big three.”

The Wachovia merger is but a faint memory:

  • “it’s hard to distinguish east and west anymore.”

In business you have to be willing to evolve:

  • “some things, just because you did it that way for 20 years doesn’t mean you need to do it for the next 20 years.”

Citigroup Earnings Call

Legacy problems are fading into the past:

  • “reduced our assets in Citi Holdings by $7 billion. Holdings assets now total just under $150 billion, or 8% of our balance sheet.”

Comments on international markets:

  • “Latin America, it slowed down a little bit in the first quarter…The issue for us remains Asian…decent growth in Hong Kong, in Singapore. The issue…[is] Korea is a drag on us right now…But it’s not just Korea. There’s deleveraging, there are regulatory constraints being put on in several countries throughout Asia. And so we’re facing some headwinds in Australia, in Taiwan, and in Korea as well.”

A great line for people who don’t like lawyers:

  • “The one thing that you have to assume is that the legal community is very creative, and so I would say that there always is the opportunity for additional litigation, even in matters that you might otherwise think would have passed the statute of limitations. I don’t think lawyers have statute of limitations.”

Bank of America Earnings Call

For those keeping score, a summary of what’s left on the reps and warranties front:

  • “we’re generally through the GSE exposure as it relates to rep and warrant…You then go down to the monolines. There are three significant monolines that we did business with, five in total. We obviously have had previous settlements with two of those three monolines. The one that obviously gets a lot of press is MBIA, that continues to be out there….If you then flip to the securities litigation, which is the other significant piece of the litigation expense, one of the reasons that we think the settlement that we announced today was significant is as I referenced, if we look at the original unpaid balance company wide, of all of the securities that were underwritten, this settlement today relates to, companywide, about 70% of that…So I don’t think anyone’s going to ever, at this point, declare complete victory. We do think that between the Fannie and related settlements and the look back in the fourth quarter as well as the settlement that we’ve announced today, that we’re moving through in a pretty meaningful way this pipeline of items.”

Goldman Sachs Earnings Call

It’s more important to get regulation right then get it done

  • “While everyone would like clarity, it’s natural for these rules to be developed over multi-year timeframes especially given the complexity and the potentially significant ramifications for the global economy.”

The new Business Development Company is not an attempt to get around regulations

  • “That’s very much just part of our asset management strategy…so no this — that has nothing to do with Volcker.” 😉

Interesting point of view on the commodities selloff

  • “I think some of the volatility we have seen particularly in commodities it looks more like liquidation of crowded positions. So, I wouldn’t read too much into it.”

It’s a buyers market for labor, especially in financial services

  • “In terms of talent, quite frankly it feels like one of the better market environments we’ve seen in quite a long time. Our ability to acquire and add people to our team seems pretty good.”

JP Morgan Earnings Call

Enough is enough on regulation:

  • “the banking system has gotten so much stronger in the United States and it’s not just capital but it capital, liquidity, oversight, sort of activities that people didn’t like, [no longer] [ph] being done, derivatives going to clearing houses and the initial wave of OLA and Living Wills et cetera, those things should all work. I hope at one point we declare victory and just stop eating our young at this time.”

Loan growth was slow because demand was pulled into the 4th quarter (heard this from virtually every bank):

  • “just given the year end issues that people were concerned about, and so that has had an impact [on loan growth]”

WebsterFirst RepublicM&T BankPNC (Regional Banks)

Commercial Banking is Strong:

  • “Commercial banking continues to surge, as commercial loans grew 16% year-over-year” (Webster)
  • “the growth that we’re seeing in pure C&I is really in asset-based lending, which while C&I related is kind of a specialty product and something that we’ve gained a lot of share and credibility in. And we’ve seen less growth in traditional corporate revolvers, certainly in terms of utilization, even though we’ve grown clients” (PNC)

Loan growth was slow because demand was pulled forward:

  • “we think that most of [weak industry loan growth] was the pull forward into the fourth quarter, and we haven’t seen a material shift in attitude from our clients.” (Webster)

Comments on Regional Economies:

  • “The San Francisco Bay Area economy is outperforming the broader U.S. economy with very strong regional trends in employment and housing…Boston and New York…also outperformed the U.S. as a whole. While Southern California did not grow as fast as our other markets, we are seeing clear signs of improvement” (First Republic)
  • “in upstate New York, as we talk to people and actually all the way across through Albany, we’re seeing that some of the clients are actually — have more utilization in their lines, that we’re hearing stories of people looking to make capital investment, a few capital investments. When you flip all the way down to the other end of the franchise, in Washington D.C., it’s more reserved, people are worried about the sequester, the competition has picked up.” (M&T)

Rising equity markets put stress on deposit growth especially for banks with premium clientele:

  • “Deposit activity slowed in the first quarter as total deposits declined 1% from the previous quarter. As Jim noted earlier, our clients began to move money into real estate and equity markets.” (First Republic)

Tough regulatory environment:

  • “industry as a whole is subject to a heightened regulatory environment and expectations…if you look at recent merger activity in the banking sector, the trend seems to be that it’s taking notably longer to get regulatory approvals.” (M&T)
  • “You’ve got to keep making investments [in compliance]. A huge change is going on in the industry. And it’s not a matter of sort of saying, well, I was okay last year, so I’ll be okay this year. You’ve got to make those investments” (M&T)

Pricing is getting more competitive but not awful:

  • “nothing is back to where it was on ’05 on a spread or structure side. We’re gradually grinding our way lower, but we’re not through the threshold of where we would see, for the most part, decent — still decent returns on credit. And there’s different pockets…But even the plain vanilla isn’t back to where it was in ’05 where it just — it got pretty silly.” (PNC)

TD Ameritrade Earnings Call

The retail investor is still scared, but RIAs are fully invested:

  • “those investors who are engaged in the markets are increasingly bullish and our RIAs continue — are currently fully invested with record low levels of client cash as a percentage of client assets, many retail investors remain cautious”
  • “It is an advice and guidance market” (Retail investors want their hand held)

Not a lot of margin activity though

  • “the probability of margin loans going up with the market…happens probably 75% of the time. And there always is these 25% that it doesn’t. And it didn’t happen this quarter. So we’ve been watching and thought it would come. It didn’t come” (Noted that high level of margin on Apple may have been the reason)

ETFs are growing but investors still use everything else

  • “ETFs for a retail trader, yes, they’re using the ETF…[but] they continue to be very interested in equities, and mutual funds continue to do well, equity mutual funds or balanced mutual funds.”

If you want to get the retail investor interested, you want some volatility

  • “an increasing market with a few corrections along the way for increased volatility. That’s a perfect market environment for us”

Blackrock Earnings Call

Blackrock is too big for words, let alone too big to fail

  • “We’re at the highest AUM ever, $3.936 trillion”

Comments on investor behavior

  • “Investors want fixed income that look like equities and equities that look like fixed income.”
  • “we saw at the beginning of the first quarter, a huge rerisking. But the rerisking came from cash, not from bonds”
  • “I don’t believe this means we’re seeing a great rotation out of fixed income”

ETF growth is in the third inning maybe

  • “I think people are miscalculating the continued growth, both institutionally and somewhat retail on utilizing ETFs as beta as alpha”
  • “We’re actually witnessing some of the largest global institutions who were heavily, 5 years ago were 100% in active, they are now navigating the majority, their reinvestments and their new investments in beta.”


Google Earnings Call

Futurism is in Google’s DNA

  • “as CEO it’s actually super important to keep focused on the future. Companies tend to get comfortable doing what they’ve always done with a few minor tweaks. It’s only natural to want to work on other things you know, but incremental improvement is guaranteed to be obsolete over time, especially in technology, for our history has shown that there is a lot of revolutionary change.”
  • “There are so many opportunities in the world to create technology that makes people’s lives better. We are still only at 1% of what’s possible; we are really just getting started”
  • “If you look at most companies, they will never do anything different and eventually they run into problems for that reason…I’ll be more worried that we don’t do those things fast enough and build on revolutionary change that happens in the technology industries.”

People who question the value of the Fiber strategy may not really get what Google is doing. Apparently it’s about finding better and higher uses for their capital. Google certainly isn’t viewed as a disciplined company in capital allocation, but maybe it deserves to be:

  • “we would love to find businesses much bigger than our entire current business to invest in, but I think there’s only a very small number of such companies that even exist. So I think, we look at places where we can provide a lot of – on Fiber we look at places where we can provide products that can make really big difference in peoples’ lives and we can make a lot of money and resources doing it. And I think it certainly meets that criteria”

NVIDIA Analyst Day

The PC is dead:

  • “This new future has PC still utilized by many to create content for the heaviest weighted applications, for productivity, for design, for play, but surely for consumer average computing the PC is going to get supplanted by whole bunch of other computing devices that are cropping up everywhere.”

Android is a big deal and its value lies in the native Google ecosystem:

  • “the most important thing to me is Android. You guys know this very well, aside from the iPhone, the rest of the world really didn’t ignite into this incredible growth until Android took off. Android…It’s open. It’s the freedom OS. It’s the OS of the people.”
  • “But the other capability that Android provides is, Android has all the services that Google provides, the valuable services. The day that you sign on to the Android, you have Chrome, you have YouTube and you have search, you have maps, you have all those Google Play apps, it’s a rich ecosystem. It’s a useful platform.”

Tablets are primarily gaming devices:

  • “tablets especially are gaming devices, about a third, about 40% of the people who use their smartphones, they spend about 40% in time playing games but about two thirds of the time spent on the tablets playing games”

Yahoo Earnings Call

Step 1, stop company from sinking into an abyss, step 2, move forward

  • “The first phase was all about getting people to believe in Yahoo!…Our attrition rate for top talent is essentially half of what it was just a year ago…companies with the best talent win, and it’s clear we’re now back in the game.”
  • “Now, our focus will shift to the next sprint which is all about building beautiful products and executing well against our business strategy”

Yahoo has all the ingredients to satisfy smart phone users. (Side note: cross reference this with the quote from NVIDIA above about Android and consider why Yahoo may be the perfect acquisition for Apple).

  • “I did an exercise at one point where I pulled all of what people do on their phones ordered by frequency. And with the few key deletions largely what carriers provide in the form of voice and text, and possibly maps, we – the list goes like this. Check e-mail, check the weather, check news, get sports scores, play games, share photos, group messaging, get financial information. And when you listen to that lists, not only is that in order of frequency what people do on their phones, it also has almost an exact correlation to Yahoo!’s business and our product line.”

Intel Earnings Call

We’re really more of a second half story…

  • “In the second quarter, we will launch Haswell, enabling a new wave of ultra-sleek designs across multiple form factors by our customers. We believe the combination of an improving macroeconomic environment, Haswell coming to the market; ultramobile form factors like ultrabooks, convertibles, and tablets; and touch-enabled devices leads to a return to growth in the second half of the year.”

But it’s gonna be great, we promise…

  • “the ability to miniaturize and bring things into extremely thin form factors is as revolutionary as the amount of changes I’ve seen in my time in this industry.”

Microsoft Earnings Call

The PC is dead

  • “In the Windows division, revenue was flat this quarter. Within that, OEM revenue performance was in line with the underlying x86 PC market, which continues to be challenged as the PC market evolves beyond the traditional PC to touch and mobile devices.”
  • “Innovation is happening faster, people are getting new experiences and new form factors. I think that’s what Windows 8 was designed to take advantage of”

But inventories may be normalized

  • “I did mention the fact that we believe [PC] inventories were drawn down. We do think they’re at normal levels at this point, though”

We’re excited about Intel’s new stuff…

  • “we’re very encouraged by both Haswell and some of the Atom processors to really improve the overall user experience that Windows 8 delivers.”


Freeport McMoran Earnings Call

Two quotes say it all:

  • “Like all of you, we’ve been focused on the markets over the past two weeks.”
  • “this mining is a tough, tough business”

Look on the bright side though:

  • “China, of course, remains the important demand driver…we’re certainly not seeing any diminishment in demand for our copper concentrates that we ship there and our other products”
  • “The market will work. Over time, the lower price will encourage consumption, the inventories will work off.”
  • “In connection with [our acquisitions], we completed $10.5 billion in financings…The weighted average interest rate of these financings approximates 3.1%”
  • “At this point, we have not made any decisions to sell the assets.”

Core Labs Earnings Call

Below $90 WTI Crude unconventional plays become uneconomic

  • “when we looked at a lot of the unconventional plays, you’ve got now WTI that has slipped below $90. For us, that’s kind of a benchmark where we feel outside of the sweet spot in the Bakken, in the Eagle Ford, and then the Niobrara. It’s very difficult to reach a reasonable return on investment for our clients.”

But is the recent commodity price volatility going to affect oil producers near term?

  • “Absolutely not. Absolutely not, we need, come on we need months below that before you get any change in behavior”

There are unconventional plays outside of the US

  • This is a very large shale deposit over Western Siberia…the Bazhenov Shale…We’ve talked about the Silurian Gotlandian Shale that underlies the main basins in Algeria stretching over into Libya, the Ghadames basin, the Illizi basin…Vaca Muerta, a shale in the Neuquen Basin, in Argentina…It does appear to have the high potential…but we just think the geopolitical risks there are too high.

CSX Earnings Call

  • “domestic coal headwinds persist, although we expect volume to be relatively stable on a sequential basis.”
  • “Chemicals was the key driver in the industrial sector growing 11% on strength and energy related products, including crude oil, liquefied petroleum gas and frac sand”
  • “Regarding the construction sector, building products and aggregates increased on the strength of a slowly improving housing environment.”


Abbott Labs Earnings Call

Emerging markets are still way better than the alternative

  • “even a bad day in an emerging market looks a lot better than a developed market right now. So when we look at some of these emerging markets and even at the very strong growth rates we see there, they are a little slower than what we may have historically seen in last couple of years”

Emerging market business environment consists of a few tiers of competitors

  • “In a lot of case the multinationals and or exporters that are not local manufacturers in those markets are in those upper tiers and trying to move down and the local manufacturers in the lower to mid-tier is trying to move up. We see that in almost every business we’re in.”

Everyone is doing well though in EM, and that’s why it’s important not to fool yourself into thinking you’re awesome (sounds like great advice for investors too)

  • “we were careful to look at this internally not to get too excited about our growth if we are not taking share. You know we want to be paying attention to whether or not we are winning in these markets and in the competition. It’s wonderful to have the growth but at the same time we are mindful that your competitiveness is measured in your share as well.”

A great lesson for investors about M&A

  • “I think one of the things that makes any company successful in the M&A or licensing area is that you have done your homework and you have been doing it overtime, so that when you finally decide to make a move with something, you know you have had a lot of diligence and you know why you want to do it and so forth and you are ready.”

UnitedHealthcare Earnings Call

Medicare Advantage is shaping up for a really difficult operating environment

  • “By far, the most impactful headwind is the Medicare Advantage rate picture for 2014. While the final guidance was improved from the negative 8% all-in starting point, it is still a significant challenge…the Medicare Advantage program [is] significantly underfunded, a more than 4% net reduction against the typical industry forward medical cost trend outlook of 3% or more for 2014…[this] will cause UnitedHealthcare to reduce benefits and pull back access in certain markets and will affect the growth prospects and earnings potential for our overall Medicare Advantage offerings across all our markets for 2014.”

Healthcare is a local business:

  • “like anything in health care, it’s a market-by-market proposition”

Johnson and Johnson Earnings Call

Healthcare utilization was weak in the US in Q1:

  • “While we believe that overall healthcare utilization trends continues to show signs of stabilization, the modest positive increases we saw in the fourth quarter do not appear to have persisted. And at this point we are not anticipating a meaningful market acceleration this year.”


Danone Earnings Call

China is still on fire as far as Danone’s baby formula business is concerned

  • On the Chinese [baby category]…the fundamentals is that this market which has been extremely strong…keeps being extremely strong in terms of value growth and perhaps even stronger…there is not only no sign of weakening of the demand but on the contrary we see signs of strengthening of the demand.

Coca Cola Earnings Call

We’ll use the opportunity of falling commodity prices to invest more money in the business

  • “I have said many times that if commodities go down, don’t look for us to reinvest that in price. We have worked very hard to earn the price that we take in the marketplace. We don’t have an affordability problem in the United States with our sparkling beverages. We would love to continue to invest behind our brands.”