Company Notes Digest 5.31.13

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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

John Stumpf is still bullish on the economy and housing:

“I am more optimistic today than I have been in some time…housing is clearly on the upside of the curve.” (Wells Fargo)

But business investment is still sluggish and maybe just starting to be on the upswing, especially in IT:

“I think that the financial crisis of 2008 fundamentally reset not only consumer spending, but also business spending on categories like IT. And if you look at like financial institutions their compliance costs have gone up dramatically and that money has to come from some place. And we see businesses of all sizes fundamentally having reset how much they are willing to spend and I think that is a function of the financial crisis and sort of a confidence around are we really out of the woods yet.” (Hewlett Packard)

Business spending may also be sluggish because there remains excess capacity though:

“companies have gotten a lot more efficient the last five years. There’s still capacity left in plant and equipment. I think technology has changed some of that.” (Wells Fargo)

In retail even if the weather isn’t bad now, we still may have to hear about it in Q2:

“overall, I think it is a fairly promotional environment right now, that’s one of the challenges that we are all facing, and that’s something that we talked about on our last earnings call, that we were expecting the promotional’s second quarter due to the late start to spring selling, because of the challenging weather.” (Steve Madden)

International Macro

Japan

There is a real increase in economic activity in Japan, but is Jewelry a special type of purchase?

“Without a doubt, Japan sales growth in the quarter exceeded expectations more than any other region…we took a price increase in Japan on April 10…included an adjustment for the yen’s weakness…it spurred purchasing in advance of the increase. However, we did not experience the typical expected slowdown after that…we attribute the unusual strength to recent reports of a surge in household spending in Japan, likely tied to the Japanese government’s efforts to stimulate their economy.” (Tiffany)

Clearly the Japanese people aren’t exactly feeling more wealthy as they will spend at home, but purchasing power has fallen abroad:

“pronounced softness in the Hawaii and Guam stores that reflected less Japanese tourist spending.” (Tiffany)

China

A very interesting discussion from Dow’s CEO about China:

The Chinese feel ok about investing in the US:

“I would remember meetings in the hotel rooms like this where the Chinese issue was over here trying to figure out whether the U.S. is going to be good on all the money that China had over here in terms of its banking system, financial system, that’s over with and the Chinese are quite happy to put money in the United States.” (Dow Chemical)

But Europe was a “wakeup call”:

“I think Europe was a big wakeup call for the Chinese and about a year or so ago there were transition in the leadership, they pretty much decided that they can no longer rely on an export led economy.” (Dow Chemical)

That China needed to change their export driven model. The new leadership is focused on stoking domestic consumption. (This is some of the first clear commentary that I’ve heard on the direction that China’s new leaders are moving):

“[China] fundamentally took a very profound decision with the new leadership…I’m a China head, I’ve been going there since the 70s, I do six trips a year, I’ve lived through the remake of China. I think the profound remake of China is to move their economy to 70% or 80% domestic demand drivers…That means not the property speculative world they’ve seen that means not the bridge to nowhere type infrastructure builds that means sustain consumption and to do that they’re focusing it on the service sector.” (Dow Chemical)

In the mind of the Chinese, more domestic consumption means pushing service businesses like financial services. (Someone should tell them that financial markets can do a poor job of allocating capital too):

“they are creating insurance sectors, health sectors, pension based sectors if you like mutual funds or alternative uses of capital, trying to liberate liquidity inside their economy so smarter choices can be made on how capital is allocated” (Dow Chemical)

Still, China’s economy as it is today is clearly struggling. Can you turn a ship that big deliberately?:

“China continues to slow and cannot seem to find traction. The growth in electricity production has slowed to 5%, below half the prior rate. And despite this slowing, domestic coal production continued to grow at 7% or 8%.” (Joy Global)

Egypt

According to Apache Oil and Gas, the environment in Egypt is stable, and actually may be improving for oil companies because the government realizes how important oil is to their economy/political control.

“I’ve been to Egypt twice in the last six months. I’ve met with the President of Egypt. I’ve met with the Prime Minister of Egypt. I meet with the Petroleum Minister every time I’m there…It’s too simple to say nothing has changed but I talked to the U.S. Ambassador, who I talk to occasionally, a couple of days ago and I said, “Anne, what’s changed?” And she said, “Nothing, it’s the same as it is.”…we haven’t seen any change currently other than a little bit things have gotten faster. We’ve got more development leases in 2012 than we’ve gotten over the last four or five years. …We got 27 in 2012. In 2011 and before, we probably got nine a year. So they recognize the importance of the product.” (Apache)

Financials

Bank analysts should focus on interest rate risk as credit risk is probably controlled:

“one of the biggest risks today in our industry is not credit risk, it is interest rate risk” (Wells Fargo)

Banks still have legacy spending from the crisis that is inflating costs:

“we have some expenses related to the downturn that we think will go away or become less, so that’s kind of a tailwind side.” (Wells Fargo)

For the economy to continue to re-leverage, growth is going to have to come from new consumers buying homes (i.e. Gen Y). Also–is this an indication that housing demand is primarily coming from investors today?:

“[to get loan growth] it’s going to take consumers to start to buy housing again” (Wells Fargo)

When it comes to capital there is a tradeoff between stability and profitability:

“I want sufficient capital, but not – or even – I don’t even care if it’s 5% or 10%, whatever, I mean, we can argue about what the exact number ought to be, but I don’t want to go over the top in this. There’s also a cost of having too much capital.” (Wells Fargo)

A couple of interesting notes on the banking businsess:

“We have found that deposits that come with a primary checking account that relationship is 2.4 times more profitable than one that does not” (Wells Fargo)

“When you’re in the auto lending business, you are a little bit in the used car futures business” (Wells Fargo)

Consumer

That product you think you’re getting at a discount because you waited for the next season may not be the exact same product:

“If it’s a real fashion forward item, in that very first few months… the real fashion forward customer…will pay virtually whatever the price is, so we can typically 200, 150, in that range for newness. When you then go into the second season…then typically $99 for an item like that is going to be a magic price point…In terms of the gross margin, I think it’s important to understand that we build the product differently…so there is not a big gross margin deterioration, when we take prospects back to $99…we have made adjustment to the materials…etcetera such that we can price it out.” (Steve Madden)

Rupert Murdoch talking about how Ted Turner said he was going to “squash him like a bug” (Oh Billionaire problems):

“when we launched Fox News, no one thought we could take on CNN. Nobody. Even Ted Turner bragged that he was going to squash me like a bug, and a lot of other things. But with hard work and the genius of Roger Ailes, Fox News has been #1 in cable news for 11 straight years” (Newscorp)

Interesting stats on the Journal’s readership base:

“43% of Wall Street Journal readers are millionaires, and the other 57% will be millionaires if they continued to read the Journal.” (Newscorp)

We spend a LOT of money on K-12 education in the US:

“K-12 alone, 50-plus-million kids in America we’re talking about, is now almost $700 billion market. And of that, about $40 billion goes into products and services and $17 billion on instructional materials and technology.” (Newscorp)

Technology

Dueling perspectives on how people are watching video content:

AT&T is seeing people move away from the TV to smaller screens:

“I would have thought before started really seeing how customer use the devices, that if you are inside the home, you are going to watch on a TV, the biggest TV you can go find, and certainly, there still some of that, a lot that. But increasingly tablet usage is inside the home, predominantly as oppose to out of the home.” (AT&T)

Logitech is seeing more an more people hooking their computers up to their TVs:

“our number one selling product right now in keyboards and desktops is actually a product used for the TV so an increasing number of people…bring their computer their laptop connecting up to the TV…this is a phenomenon that started about four or five years ago and it just keeps picking up steam. It is in fact in the U.S. it was 8% of people doing that about three years ago it is 30% doing it now 30% to 31%” (Logitech)

Either way people still aren’t cutting their cable quite yet:

“so far we have not seen [TV] cord cutting in any material way, in fact not even in an immaterial way at least from our perspective.” (AT&T)

Statistically people are still browsing the web more on PCs:

“if we look at statistics actually still most hours on the Internet [are spent] on the desktop or the laptop because if you want to stay long time on the internet it is still much more comfortable to be on your PC” (Logitech)

Big shift in iPad satisfaction according to a study by Logitech. Does this say more about Apple or tablets?

“18 months ago, we did a survey of iPad owners and 70% of them globally said they love the iPad exactly as it is, don’t need anything else, it’s perfect. We repeated the same survey 12 months later. This time only 30% of consumers said they like the iPad as it is and 70% of them this time said they want more things around the iPad to accessorize it to make it more useful” (Logitech)

Your data provider has more information about you than Google, Facebook, etc:

“because of all IP and its every set top, every home and every set top in every home, we collect the data anonymously, aggregate and enormous, let me repeat that a couple of times. But we have that information and have very good insight on how our customers are behaving, what they are watching et cetera…if an advertiser wanting to by the Ellen Show, we know based on our data who that audience is. We can do a couple of things. We can go find that same audience outside of the Ellen show and maybe extend reach or drive price a little bit better. We can also go find that same audience online or on your mobile phone.” (AT&T)

Mature technologies in the US still may have legs in emerging markets:

“enterprise printing is not shrinking as you look around the globe and part of that is because so many enterprises in emerging countries are actually growing their printing even though in the U.S it maybe flat to slightly declining.” (Hewlett Packard)

This means that there may still be price elasticity to demand:

“my view is that the low end is growing very rapidly, whether it’s low end PCs in Brazil or 1P servers here in United States and we have got to not over engineer our products, but have the best quality and the best features for a given price.” (Hewlett Packard)

As dysfunctional as HP was, Meg Whitman making the argument that the revolving door of CEOs left HP with some good assets:

“say what you will about my predecessors, they assembled a set of assets here that just happens to be perfect for what I call the new style of IT.” (Hewlett Packard)

Materials/Industrials/Energy

Joy Global’s mining outlook, seems to be making the case that the worst is over:

“Yes, I definitely think we’re at a low point. There’s no doubt about that. I think the question is what does the slope look like as things get better and how long will that take.” (Joy Global)

Coal may be turning positive:

“the outlook for the U.S. coal market has turned positive. I guess, this is first in, first out, if you will. With natural gas prices above $4 per million BTUs, fuel for power generation is increasingly switching back to coal.” (Joy Global)

Copper is a little better than people think:

“I think copper is an underestimated market, especially because of the inventory that has moved from private to exchange stocks. Our customers agree with copper strongly represented on our prospect list.” (Joy Global)

But it’s still a while until CapEx spending returns to coal:

“both met coal and thermal coal, on a global basis, we probably have 5% to 7% excess capacity…And so that’s going to take us a little bit of time to work off…I think we need to see supply/demand balance get closer, which is probably not a couple of quarters away, maybe 1 year away” (Joy Global)

Contrast Joy’s view on electricity demand to Apache’s which says the move to gas is structural:

“I’m changing my view [on nat gas] a little bit. Not that it’s going to go back to $14 but I think you got some upside in the price right now…it’s not about how much gas you can flow or what you’re gas production is. But I sense for a lot of reasons I think you’re seeing utilities being regulated to go to natural gas.” (Apache)

Seems that most oil and gas companies see oil in a $90-$110 band:

“We are definitely way over the maturity curve on wells. I think whether in the next year or two, you see oil prices linger a little bit between 90 and a 110, I think forward curve is going to be up.” (Apache)

The US isn’t the only market where unconventional drilling makes sense:

“Unconventionals, that’s been the story in North America but we think over the next five to ten years will be the story of the international markets as well…we’re the unconventional leader in North America…it’s an important strategic thrust for us to…be ready to work for customers around the world in unconventionals.” (Halliburton)

Take note of soy:

“soy is an emerging story, and within Monsanto, we say that this is decade of the bean” (Monsanto)

Miscellaneous Nuggets of Wisdom

Be fair and honest with your customers when times are good, because you’ll be glad you were when times are bad:

“[we’ve been able to hold our margins because] We’ve been consistent, open, transparent with [our customers] on pricing when we need to price. And we haven’t tried to overprice in the up cycle and they’ve — I think they’ve developed a confidence that we’re fair and balanced with them. And therefore, we’re able to execute pricing when we need to in the down cycle.” (Joy Global)

Business isn’t about financial statements, it’s about serving customers well:

“We don’t manage the Company to the margin. We manage it around providing services and products that our customers need and help them succeed financially.” (Wells Fargo)

It’s not about being the biggest either:

“Incidentally, we don’t set out to be number one in anything. If we get there because we’re doing a good job, great, but I don’t have league tables on anything that – because the size has never been the arbiter for us.” (Wells Fargo)

It’s tough to compete with state owned enterprises:

“We’ve gotten out of me too businesses that subsidized companies can go win at…I can do a lot of things, I can’t get subsidies like…state owned companies” (Dow Chemical)