Company Notes Digest 4.18.14

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

Comerica’s banking customers are more optimistic, but still hesitant to make investments

“our customers and that is they are mildly or modestly more optimistic, but they are still cautious, so I would say it’s too early really to call a turn of the corner in CapEx, and the beginning of expansion there” ($CMA)

Richard Fairbank at Capital One thinks loan growth will continue to be slow

“I do think though it’s part of the macro trend and delevering that frankly consumers and corporations have been doing for a number of years. So, it’s hard to prognosticate, but we generally operate with an outlook that revolving debt will probably be, the growth of revolving debt will be pretty slow.” ($COF)

Slow loan growth is a function of demand

The consumer remains conservative

“The consumer is just being very conservative. In some ways Ken, the very thing that sort of frustrates the economy from growing, which is consumers are not spending enough, what are they doing with their money? Well, a lot of times they are paying down debt and just being extra careful.” ($COF)

Businesses are guarding liquidity too

“I think one of the things you’re seeing too is people are keeping more liquidity and more potential with their lines as well than you had in the past.” ($CMA)

Banks are trying to give money away. The loan environment is very competitive

“there is stiff competition for loans across all of our businesses and we fully intend to maintain our loan pricing and credit discipline.” ($CMA)

A lot of banks are trying to stay cautious in the competitive environment though

“I think going forward you should expect to see us grow loans but we’re going to be prudent and it needs to be at returns that make sense and for those customers that we have good relationships with.” ($BAC)

Conservative consumers and cautious banks have conspired to make a great environment for credit quality. This is as good as credit is going to get, so let’s enjoy it

“on credit…it’s hard to imagine things getting much better than this. And let’s really enjoy it while we’re in this part of the cycle. I think we are struck by the strength of the credit performance” ($COF)

It’s possible that loan demand will pick up as people start to anticipate a rate hike

“I think the Fed in their current messaging continues to allow people to believe that we’re getting closer and closer to the point in time when rates will move up. And I think our customers are starting to demonstrate behavior and getting really prepared for that moment and eventually they will use these unused lines of credit, they’ll use their deposits and they’ll start getting more lines in loans to I think accommodate that growth which is probably a few years out but may starting at the last half of 2014.” ($USB)

Bank of America thinks the M&A pipeline is encouraging

“I think what we see is, the overall markets continue to be strong. The pipeline and the amount of activity in discussions from an M&A perspective is encouraging.” ($BAC)

The question is: will more economic activity generate inflation? There were some signs this week that inflation could be percolating

Chipotle rings the bell on food inflation

“With all of this food inflation we have seen so far and expect to continue to see, we’ve decided to increase our menu prices. It’s been nearly three years until last company wide price increase and while we want to remain successful to our customers, we need to pass along these rapidly rising food costs” ($CMG)

Oil markets have been tighter than expected

“the oil markets have been significantly tighter than anticipated, as strong demand trends in OECD and in the Middle East together with continuing supply disruptions in various regions have left to lower spare capacity figures and pushed OECD stocks down to the largest deviation from historical averages since 2003.” ($SLB)

North American oil production has been just enough to meet global demand growth. Oil should stay above $100

“The North American supply search continues to be just enough to equal the world’s growing demand, while all other growth regions, including Iraq, Brazil and the Caspian are struggling to meet their production targets. This should continue to support oil prices around $100 a barrel and therefore encourage oil directed investments in both the North American and International markets.” ($SLB)

Medical costs still inflating

“We continued to project a 6% commercial medical cost trend plus or minus 50 basis points for 2014.” ($UNH)

Signs of budding inflation, but not in wages

“Labor costs were 23% of sales in the quarter, a decrease of 60 basis points from last year. Labor leverage was driven by higher sales volumes partially offset by stronger management staffing ratios and normal wage inflation” ($CMG)

Citi seeing a shift in sentiment around emerging markets

“We’ve kind of transitioned out a bit of the year-end malaise, which was largely focused around Fed policy or Fed stance. And I think we’ve seen volumes pick up, and I think confidence result as part of that.” ($C)

Blackrock also seeing a big shift in inflows to EM products

“In the first few weeks of January, we had up to $8 billion of outflows in EM, which was pretty disconcerting. Since that we had $4 billion of inflows. But importantly, since quarter-end, which is all public, so I can talk about it, we’ve had $10 billion in net inflows in our iShares products. So year-to-date we’re over $17 billion of net flows. At quarter-end we were approximately $7.5 billion, so huge change in momentum.” ($BLK)

Intel seeing better consumer spending in emerging markets

“Consumer still remains a bit weak for us. Emerging markets starting to strengthen in the consumer, but the rest of the world still showing weakness at the consumer level.” ($INTC)

Abbott reminds that slow by emerging markets standards still isn’t bad

“I suppose it’s fair to say in a general sense the economy or the market in China has slowed some, but there’s slow and then there’s slowed. And China is not a slow market, China is not like Europe or the U.S. or Japan or developed markets, it’s by comparison a robustly growing market. The fact that it’s not growing double digits may disappoint some people, but I think the high single-digit growth rates in the Chinese economy are pretty attractive” ($ABT)


Larry Fink at Blackrock thinks we should be prepared for more volatility in markets throughout the year

“Volatility continued in early April as valuation concerns and short-term de-risking drove the worst week for domestic equity market since 2012. And I expect this type of volatility is likely to impact markets for the remainder of the year.” ($BLK)

Comerica sees pricing pressure in commercial real estate segment

“we are getting pressure in the commercial real estate portfolio, there is no question about it. You have got a lot more banks out there chasing opportunities” ($CMA)

Capital One doesn’t see anything to be too concerned about in CRE though

“when we look at LTV debt service coverage ratio and debt yield in commercial real estate we see things that are well within the guard rails we would look at and frankly are still I think we are still pretty comfortable with how we see those metrics moving in the marketplace, at least with respect to the loans we are originating.” ($COF)

Blackrock seeing lots of interest in real estate and infrastructure investments

“we are now in more dialogues on real estate than we had been in many, many years and infrastructure. Infrastructure we brought along a team over three years ago and we are now starting to see accelerating flows into our infrastructure alternative area. We’re about $2 billion and I expect to see a doubling of flows over the next 12 months to 24 months in our infrastructure area.” ($BLK)

Retail investors thirsty for alternatives products

“the retail base is thirsty for alternatives, and so long/short credit and long/short equity but both global are important for the retail base. And we’ve launched since 2011 six 40 act alternative products; they continue to raise money” ($BLK)

Banks are fully phasing in Basel III

“Basel III standardized became our primary regulatory capital regime in the first quarter. Regulatory capital ratios for periods prior to the first quarter are reported under Basel I.” ($COF)

Analysts have focused a lot on LCR, but most banks don’t expect it to have a big impact

“let me start with LCR. Basically we don’t think there is going to be a material financial impact. It’s a little bit hard to be, too definitive on the ultimate impact because we don’t even have final rules at this point. But I think almost — unless the rules change materially, we wouldn’t see a real financial impact from this” ($COF)

Blackrock foresees big changes to Fixed Income market structure. More trading will move to exchange and more assets in ETF vehicles

“There is no question as balance sheets of the dealers are more contained you see wider spreads than fixed income. I don’t think this is a long-term problem, it may be a short-term problem; it will move, it will create more movement towards exchange trading for fixed income. And I do believe this is one of the reasons why more interest in ETFs and fixed income. So you don’t have to focus on a bond, you could focus on ETFs that have maturity or ETFs that are connected to benchmarks. And so this is one of the reason why we think fixed income ETFs will grow dramatically over the course of next two years” ($BLK)

There is a groundswell movement towards “unconstrained” Fixed Income products

“this is just beginning, this groundswell towards — moving towards an unconstrained type of fixed income product. I think this will accelerate and I think it will become a very large — well it is a very large component of our dialogue with institutions worldwide today.” ($BLK)

You can stay away from HFT if you’re big enough

“we have invested tens and tens of million of dollars for making sure that the high frequency traders did not arbitrage us. We looked at it is a fiduciary responsibility making sure that we always provide our clients best execution. And we only do execution with the reputable counterparties and market venues. So this is something that we’ve been focused on for years.” ($BLK)

People now carry a bank branch in their pocket

“This quarter, more than 10%, of all of the deposit transactions that consumers make in our Company are now done through mobile devices, as people effectively carry a branch in their pocket” ($BAC)


Chipotle finds that creating its own conversations is the most effective form of digital marketing. Note: This is free

“we’ve always done some marketing on a number of digital outlets. We’re active on Twitter, we’re active on Facebook. We provide digital offers as well. So we’ll continue to do that I wouldn’t say necessarily that will ramp up. But one of the things I think that we’re really proud of is that our marketing has smart conversation. And so when we do things like Farmed and Dangerous so we do things like the Scarecrow, it creates conversation that people are curious about people are interested in. And so we see lots of activity that our customers are engaging in through Twitter, through Facebook, kind of on their own.” ($CMG)


Perhaps because it sees the limits of advertising revenue, Google is getting into the business of selling goods and services

“Let me switch over to our emerging new businesses, digital content, hardware and enterprise. Google Play continues to be the thriving hub of our digital content business” ($GOOG)

Google is particularly excited about the enterprise cloud

“We expect to see continued momentum in this area and we believe we can bring significant value to the many companies that opting public cloud because of our experience in building and operating one of the world’s largest cloud computing environments for over a decade.” ($GOOG)

It’s very early days for the cloud

“he important part to at least acknowledge in the space of cloud computing is we think that it’s very, very, very early days. I mean if you think about the potential scope and scale of what this opportunity is, that’s pretty much every business which is going to be around for the long-term has to operate in the cloud.” ($GOOG)

There are massive efficiencies to be gained in the cloud. Companies are going to make the switch

“There’s no efficiency compared to the efficiency of the cloud, but in compared to owning your own infrastructure running it by yourself. So, this shift is going to happen. It’s a matter of every company going through that shift one at a time. And if you look at the opportunities out there and the options, there’s very few options.” ($GOOG)

Google believes they have a cost advantage in the cloud

“we’re very comfortable with our cost structure. In light of Google efficiencies, economies of scale, our vertical integration from data center to chip — to servers, to software. I mean we really have — we believe we have absolute unique position from a cost structure perspective and therefore, from a margin perspective makes us very, very comfortable.” ($GOOG)

The challenge is getting enterprise customers to understand

“the key is to be able to work with the companies out there, the enterprise customers out there to get them to shift on the legacy systems, get on to the cloud and realize that Google has been working in the cloud for more than a decade, because we have been running one of the largest cloud computing platforms in the world in the public space.” ($GOOG)

In Google’s opinion, digital should have 100% share of the global advertising market

“Our aspiration is to be able to serve every advertiser in the long-term and our aspiration is that — our hope is that every piece of advertising becomes digital advertising.” ($GOOG)

Intel seeing corporate spending on PCs

“Even as challenges remain in the consumer client segment, we saw continued improvement in enterprise clients, driven by increasing form factor innovation and refresh” ($INTC)

Inventories have stabilized in the PC Market

“Actually inventories are in very good shape as we look across the entire supply chain, both within Intel and outside. So, we think inventories, after that correction in the beginning of 2013, are actually normalized now where they will probably stay.” ($INTC)


This is the first real quarter for Health insurers to operate under ACA

“This is was really the first quarter a full scale operation under the ACA. Everything else in the past three years has been more of a preamble.” ($UNH)

The impacts of ACA have been significant

“The ACA’s impacts on 2014 had been immediate and significant as we described at our Investor’s conference. Nondeductible insurance taxes, ACA prescribed Medicare Advantage funding pull backs, commercial underwriting changes and various other provisions cumulatively reduced our per share, net earnings by nearly $0.30 for this quarter and sequestration cut an additional $0.05 in this quarter” ($UNH)

ACA is expected to lead to:

Strong growth in Medicaid

“Over the past 12 months alone, UnitedHealthcare has implemented six new or renewed Medicaid contracts and grown to serve 395,000 new members.”($UNH)

Medicare Advantage growth flat to down because pricing unfavorable

“Medicare Advantage program was essentially flat down 5,000 people sequentially and well within the range we expected, despite significant market exists and products network adjustments made in response to the 2014 Medicare Advantage rate cuts of more than 6%.” ($UNH)

Commercial covered lives declined sharply

“Commercial membership also began the year generally in line with our expectation with a sharp decrease in people served through fee-based relationship as well as some expected declined in risk-based business. As expect our individual policy business declined this quarter as we decrease by 90,000 with the advent of the ACA.” ($UNH)

Some new entrants are under-pricing business to win market share

‘Over the last quarter, we have seen intensified pricing in several markets including small group in New York, a large market for us. We believe several carriers there including new entrants are pricing well below cost and what we would view as unsustainable pricing levels.” ($UNH)

Exchanges are still in very early stages. This is a learning phase

“It is still very, very early in the life of the exchanges and second year in terms of how they will evolve, will be effectively somewhat by what I call, a lot of spontaneous change over the course of the first year implementation, which we understand that does require some consideration and calibration as we go” ($UNH)

The new Hep C treatments are effective, but the costs need to be addressed

“I think as you mentioned first the hep C therapies as you know are very effective and one of the things that we are doing is working to ensure that appropriate clinical protocols and standards are in place, but as noted the price is exceptionally high and as Steve said in his opening comments that controversial and it’s putting a lot of pressure on States, CMS and in terms of our day as well as our employer sponsor, so the cost has to be addressed” ($UNH)

Materials, Industrials, Energy

US Natural gas prices should come back down

“U.S. supply trends remain strong on the back of the Marcellus and as the weather normalizes over the springs and summer months we expect the North American market to return to a balanced supply demand situation from natural gas.” ($SLB)

International natural gas markets still tight

“International gas markets remain relatively tight largely driven by Chinese demand which continues to grow at double digit rates while European gas demand has eased in the past months on a mild winter.” ($SLB)

Shale drilling activity picking up internationally, starting with Argentina

“In Argentina, year-over-year growth was strong driven by rig-based activity in the Vaca Muerta shale where we are also actively engaging with a number of customers on sub-surface studies and on projects to improve drilling and completion efficiency.” ($SLB)

Brazil is creating an overhang on the global deepwater market

“if you look at the deepwater market, it’s really two separate stories, you have Brazil and you have the rest of the world. In 2013, Brazil represented around 30% of the global deepwater drilling activity and in Q1 of 2014 Brazil was 20% down in activity while the rest of the world was up 3%. Now for the full year of 2014, we expect Brazil to be down more than 20% versus last year, while the rest of the world we see as being up high single digits.” ($SLB)

Capex spending in the US not enough to create pricing power for commodity oil services

“I don’t think 6% [industry capex spending growth] is going to be sufficient to have a wide spread price increase in commodity type of technologies…at this stage I would say that we are expecting North America land pricing overall, we are hoping it’s going to flatten from where it is now.” ($SLB)

International oil companies are going to be focused on generating cash flow, cutting back on exploration

“I think what’s going to happen at least over the next couple of years is that the IOCs will focus more of their spend where they can drill wells and generate production from existing infrastructure or from infrastructure that costs less. So huge infrastructure projects, I would expect to be kind of lower in frequency. And some of them might be postponed as we have already seen. While the focus, again is going to be on generating production which generates cash. So the ability to do that at the lowest possible investment, I think is going to be the focus, which is still good for us.” ($SLB)

Miscellaneous Nuggets of Wisdom

When you’re in the early stages of a new line of business, it’s helpful to have a strong first customer to help work out the kinks

“Altera, who is really our lead premier customer — I’d say big customer has really been helpful. They’ve helped us see where we’re strong and where we are not and what it takes to become strong in those areas. They are making good progress on their products.” ($INTC)

It’s good to be humble too

“I think we still have a lot to learn about how to be a good foundry” ($INTC)

Profitability is fungible

“there’s kind of a point where you would say, okay, it’s making enough money, let’s make sure we’re spending enough in SG&A and R&D, which we are.” ($ABT)

In gaining pricing power, focus on building a great product so that you have the permission to raise prices

“What we think more about is making sure that we earn pricing power. And if we focus on that, if we focus on creating a wonderful restaurant experience and cooking and serving delicious food that we have the permission to raise prices” ($CMG)

You can’t measure success in quarters

“One of the things I always caution investors about, we get so obsessed about our quarter in the United States because that’s how we are. We are quarterly driven, CNBC driven economy. And our investments and progress in some of these markets, you can’t measure in quarters. I know we need the feedback every quarter but to know that everything is okay and everything is on track and so forth then I would say everything is okay and everything is on track. I expect speed bumps out of the emerging markets. I don’t expect not to have them.” ($ABT)

You can’t change an industry from the sidelines

“if you want to be part of transforming a market which obviously are ultimate goal this year, and transforming it to the benefit of our customers, we are firm believers that you have to play in it; you cannot change it from the side lines.” ($SLB)

Always say please and thank you. Some variation of “Thanks” appeared 80 times in Google’s conference call

“Thanks Peter. Thanks again for the question.” ($GOOG)

Polite, diligent workers trump technology in generating productivity

“in terms of hospitality things like clear communication, great eye contact, friendliness along the line, efficiency along the line, sense of urgency. All of those things are the things that compose a great customer experience at Chipotle…the things that generate the best possible customer experience, those same things happened to be the things that generate the fastest throughput…what we kept finding is no matter how much of the sort gimmicks we added or how much we used, tried to use technology to increase our throughput nothing could compete with the restaurants…to make a long story short, great teams are just faster and better.” ($CMG)

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