Company Notes Digest 5.27.13

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

US Macro

A “sense of urgency” among home buyers. Unbelievable!:

“1 year ago, we were somewhat reluctant to raise home prices for fear of crimping demand. Now we are finding that in many markets as prices increase, a sense of urgency takes hold and demand continues to rise. We have raised prices this quarter approximately $26,000 per home on average.” (Toll Brothers)

Home Depot sees a “return to normal” in its hardest hit markets:

“the markets that were really ground zero of the housing collapse…California, Florida, moving into Arizona, now even Las Vegas and Nevada…[are] starting to return to more normal performance.” (Home Depot)

But Target doesn’t sound so positive about its customers. Versus the housing comments, perhaps a sign of stratification between the haves and have-nots?:

“our guest continue to shop cautiously, planning their spending and sticking to shopping lists, and they continue to feel the burden of economic pressures. Recent guest surveys indicate that three-quarters of our guest are aware of this year’s payroll tax increase, and among those, the majority have noticed the impact of the tax increase on their paychecks and indicate that it’s affected their spending” (Target)

“Basket data confirms that needs-based trips have been increasing, while wants-based trips focused on discretionary categories have been declining.” (Target)

Of course it could just be the weather too:

“You know, we did see better results in areas that had more normal weather. So that would primarily be the west coast.” (Target)

International Macro

Green Shoots in Greece:

“we’re seeing clear signs of a return to profitability…We see a positive tailwind in Greek confidence…recovery of GDP [is] expected in the end of this year” (National Bank of Greece)

These delinquency rates are off the charts bad though:

“The 90-day past due ratio increased to 20%, 19.8% for the Group and 24.3% in Greece again by far the lowest among Greek peers both had a group as well as the parent level.” (National Bank of Greece)

Dawn in Greece, but dusk in Canada?

“In Canada, the slowing housing market has raised concerns about the possibility of a more dramatic correction. As you know, several years we were worried about the housing market and the risk that Canada was running. We spoke publicly about those concerns. But the government has responded with a number of reforms, which are having an impact. In my opinion, given the structure of Canadian lending, Canadians do not need to worry that we will see the type of meltdown that has occurred in other countries. We may see some softening in prices, but this will be a good thing, not a prelude to a major correction…But Canada is affected by these competing global forces, and our view is likely to underperform the United States in the next few years.” (Toronto Dominion)

Financials

This interest rate environment is really hurting financial companies.

TD focusing on “permanent” cost reductions:

“For TD, we have to assume, despite the discussion that’s going on about where interest rates are going, that for our purposes of running the business, that interest rates do not rise soon and, therefore, that we will continue to face downward pressure on margins for at least one more year. That’s why, despite the good performance we recorded in the first half of the year, we are continuing to focus on expense management. The operating environment has changed in the last couple of years, and we had changed with it. Finding current year cost savings is not enough. We continue to focus on more permanent cost reductions.” (Toronto Dominion)

Insurance companies tightening standards to try to actually make money on the underwriting:

“In recent years, we’ve seen the market go through a steady de-risking of the products. We’ve seen a shortening in the products’ shelf lives. We’re seeing regular updates in new business premium rates to reflect the changes in the product features as well as to reflect this continuing low interest rate environment. We’re also seeing general tightening up of underwriting standards.” (Reinsurance Group of America)

Consumer

Old habits die hard because demographics persist:

AM Radio is here for the “foreseeable future”:

“AM radio in the automobile is still pretty dominant and the demographic that we target is typically adults 35 to 64 and plus. That demographic still uses AM service and will continue to use it for the foreseeable future. So there are some attractive acquisition opportunities. And as people become pessimistic about it, if you can get the right price, I think there’s still an opportunity there.” (Salem Communications)

“Linear” TV is likely to “benefit” from the same trends as AM radio:

“if you look at demographics…linear TV over the next 10 years…will continue to grow very slightly. So linear TV model is not going to change” (Verizon)

But media consumption is changing rapidly among younger generations:

“but if you look at demographics, 30 and below, they only want what they want and they have the ability to go get what they want and not pay anybody for that content.” (Verizon)

The Chinese still have an appetite for luxury:

“We’ve learned a lot about the Chinese business. We’ve gotten a lot of feedback from the customers both in China, in Southeast Asia, in Europe and the United States. The good news is they are gravitating towards the same looks and categories and items. They clearly want luxury” (Ralph Lauren)

Technology

Smartphone prices are coming down:

“So smartphones now as you see we had two operating systems now, you have Windows and Blackberry coming back into the marketplace. This is all good for the industry because what happens is the more competition you get in the space the more technology is advanced and the more competitive the prices become. So I think what you are going to see is over time the smartphone cost is going to come down, just by the nature of how the curve works and you can pretty much track it based on history” (Verizon)

People may be surfing the web more on mobile, but they’re not necessarily shopping more:

“Mobile, in general, has a much lower conversion rate than the site” (Target)

Google’s search algorithm makes and breaks websites:

“Google was viewing that as sort of duplicative content, identified as content farmed and essentially dropping what was the most valuable asset that American Bridal really had, which was a lot of the SEO results.” (XOXO)

I’m not sure I totally understand this, but it strikes me as important:

“[on the wireless network] I think the content providers are opening up saying, okay, well, maybe I should pay for the delivery and not the consumer.” (Verizon)

Is this what got people so excited about Solar stocks last week?:

“Gross margin was a positive 6% for the quarter, which was encouraging.” (JA Solar)

Healthcare

We may be at a tipping point for mass market genomics:

“the direct-to-consumer market. This market is really interesting. For us, it’s approaching $50 million this year. There are companies that we partner with like 23andMe, Ancestry, Family Tree, National Geographic, who have really unique propositions on what to do with genomic data and how that ties into their own databases and their own information. The market is significantly elastic. We’ve seen that. It’s been tested really well by these companies. And they’ve now hit what we think is a pricing sweet spot, where for a very moderate sum, you can have your own DNA genotype.” (Illumina)

Industrials, Materials, Energy

Return of manufacturing advantage to North America?

“directionally, we believe that as we look at our competition overseas, there is continued opportunity to take back market share in the U.S. One of the questions with that obviously, is at what price level can you take that market share back? And thus it makes a lot more sense economically to build new capacity in Mexico, where we know we have greater margin opportunities.” (Superior Industries)

Interesting to think about the macroeconomic sensitivity of garbage:

“we’ve all seen landfill tons drop off quite a bit over the last five or six years through a whole host of – for a host of reasons, the Green Movement is called some of that, I kind of call it the deindustrialization in the United States, that has taken waste overseas.” (Waste Management)

An example of the broader headwinds facing the labor market:

“the best way to – for us to pull efficiency out of the system is to say you’re going to take the same paycheck home, but the guy at the bottom of the totem pole the guy that is the worst performer, we all have those, that guy goes away and we take his work and redistribute it. So, you become more efficient, you still take home the same paycheck, its just we’re doing it with fewer people.” (Waste Management)

The shipping stocks may be getting ahead of themselves:

“usually the capital markets [are] ahead of the actual [business]…by six months or three quarters. However …[the] optimism in the capital markets is not justified by the demand and supply factors in our industry.” (Diana Shipping)

Although falling iron ore prices may actually be good for the dry bulk shipping market:

“there exists a consensus in the iron ore market. The prices will fall…possibly to below US$100 per ton…Such a scenario would probably be positive for the dry bulk shipping market because Chinese iron ore producers would fail to break even, thus scaling down or even abandoning their production altogether.” (Diana Shipping)

$4.50 is Anadarko’s magic number for natural gas:

“In the event that gas prices kick up above $4.50 and we see they’re going to maintain above $4.50, it creates a lever for us, and we can actually increase our activity level in the dry gas fields” (Anadarko)

Miscellaneous Nuggets of Wisdom

Every company is unique and has its own business practices.  Even two seemingly similar companies may be very different:

“It’s hard to compare company margins. I mean, clearly these competitors do a great job of managing their businesses and we’re trying to do the same, but it’s a bit hard to compare us to anybody, its been hard to compare them to us as well. So, I think what I’ve looked at is what can we do to improve ourselves, not necessarily relative to a competitor” (Waste Management)

When I talk about looking for management teams driven by curiosity, this is the type of comment I’m looking for. Genuine amusement at facts others might find boring, because the world is an interesting place:

“It’s really interesting statistics. If you look at the first quarter 22% of the sales based online were actually picked up in the store…isn’t that interesting?” (Home Depot)

The big dog can afford to sit back and let others take risks, then swoop in once new technology becomes proven:

“So our eyes wide open. We want to be where the customer is going. We don’t necessarily want to lead the way.” (Home Depot)

There is a difference between price and value. Focus on giving your customers good value, not just the cheapest price:

“You can be the cheapest and you may get a quick win here, but if your network can’t support that, it’s not a good product, people are just going to turn back off.” (Verizon)