Company Notes Digest 4.25.14

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

Lot’s of bright flashing signs that we’re in a late cycle environment this week:

“I would say to you that in terms of the cyclical change I think we are at the high-end here or the trailing end of the cycle” ($AMTD)

Late cycle sign #1: frothy capital markets

Retail investors are coming back into the stock market:

“Our retail channel had its best quarter for net new client assets in three years” ($AMTD)

The environment is perfect to hook a retail investor, bullish sentiment with enough volatility:

“anytime you have the kind of increasingly bullish sentiment that we’ve had over the last 6 to 9 months, and you have increase in volatility, our trading is going to be strong than as it was this past quarter.” ($AMTD)

The casino is open for business:

“Nearly every client engagement metric…was up for the quarter. More clients were logging in; more clients were logged in were trading, and more of the clients trading were trading more.” ($AMTD)

Retail investors are bullish:

“Retail investor behavior continues to suggest an increasingly bullish sentiment” ($AMTD)

They’re inexperienced:

“as investors continue to reengage with the markets, we’re seeing more client interest in tools and education.” ($AMTD)

And they’re getting reckless:

“client cash as a percentage of total client assets ended at 14.8% in the quarter, slightly below our historical range of 15% to 20% and the lowest we’ve seen since September 2007.” ($AMTD)

“margin lending has increased again. So it’s higher now than it was at the end of the quarter” ($AMTD)

Financial buyers coming back into the market for hotels:

“for the past several years, we were only able to sell hotels in ones and twos because the primary buyer was public REITs who would buy a hotel, issue some stock and then come back for another hotel. What we’re seeing now, of course, is much more private equity money and, therefore, a greater interest in portfolio sales.” ($HOT)

Starwood trying to unload properties as fast as possible:

“Moving on to asset sales. We continue to believe the market for hotel sales is becoming deeper with a larger pool of buyers and more buyers looking for portfolio deals. We have a significant number of assets on the market in North America, Europe and Asia. Our intention is to get transactions completed on acceptable terms as fast as we can.” ($HOT)

Non-traditional buyers piling into VC too:

“corporate venture funds and investors, which pulled back significantly during the economic crisis, have been reemerging to support new company formation…corporate venture funds are sponsored not just by technology companies, but by entertainment, auto, apparel, retail, financial and consumer product companies.” ($SIVB)

Largest volume of VC investment since 2001:

“In the first quarter of 2014, venture capitalists invested $9.5 billion in 951 deals, the highest quarterly dollar amount since the second quarter of 2001.” ($SIVB)

The markets are hot, frothiness is to be expected:

“we’re keeping a close eye on valuations. The markets are hot. In our experience, a certain amount of frothiness is expected to be in any hot market.” ($SIVB)

Banking competition is intense:

“Competition remains intense and shows no signs of letting up. Some lenders appear to be stretching for growth at any cost, and we’re seeing more situations where we have to decide whether it makes sense to sharpen our pencils or walk away…you do see people pushing the envelope.” ($SIVB)

Suntrust frustrated by aggressive pricing in CRE:

“on the commercial real estate side, Aleem’s comment was right, I mean we’re frustrated by some of the pricing that’s out there” ($STI)

Late cycle sign #2: construction industry leading

Construction was Caterpillar’s best segment:

“The most positive was Construction Industries. And it was up 20% from the first quarter of last year. And in fact, this quarter, it was our largest segment by sales” ($CAT)

North America leading the construction boom:

“with Construction, I think the one area, geographic area, that’s, I would say, has had the most upside for us is actually North America….I’d say North America is the reason for the upside.” ($CAT)

Construction lending returning:

“I think we are seeing signs that construction levels are picking up and with that that construction lending is an opportunity that’s picking up.” ($CYN)

The cranes are coming back too:

“If we drive around the markets that we’re in, you’re seeing levels of construction, you’re seeing cranes that we all bought four years ago that all moved to China.” ($CYN)

Hotel supply is tight, more on the way?

“At the upper end, new supply is especially scarce, so as long as the U.S. continues its even modest economic growth, it seems likely that high occupancy and rising rates are here to stay for a while.” ($HOT)

Late cycle sign #3: percolating inflation

Occupancy maxed out, so hotels driving REVPAR growth with pricing:

“occupancies once again were pushed to record highs. At this point, you’d expect late-cycle market dynamics in North America with REVPAR growth predominantly coming through higher rates” ($HOT)

DR Horton sees costs rising, especially labor:

“I think costs are going to continue to increase….clearly, labor is one of the cost components that’s going up. And lumber, I don’t think, is going to come down nearly as much as what it did last year.” ($DHI)

Tight labor market for Halliburton in Texas:

“We’ve seen this sort of tightness in labor before. So, we may see some increased costs but the ability to execute and deliver the people, I’m quite confident that we will do that.” ($HAL)

Home prices too high for first time buyers:

“we’re trying to increase our affordable buyer pool in that market because we have seen people coming into our model homes in the D.R. Horton brand, who can’t qualify because of the pricing power that we had over the last couple of years.” ($DHI)

Late cycle sign #4: Chinese Slowdown

A lot of worried eyes on China:

“we’re closely watching growth rates in China. We had a good first quarter in China. In fact, company sales were up 30%. But we’re concerned that if economic growth in China slows enough, it could have an impact on our business.” ($CAT)

Tight liquidity has slowed real estate development:

“On the development front, our view is the tighter liquidity has tempered the pace of real estate development. Many of our new hotels are slated for Tier 2 and Tier 3 markets and are part of mixed-use developments. As a result, the time it takes between signing and opening new hotels has become longer.” ($HOT)

Kimberly Clark hitting a growth wall in China:

“if you looked at China, we’ve been growing at 40 and now I think in the first quarter, we were at 30. We were at 70-ish cities and now we got 90 by the end of last year. We went from 90 to 95 in the first quarter. So the rate of new city expansion is probably slowing a little bit, which is why those numbers are coming down.” ($KMB)

Appendix to the doomsaying: Counter arguments

DR Horton says housing markets staying strong:

“Housing market conditions remained favorable and continue to improve in a manner consistent with our long-stated expectations for the housing recovery. As expected, we are seeing the pace and strength of the recovery vary significantly across our local operating markets, mostly tied to improvement in each markets economy” ($DHI)

CAT agrees housing ok, but not where it was 6 or 7 years ago:

“I think our view of housing is that it will continue, particularly for starts, kind of continue to get better. We think this year is going to be over 1 million. So I think we’re pretty constructive on — at least for the U.S. housing, I mean. But again, you’ve got to put that in perspective. It’s still way below where it was 6 years ago, 7 years ago. So getting better, but not great” ($CAT)

Construction lending terms not frothy:

“think it is noteworthy that I think loans in this space and projects in this space are getting underwritten on a more conservative basis with more capital, more equity in the deal.” ($CYN)

Tech companies better companies than 15 years ago:

“the pre-IPO companies in the market today generally have much stronger business models than the pre-IPO companies we saw 15 years ago” ($SIVB)

Q1 not that bad in China:

“in China. For this first time in over a year, performance was stronger than we expected…Our result was especially good in light of government austerity, not to mention a slight drop in inbound travel to China. We’ve also improved our profit margins despite rising costs.” ($HOT)

Hearing increasingly not awful comments about Brazil:

“I would put Brazil macroeconomic as one or macro situation as one of those we would be watching. I would not put it in the same category as the others that I talked about: China, Ukraine, and maybe a couple of others in the Middle East at all.” ($CAT)

Financials

HFT has been good for retail investors:

“most high-frequency trading techniques have been good for retail investors…he retail investor has never had better access to the markets or better execution quality.” ($AMTD)

Retail investors don’t really care about the issues in Michael Lewis’ book:

“trading did not change after Michael Lewis’s book…we have had, I think it’s — let me get them here for you, 70 phone calls and 112 emails on this…it’s not a hot issue with our customers. And our perspective on this is, this is a Wall Street issue, not a Main Street issue.” ($AMTD)

The SEC isn’t signaling that it’s particularly worried either:

“I can say, I have had no discussions with anyone at the SEC in the last two or three weeks.” ($AMTD)

Bank branches are still important for customer acquisition:

“Going forward, you can expect continued rationalization with additional net reductions in our branch network; however, at a slower rate than what we accomplished over the past couple of years, particularly given the importance of a branch and client acquisition and account opening.” ($STI)

Broad based recovery in CRE, except retail still slow:

“We’re starting to see some of that recovery in virtually all categories multifamily, industrial, little less office, retail, clearly, on the bottom of that food group in terms of recovery. So it’s pretty broad-based.” ($STI)

Still not a strong appetite for mortgages to subprime borrowers

“We, from our mortgage company perspective, don’t see a lot of institutions willing to buy [low FICO score] kind of paper.” ($DHI)

Property & Casualty insurance has become a less cyclical industry:

“We’ve been talking about much less amplitude in the cyclicality of our business for a lot more than three to five years. I think you can go back almost 10, certainly 8 where it began to get increasingly clear to us that the factors that we thought had contributed to that remarkable cyclicality were being moderated.” ($TRV)

Consumer

Low end consumer still muddling along:

“I also mentioned on that last quarterly call…that I was beginning to get the sense that consumer sentiment of our core pawn customer was moving in a more positive direction…I’m still not prepared to declare a turnaround in consumer behavior” ($CSH)

Retailers like selling diapers because they attract a desirable kind of customer:

“I think many of the online retailers want diapers for a lot of the same reasons that other retailers are focused on that category, because they want to get the young family as a regular customer.” ($KMB)

Netflix is finding that it’s expensive to produce high quality original content:

“I think what’s happening is that we are committing to larger budget shows not that the same show is more expensive to make year-on-year. We are looking at kind of shows that we are competing with. We are still only competing with kind of the top end of cable for those shows.” ($NFLX)

Consumers now spending more time online than watching TV:

“last year was the very first time…consumers spent more time in digital…than they did on TV…the average U.S. consumer…spent 4.5 hours per day on TV but 5.75 on digital and that’s largely been driven by mobile.” ($FB)

Advertisers care about being able to measure their spending:

“anything that helps advertisers measure their spend is really important. I’ve talked on the call a bunch about how measuring online and in-store sales really matters. It also matters to marketers to be able to measure their spend compared to other investments they can make.” ($FB)

Technology

New man at Microsoft sits in on earnings calls, a positive change:

“my first day, I have said I am committed to an ongoing dialogue with investors. Joining these investor calls going forward is going to be a big part of that, and I am enthusiastic about today’s call.” ($MSFT)

His vision is to focus on cloud and mobility:

“from day one I have had this deep conviction that our vision is about being going boldly into this mobile-first, cloud-first world.” ($MSFT)

Technology industry only respects innovation:

“our industry does not respect tradition, it only respects innovation.” ($MSFT)

Microsoft’s biggest innovation may be pioneering the use of big data to power its own organization. It will be an interesting case study to see if more short term data leads to better long term results:

“I think really it’s a cultural statement about how we are going operate more internally as well. And so maybe that’s the most forward-looking comment I could tell you which is that being empowered to look weekly, monthly and see how we can get better and better and better. And I think that’s actually driven a lot of excitement around here.” ($MSFT)

Still a lot of growth to be realized in the smartphone market:

“what I see as the bigger opportunity for Apple is that the smartphone market is still only 1 billion or so units and it will eventually take over the entire mobile phone market.” ($AAPL)

Emerging markets have always bought older generation phones, iPhone 4s leading the way in China:

“The addition of China Mobile coupled with great response to our more affordably priced iPhone 4S led to an all time quarterly record for iPhone sales in Greater China.” ($AAPL)

Even in the US there is still plenty of room for upgrades:

“we still have about 22 million 3G smartphones and a little more than 23 million basic phones in our base which provides us with a good opportunity to move customers upgrade 4G smartphones.” ($VZ)

It’s possible that the carriers’ new pricing schemes will lead to more phone upgrades:

“I do believe that upgrades may increase with EDGE, but again I think it’s too early to tell.” ($VZ)

The new schemes aren’t designed to push customers in any specific direction, just about giving them more choices:

“this comes down to personal choice and again our sales forces is not compensated to drive traffic to any one sort of plan. At the end of the day, it’s all about customer satisfaction and treating our customers and the choices that they want. So, again, its – the way I look at this is, as we manage the business, these plans are all profitable plans to us. So it comes down to customer choice” ($VZ)

Remember, the changes in carrier pricing policies is only in the US:

“the things you’re seeing in the U.S. are not occurring in many of the other geos in terms of the upgrade policies and so forth. I mean, each country has its own kind of cadence associated with this, and the U.S. is – it’s in the 30% of our business, not 100%.” ($AAPL)

Not surprisingly, Netflix is against the Comcast TWC merger:

“we are in opposition to the Comcast, Time Warner merger because we are really concerned about what happens when the combined entity, if the merger were to go through, would have with over 60% of U.S. homes passed and eventually over 50% of U.S. homes subscribing to cable Internet and that’s a worrisome factor” ($NFLX)

Probably because they had to pay Comcast a ransom:

“we did end up choosing to pay Comcast to improve the video quality that our members experience. We don’t think we should have to, but in the short-term we felt like we had no choice.” ($NFLX)

Materials, Industrials, Energy

Halliburton’s CEO thinks that higher natural gas prices are sustainable:

“If we look at LNG export clearly a positive and its moving the right way, if we look at sort of the uptake on gas and its positioning in the market as long-term, fuel for electricity and then we look at sort of the economy and the upside in this economy, all of those conspire to in my view a sustainable gas market.” ($HAL)

The oil service industry has been running for years with only one engine working. If gas comes back it could be huge:

“I mean, its clearly in my view more than a two-year cycle, because as I indicated earlier, we are not getting any help from gas essentially at this point in time. And I have a view on gas, I happen to believe that over the next five to 10 years, the gas market is going to be there and potentially be there in a big way.” ($HAL)

The mining industry remains mired in a downturn. CAT thought it would get better but it hasn’t:

“Despite the prospects for a better year in the world economy and continued strong production at mines, mining orders for new equipment haven’t really improved and remain at pretty low levels…Our outlook from January expected mining orders for 2014 to remain low, but be modestly better than the second half of 2013. So far this year, that hasn’t happened.” ($CAT)

Metallurgical coal prices are unsustainably low, but likely soft through 2014:

“current price levels are unsustainable for much of the 325 million tons of seaborne met production in operation today. Yet despite some of the supply corrections that have taken place, we expect metallurgical markets to remain soft throughout 2014.” ($ACI)

Arch thinks we’ve hit bottom in Met coal prices though:

“I think we have bottomed out. And I think given where people’s cost structure are and the fact that you’ve got a large percentage of suppliers in the world market that have a cost structure that don’t work, something’s got to change.” ($ACI)

With supply coming off-line, the market could rebalance quickly:

“I think you are starting to see the early part of that with some of these cut backs…on a 325 million ton market, it wouldn’t take a whole lot to balance this thing pretty quick.” ($ACI)

If everyone can ramp back up quickly, how long will the rebalance last though?

“on the flip side when the market does come back, we will have the opportunity to ramp these mines back up rather quickly” ($ACI)

At least thermal coal is rebounding:

“One market where recovery is evident is the domestic thermal market.” ($ACI)

Miscellaneous Nuggets of Wisdom

Satisfied customers are your best sales people:

“When members are really satisfied they tell their friends about the service and they retain better.” ($NFLX)

Building a good product is an iterative process:

“If we are very fortunate, we will have programmed it completely correctly from day one. More likely we will figure out some stuff’s working, some stuff’s not. We will adjust the formula” ($NFLX)

Look at every opportunity, but be selective about which risks you underwrite:

“we’ll look at anything because you always learn by whatever you look at, but our interest is very selective.” ($TRV)

Set aspirational goals for your organization even if they may seem impossible to achieve:

“At this level of interest rate, I’m still not 100% convinced that [our long term ROE target] is achievable in today’s environment…it remains an aspirational goal. I think that it’s critical in an organization to express a strategic goal, and absent something fundamentally changing that’s permanent, sticking with it. It’s not just words that we use here in a webcast; it’s embedded in the systems by which we price product, it’s embedded in the systems by which we evaluate risk selection. It’s what people in the field, underwriters, understand their mission to be, so we don’t mess with it lightly. We leave it as is because it takes so long to get the DNA of an organization to reflect these strategic initiatives.” ($TRV)

Sacrificing margins for growth is foolish. You end up sacrificing returns on capital:

“We also don’t believe that you can on the margin grow your business by cutting price marginally. I think – we think that’s just a fool’s approach to the business. If you really want to use price as that type of a competitive approach, you’ve got to cut it to the point where you’ll accept materially lower returns than anybody else. That will change it, and my guess is it will be at a level of profit that is simply unsupportable for the long term. So we at least, we reject the notion that you can moderate pricing to grow your business.” ($TRV)

Don’t grow by cutting price, grow by identifying your competitive advantages:

“We try really hard to grow our businesses, and in many cases we’ve been extremely successful. It’s not been based on price; it’s been based on risk selection – importantly, identifying the competitive advantages that you have in your business and applying them more broadly to business opportunities that arise.” ($TRV)

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.