Company Notes Digest 5.5.17

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Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

Editor’s note: Please note that this week’s post was compiled by Erick Mokaya.  Erick has been helping out on our weekly piece for about a year now and has consistently done excellent work.  He’s an incredibly strong young analyst and we feel very fortunate to have him working with us.

The US and the global economy are both experiencing gradual improvement. The US economy in particular is seen as resilient and in good shape even though the last quarter experienced slow economic growth. The energy sector is bouncing back as rig counts increase but we may have to wait awhile before new ones can be built. Meanwhile, car inventories are building up as sales slowdown and AI and machine learning are increasingly playing a bigger role in the development of tech companies.

The Macro Outlook:

Nothing much has changed in the economy

“broadly speaking, not much has changed since the last quarter. We’ve seen modest pickup in global growth, in part due to market-specific fiscal stimulus, although uncertainty about the direction of trade policies continues to be a concern.” —Mastercard CEO Ajay Banga (Financials)

Any economic weakness is likely transitory

“Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed….The Committee views the slowing in growth during the first quarter as likely to be transitory” —The Federal Reserve

US industrial sectors are in “good shape”

“The part of the world that you should be focused on at this point is the United States of America, because our economy is growing. All sectors are in good shape. Some sectors are surprisingly strong at this point like agriculture, like non-residential construction. Automotive has not come down. Actually, we are seeing automotive turning back up. And we have a limited amount of domestically generated steel available for all these uses.”—Cliffs Natural Resources CEO C. Lourenco Goncalves (Iron Ore)

Inflation is likely to rise

“We are seeing increases from suppliers. So I think as we work through calendar 2017, we will see a few more supplier increases, and likely have some moderate inflation as we go forward.” — Applied Industrial Technologies CEO Neil Schrimsher (Industrials)

“… for the full year we still see overall inflation in that 3% range which is obviously higher than what we ended up with last year.” — Union Pacific Corp CEO Lance M. Fritz.

“… just as people start to talk about rates potentially moving up and inflation maybe starting to move a little bit, you’re starting to see loss cost trend, which makes sense.” —Markel Co-CEO Thomas Gayner

But there are also pockets of deflation

“…If I look at our spending year-to-date where we track this every month, we are still net deflation year-to-date as a company. So we’ve certainly experienced more deflation in our costs after the first quarter in 2017 versus 2016 and there is a mix there.” —ConocoPhillips Vice President Alan J. Hirshberg

Optimism is still running high

“…the new US administration’s proposed policies of reducing corporate taxes to 15% rolling back regulation…and significant infrastructure spending has the potential of boosting economic growth significantly in the United States. Already sentiment among small businesses has improved dramatically and animal spirits in the United States are being revived.” – Fairfax Financial Holdings CEO Prem Watsa (Insurance)

But conviction has ticked lower

“This quarter it feels like conviction for tax and regulatory reform is more muted…. This was a quarter that was defined by low volatility, a lack of conviction with our clients. One of the things I would say is our business is definitely weighted, or levered, to times when our clients have a lot of conviction. One of the things that happened is that conviction sort of ebbed.” — Goldman Sachs President David Solomon

The administration is trying to manage expectations. Stronger growth is still two years away.

“In our projections it will probably take two years to get up to three percent growth and then we can have a sustained level.…” —U.S. Treasury Secretary Stephen Mnuchin.

International:

A strong US economy means a strong global economy

“When the US economy, which is approximately 20 trillion, does well much of the world does well. To us this means our concerns of China or Europe precipitating a worldwide recession depression have been significantly reduced, but not delaminated. Also the trade policies of the US could precipitate a collapse in world trade.” – Fairfax Financial Holdings CEO Prem Watsa (Insurance)

Economic growth in the Eurozone is solid

“growth is improving. Things are going better. And you remember in 2013 we were speaking of a recovery which was fragile and uneven, and now it’s solid and broad.” —ECB President Mario Draghi.

The UK is bouncing back

“in general the UK is making a nice comeback. I mean we are seeing good activity there. I think we had a recent survey of clients that showed that London once again was the favored destination for international capital among all major markets around the world.” —CBRE President Robert Sulentic

But companies are still keeping watch for the impact of Brexit

“Brexit is not over yet, so I would say everyone is still waiting to figure out what the actual rules will be and there’s no question it will put some pressure on both the manufacturers and the retailers and, I think, that’s a piece of the uncertainty there.” —Mondelez International CEO Irene B. Rosenfeld (Packaged Food)

Companies are seeing opportunities in China

“continued growth opportunities for us do exist in China…. just 40% of the Chinese customers do finance their cars. That is, I think pretty good snapshot number for the market…this number with a 40% has come up significantly over the last five, six, seven years, so the market is normalizing and this is certainly other than the growth of our brands are expecting in China a huge opportunity—Volkswagen Head of Group Sales Fred Kappler

Brazil is looking up as it recovers from a recession

“Brazil is showing signs of emerging from its two-year recession… the international markets have in the last, I would say not just this quarter, over the last six to nine months, things have been moving up in the international markets…Brazil is turning the corner.” —Mastercard CEO Ajay Banga (Financials)

“….we talked briefly about Brazil, a market which has almost collapsed. We expect the market to recover over time maybe starting as early as the second half, but slowly but surely from very low levels.” —Volkswagen Head of Group Sales Fred Kappler

Things still have not normalized in India since demonetization

“if you spoke to consumer product companies that are large in India, a Unilever kind of company, they would tell you they still see an impact on total consumer volumes and downsizing of inventory in the retail system because of some non-availability of adequate cash for transaction capability….You’re seeing more electronic. You’re seeing a little more cash, still not back to where it was, but it’s headed in the right direction.” —Mastercard CEO Ajay Banga (Financials)

Financials:

Startup capital has become more scarce

“Raising money was the top challenge identified by startup executives in our recent annual Startup Outlook Survey. Fortunately, there is continued investor appetite and capital for good companies, especially those that can demonstrate growth….we believe there is sufficient capital to fuel the innovation ecosystem and that good companies will continue to get funding.” —SVB Financial CEO Gregory Becker

Investors are still allocating capital to commercial real estate though

“capital rising has been very, very strong for us and I would say continues to be on a fairly consistent basis. We are seeing maybe as that investor just being careful and thinking about where they’re investing in aware of the fact that were we’ve been in a slow but longer economic recovery than prior cycles that this cycle feels a bit different, but the flows of capital into our investment management business have continued quite strong.” CBRE CEO Robert Sulentic (Commercial Real Estate)

Technology:

Artificial Intelligence is of increasing importance

“our testing platform now employs artificial intelligence, where we crawl through the claims and look for anything that’s unusual. And so that has resulted in what I think have been very successful welcome seasons over the last several years.” —CVS Health Corp CEO Larry J. Merlo (Health Care).

“I’m really happy with how we are transitioning to an AI-first company. The Google Assistant is one of our first steps towards that future…Advances in machine learning are helping us make many Google products better.”—Google CEO Sundar Pichai

“Over time, the AI tools will get better. Right now there are certain things that AI can do in terms of understanding text and understanding what’s in a photo and what’s in a video. That will get better over time. That will take a period of years, though, to really reach the quality level that we want.” —Facebook CEO Mark Zuckerberg

Microsoft says that what’s happening at the edge is the most exciting part of cloud

“when everyone’s talking about the cloud, the most interesting part is the edge of the cloud. Whether it’s IoT, whether it’s the auto industry, whether it’s what’s happening in retail, essentially compute is going where the data gets generated, and increasingly data is getting generated at the volumes in which it’s drawing compute to it, which is the edge.”—Microsoft CEO Satya Nadella

Too much demand is bad if you don’t have inventory to meet it

“one of the things that we did not get right was the mix between the iPhone 7 and the iPhone 7 Plus. It wound up that demand was much stronger to the iPhone 7 Plus than we had predicted. And so it took us a little while to adjust all the way back through the supply chain and to bring iPhone 7 Plus into balance” —Apple CEO Timothy Cook

Mobile ad revenue is now 85% of Facebook’s ad revenue

“Mobile ad revenue was $6.7 billion, up 58% year over year, and was approximately 85% of total ad revenue… More businesses around the world are shifting to marketing on mobile…. I think increasingly, the question is not if you can do without TV, but it’s if you can do without mobile” —Facebook CFO Sheryl Sandberg

Industrials:

Car inventories are piling up and need to be reduced

“U.S. new vehicle inventory stood at 29,800 units, which equates to a supply of 86 days, consistent with a year ago but far too high…. we must adjust our inventory level downward in the second quarter…we’re not the only dealers in these oil patch markets who have found themselves with too much inventory based on a further slowdown of sales.” —Group 1 Automotive CEO Earl J. Hesterberg (Car Dealer)

“passenger car inventory remains heavy and we have been working to bring that down to more appropriate levels by cutting production, and we remain committed to match supply and demand. We expect to end…with significantly reduced passenger car levels.” —General Motors CFO Chuck Stevens

Materials, Energy:

Oil companies are putting rigs back to work at an “astonishing” rate

“our North American customers are demonstrating that their economics work even at current oil prices in many North American basins by putting rigs back to work at an astonishing rate —National Oilwell Varco CEO Clay C. Williams

The steel industry is in good hands with Wilbur Ross

“Just to give an idea, Mr. Wilbur Ross was the guy that put together Bethlehem Steel and LTV Steel just after the debacle of the two companies around 2001, 2002. And that was a result of trade case. So, Wilbur Ross knows trade cases very well. So, I don’t know what you’re concerned about”
Cliffs Natural Resources CEO C. Lourenco Goncalves

Full transcripts can be found at www.seekingalpha.com