Company Notes Digest 5.30.14

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

Considering it’s June and we’re still talking about weather, I’m thinking DSW may have a point:

“we won’t wait for…maybe the weather never turns.” ($DSW)

Toll brothers hasn’t seen much of a shift in housing activity in May

“Demand over the past year has been solid although relatively flat compared to the strong growth we experienced beginning in 2011 coming off the bottom of this housing cycle. So far in May the story has been more of the same. Traffic and deposits are up a little and agreements are down a little. Business continues to be good but relatively flat.” ($TOL)

Toll argues that this lull is similar to what we saw in the 90s recovery though

“We note that the last cycle’s recovery in the early 1990’s began with a period of rapid acceleration followed by leveling before further upward momentum. We believe that we are in a similar leveling period in the early stages of the housing recovery with significant pent up demand building.” ($TOL)

Toll thinks there are a lot of people circling, but not purchasing

“you have got a lot of people circling. And since they are not buying at the level we thought they would be, they are spending more and more time contemplating and studying the decision.” ($TOL)

Toll argues tight inventory and pent up demand will lead to higher prices

“you don’t have any inventory. You don’t have any inventory but you got demand and you have price increases. You get price increases people are going to rush to try and beat the boat. So I think the best is yet to come’ ($TOL)

More retailers are starting to talk about a promotional environment instead of weather

“I think the promotional activity I would describe it as disruptive, chaotic and really is across the entire industry and I think what you are seeing is business has been tough and I think that most retailers do to address that are just price reducing in a degree that I’ve never ever seen before.” ($DSW)

Autozone voices some concerns on the consumer

“Although we have some concerns about the health of the consumer due to ongoing financial strains and increasing gas prices, we are pleased with our execution and excited about our ongoing strategies.” ($AZO)

The high end consumer is rolling though. Home prices in exclusive neighborhoods are back with a vengeance

“I think if you look at what’s happening in the very extremely sought after markets, they are not only back, but they are back with a vengeance. And I think that just leads, because those people have the money and the ability to do what they want, when they want. I think that just leads the overall luxury market. And I think there is every reason to think that it’s going to kick in very soon.” ($TOL)

Even McDonalds is bifurcating its menu for the growing income gap

“There is a bifurcation in the U.S. and if you look at the lower income levels. Some of the lower income levels have not prospered as much clearly in recent years and primarily since the recession started. It is important that McDonald’s remain affordable for consumers. And so the value component is important. Having said that, we also see that there is this category of premium burgers, and the category has been out there a while. But the premium is also defined differently by consumers. Real and fresh are two really large aspects of premium.” ($MCD)

Rising gas prices have a particularly big effect on the lower income consumer

“We continue to believe gas prices have a real impact on our customers’ abilities to maintain their vehicles and we will continue to monitor prices closely in the future.” ($AZO)

It’s been a long time since the financial crisis. Things have changed:

Families who bought homes back then are probably ready to move

“if they bought their home in ’02, ’03, ’04 most people stay in a home I think it’s seven years on average. They are back to even or in some markets they are back above water and they are looking to move their family on.” ($TOL)

Cars bought back then are already 5-7 years old

“there’s a little bit of a dip in that five- to seven-year-olds, but the more important point is that the number of registered vehicles hasn’t really changed significantly, so we still have the same number of vehicles out on the road and so you do have a little bit of a dip, if you will, if you look at the timeline.” ($AZO)

Oil demand has grown by 10m barrels per day since then

“in 2008, we were using 83 million barrels a day…we are using 93 million barrels today or thereabouts” ($APA)

Meanwhile in capital markets, hedge funds are already feeling the pressure to chase performance

“We find ourselves heading into June and people still have years to make. So I think we’re going to continue to see a push when those opportunities arise.” ($C)

And the head of Bank of America’s investment banking division noted that high M&A volume may be because companies are in a race to the finish before liquidity dries up

“I think also on the M&A side, again some extent there is a bit of a way rush to the finish in a sense that people think okay, maybe in 2015, where it might be where they are, or liquidity might not be — better there might be specifically if its heavily dependent on leverage to — I would better do my deal sooner rather than later.” ($BAC)

Many companies are still looking internationally for growth

“The story here really is one of investing in our international client base and so a lot of the growth that you see on the page has been an investment in building our [global corporate and investment banking] franchise outside the U.S.” ($BAC)

“what we’ve been focused on as a leadership team is to continue to grow our international business. It’s always been an element of our strategy, but in this environment we’ve stepped up our focused on that from a leadership standpoint and resources, because there is a strong demand for our products and capabilities internationally and because it is an area of growth for us.” ($LMT)

Increasing US healthcare cost is one variable that makes international expansion more attractive

“the bigger thing is the increasing penetration outside the United States, where healthcare cost as a percent of sales, respect to sales in that countries is lot less.” ($COST)

Financials

The key to being a bank in the Eurozone is to not fool yourself into thinking that German Euros and Spanish Euros are the same thing

“in spite of a single currency, we never allowed ourselves to be fooled that German Euros and Spanish Euros were the same thing. They weren’t. And I think having that deposit funding on a local basis was important.” ($C)

Regulations could lead to higher volatility because brokers have less ability to provide support to the markets

“I think I can make a fairly strong argument that I think over time we’re actually going to see heightened volatility. If you look at the consequences of the regulation of smaller bank and broker dealer balance sheets, you look at the continued AUM growth in terms of all types of money managers in the world; that the bank and broker balance sheets aren’t going to be there to be that shock absorber in the markets. In fact they are going to have be that shock absorber. So I can actually argue that there is probably more volatility.” ($C)

Regulators have also helped to build a moat for large banks because they’re not letting second tier big banks get bigger

“the challenge in the businesses today is if you are not off scale it’s very difficult to get scale, meaning that regulators aren’t going to allow you to buy your way to get the scale because they’re not letting big banks or brokerages get bigger.” ($C)

Citi has 1,000 people working on the Fed’s stress tests. (FWIW: I’d argue that one seasoned bank analyst should be able to do a decent stress test on any bank in about 30 minutes)

“So by the time we finish its well into the 1,000s of people that get involved in terms of our CCAR process and submission.” ($C)

Consumer

Some people still like to go out and do stuff

“not everybody wants to just sit home and type in stuff to have it delivered in the morning, people like to go out and do stuff.” ($COST)

Omnichannel retail makes it difficult for small businesses to compete

“over the last couple of years the top 10 retailers and footwear have grown their market share by several hundred basis points…all the other retailers have had market share losses and I think that what that reflects is the difficulty that smaller less well capitalized, less technologically proficient, regional footwear players that they are going to have very difficult time being competitive in the new way of doing retail and that way is that the customer wants to shop seamlessly from store to the dot com site to the mobile site and she wants to access all the product with — regardless to where it is and she wants help making that decision on what she should buy and once she decides what she is going to buy, she wants it delivered to her wherever she wants it and whenever.” ($DSW)

McDonalds welcomes competition to breakfast. Competitors bring more attention to the day-part and never get traction

“in all the years I’ve been in McDonald’s. There is always been someone entering breakfast every year. Several of the players have done it multiple times and that will continue. We actually view that as a good thing. The more energy that there is in the immediate relative to breakfast, we feel like we’ll win” ($MCD)

Organic foods are supply constrained

“We’ve seen surprisingly good success on organic and produce and fresh meat, fresh ground beef. And the challenge is the supply, frankly. There is not enough supply” ($COST)

Healthcare

Some of the Obamacare provisions have added 1-1.5% to health insurance costs

“some of the things that have been added like up to 26 year old instead of 18 to 22 based on if your kid is in college or not, your dependants, on mental and medical health priority no limits.There is — all these things have added, 1 and 1.5 percentage points to already large number.” ($COST)

Materials, Industrials, Energy

Apache is very bullish on oil

“Oil is a world market. I mean, I am very bullish on oil.” ($APA)

LNG probably wont change the natural gas picture

“this morning with $4.47, I can’t see that really changing. Lot of people think that if we get all this LNG offshore, I think – they think it will change. We can plan awful lot of LNG and still supply gas to North America, $4.50 or thereabout.” ($APA)

EOG thinks the Permian is nice, but not as good as the Bakken or Eagleford

“Permian is a great place to drill wells, it’s a lateral – tremendous amount of reverse potential. But it’s not the play quality, the rock quality and the technical aspects of the play are not nearly as strong as Eagle Ford or the Bakken. And it will not be able to maintain this dramatic growth rate that we have had historically in the country. And it will not be able to replace an Eagle Ford or a Bakken.” ($EOG)

There’s probably not another Bakken or Eagleford out there

“hink our thoughts are and we know all – we know the U.S. very, very intently. We did not see another Bakken or an Eagle Ford out there. That would be both the size of the field and the quality of the field together. That’s probably not one of those out there.” ($EOG)

There is plenty of opportunity in the US though

“I think anything internationally whether the Mexico or some other place that EOG is really not actively pursuing any plays internationally and it’s because that we see an abundance of opportunity in particularly the U.S. And we are very focused on the U.S. and we think there is ample room there for us to continue to grow the company.” ($EOG)

Miscellaneous Nuggets of Wisdom

Make a good first impression

“You know, when you first engage with a customer, you don’t start at number one, at least not on very many occasions. A lot of times, you’ll start as fourth or fifth call. Well, if nobody else in town has it, now you’ve got an opportunity to impress that customer, so they call you with something they didn’t think you would have and you have it, and then you give them prompt, great service, and guess what? Now you’ve got a chance to start moving up that list.” ($AZO)

Some words from Ray Kroc, a legendary businessman

“Ray Kroc had a statement. He made the statement years ago. He said he didn’t know what we’d be selling in the year 2000, but we’d be selling more than anyone else” ($MCD)

If you don’t cannibalize yourself, someone else will

“I get back to the question is if somebody is going to take that business, we would rather take it” ($COST)

It pays to grow organically

“We decided to do that years’ ago instead of growing the company, the typical way by acquisitions and mergers, we have historically chosen to go through exploration. And we have grown the company organically. We internally generated all of our own prospects and go out and just capture the acreage at very little dollars, very nominal dollars on the front end side and we captured not only acreage of low cost but we actually are able to capture the sweet spot of these plays by being there first.” ($EOG)

It’s tough to make the economics of an acquisition work

“I think it’s very difficult to make money in an acquisition market. You have to place so much on the upfront. And it just makes the overall project very, very low return. And the company is fortunate I think that we will be able to continue to organically generate.” ($EOG)

There are reasons to take your time and be patient

“Each one of these plays has a certain speed that is optimum speed in the time, the life of each of the fields…If you speed that up, you have – you could easily lose efficiencies and instead of reducing the well cost, you increase the well cost. And also, while you are completing all these wells, you are learning a whole lot, you are learning the rock, you are learning about the play, you are learning about the proper completion that you want to put on each one of these wells and that’s an ongoing process all the time and we are making significant advance until the time…from the people side of it, you want to make sure you have top quality people and you have a very dedicated group of people and a very focused group of people to manage and to have discipline to do all this correctly.” ($EOG)

To make good purchases you have to know things that someone else doesn’t

“we have been able to continue to capture acreage at very low cost compared to what they end up being later down the road. And so you have to be upfront, you have to know something that somebody else doesn’t know. You have to just kind of do it in a stealthy manner.” ($EOG)

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.