Company Notes Digest 6.20.14

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

Yellen sounds pretty bullish on the global economy here:

“We have a highly accommodative monetary policy. We have diminishing fiscal drag. We have easing credit conditions. We have households who are becoming more comfortable with their debt levels and more able to service that debt, an improving job market. We have rising home prices and rising equity prices and an improving global economy at least in my estimation.” ($FED)

But doesn’t see much reason to change highly accommodative policy

“with respect to the question of overshooting, let me start by saying that inflation continues to run well below our objective, and we’re still some ways away from maximum employment and for the moment, I don’t see any tradeoff whatsoever in achieving our two objectives. They both call for the same policy, namely a highly accommodative monetary policy” ($FED)

She argues that the recent CPI readings are noisy

“I think recent readings on, for example, the CPI index have been a bit on the high side, but I think it’s–the data that we’re seeing is noisy” ($FED)

Wage growth has been “contained”

“You know, I see compensation growth broadly speaking as having been very well contained. By most measures, compensation growth is running around 2 percent. So that’s real wage growth or real compensation growth that’s essentially flat rather than rising, and real wage growth really has not been rising in line with productivity.” ($FED)

Doesn’t see any evidence that stocks are overvalued based on earnings or dividends

“the committee doesn’t try to gauge what is the right level of equity prices. But we do certainly monitor a number of different metrics that give us a feeling for where valuations are relative to things like earnings or dividends, and look at where these metrics stand in comparison with previous history to get a sense of whether or not we’re moving to valuation levels that are outside of historical norms, and I still don’t see that. I still don’t see that for equity prices broadly” ($FED)

But this low volatility environment is definitely on the Chair’s radar screen

“this environment of low volatility is very much on my radar screen and would be a concern to me if it prompted an increase in leverage or other kinds of risk-taking behavior that could unwind in a sharp way and provoke a sharp, for example, jump in interest rates.” ($FED)

Kroger and Fedex each confirm that the economy is improving

Kroger sees customers willing to spend a little bit more

“The comment on the customer overall is very broadly in terms of if you look at what they are doing in total, we feel very good about and we like what we are seeing in terms of the customer in total being willing to spend a little bit more.” ($KR)

Fedex is seeing the global economy improve vs. Q1

“The global economy is recovering from the Q1 setback in the U.S. and slowdown in China, and should steadily improve.” ($FDX)

Kroger is seeing a different picture than the Fed on inflation though

“We saw inflation increase in the grocery category during the quarter. This, combined with higher inflation in meat, produce and pharmacy, has caused us to adjust our view of inflation for the year. We estimate inflation, excluding pharmacy, was 1.8% in the first quarter and 2.1% with pharmacy included. We expect it to be higher than originally anticipated for the rest of the year as well.” ($KR)

And expects to pass the inflation through to the consumer

“I would say in our ability to pass it through, it’s pretty much similar to what it’s been running.” ($KR)

Fedex notes that global trade growth is still below historical norms, but expecting improvement

“Our global trade growth is improving. It is still below historical norms. We do expect the pace of trade growth improvement to continue throughout calendar year ‘14 and into calendar year ‘15.” ($FDX)

Financials

The Fed still expects its balance sheet to shrink back to normal levels over time

“the notion that we fully expect our balance sheet to shrink considerably over time back toward normal levels, toward levels that would be consistent with efficiently conducting monetary policy, that’s still an expectation” ($FED)

Very unlikely that the Fed would sell MBS back into the market

“we would be very unlikely to sell mortgage back securities and that remains the case.” ($FED)

Expect the balance sheet to be primarily composed of treasuries eventually

“I believe it’s an expectation that eventually our portfolio will be consist largely of treasuries eventually, but they’re quite a number of details.” ($FED)

No discussions within the Fed about exit fees on bond mutual funds

“I am not aware of any discussion of that topic inside the Federal Reserve, and my understanding is that that is a matter that is under the purview of the SEC.” ($FED)

Factset saw sell-side user base stabilize

“the sell-side includes only the M&A advisory, capital markets and equity research businesses, which stabilized in terms of users” ($FDS)

Health of asset managers has improved

“Clearly, their revenues are driven by AUM and when the market is healthy it goes directly to the revenues…we definitely feel like the clients are in a healthier place than they were a year ago and definitely one or two years ago…There were fewer firms that went out of the business in this particular quarter.” ($FDS)

90% of Carmax’s customers are qualifying for auto loans

“if you look at our applicant flow, we’re still at 90% of our applicants are getting approval of some kind” ($KMX)

Subprime lenders had been fairly aggressive but have since pulled back

“We told you last year at this time that our subprime providers had got a little more aggressive. We told you in the third quarter that they had pulled back a little bit.” ($KMX)

Consumer

Retailers are battling a heavily promotional environment

“The customer wants to save on the initial pricing. And as you know, with Pier 1, we tried for a long time to stay out of following the rest of the market, but that proved really, really hard to do, if you’re going to maintain your market share. So now we’re in there with the rest of the pack promoting away.” ($PIR)

The industry is victim of the fact that they trained consumers to expect discounts

“I think the industry generally is somewhat a victim of its own activity and that we have trained the customer to expect a degree of off-pricing and because everybody does it, everybody does it and then she expects this and it just — it becomes a habit. I think that’s a piece of it” ($PIR)

Consumers appear to be embracing omni-channel at Pier 1. 1/3 of customers buy online, pickup in stores

“approximately 1/3 of those who order from home choose to pick up in-store, presenting us with yet another opportunity to drive incremental sales. 1 Pier 1 is playing out even better than we had planned and customers are embracing our omni-channel presence with tremendous enthusiasm.” ($PIR)

Carmax’s customers want to test-drive their car before buying

“We don’t fully transact online. There isn’t really a preclusion. If we wanted to really press down that path, we could. We found that customers want to test drive cars.” ($KMX)

Stores are a powerful tool to drive online sales

“you can be sure that as we look at the strength of our online business in parallel with that, we are thinking how many stores we need to go with it. But don’t forget, the stores are just a very powerful vehicle for online.”

Retailers getting pretty good at “manipulating” their customer database

“some of our competitors are much further down the road than we are in terms of the sophistication with which they can manage and manipulate their customer database.” ($PIR)

Technology

An example of Kroger using the internet of things to monitor its super markets

“[our team] is implementing a fundamental foundational technology that we can leverage to create the Internet of Things in the retail environment. One tangible example of this is real-time temperature monitoring in our supermarkets. Today, temperature checks are performed manually by our associates. But by using interactive sensors that are connected through an in-store network, we can better ensure the freshest foods by allowing for more frequent, real-time temperature checks of meat, produce, deli and frozen food products. And we love these kinds of initiatives because they save money and they free up time for our associates to engage with customers.” ($KR)

Larry Ellison says big data analytics and multi-tenancy cloud are the to biggest parts of modern computing

“what you’re asking me, which is more important, big data analytics or multi-tenancy in the cloud, I think they’re both crucial to modern computing. These are two of the biggest, biggest parts of modern computing. People spend a lot of time talking about the cloud and getting to the cloud, getting your business to the cloud and modernizing it. And big data analytics, I mean they’re number one and number two in the conversation about technology these days in all of the meeting I’ve been.” ($ORCL)

In cloud computing, infrastructure as a service is likely to be a low margin business

“The two parts of the cloud business that we’re focused on are SaaS, the applications and PaaS, the platform database and Java programming language. We think inherently those businesses are 40%-50% margin businesses. We think that’s not the case in Infrastructure-as-a-Service business. We think that’s a lower margin business…We’re in infrastructure of service as a convenience to our customers, who want to have one stop shopping and buy their applications platform and infrastructure at the same place.” ($ORCL)

Healthcare

Rite Aid sees that only 30% of people who bought health insurance on exchange are newly insured and are not heavy users of the insurance

“In terms of exchange-based plans, probably 70% of the people that we can identify related to an exchange-based plan came from another plan where we already had them as customers. So the net incremental piece of that was much smaller. And those people, those net incremental patients haven’t been huge utilizer as yet. So the utilization as a percentage of those plans is probably less than the average.” ($RAD)

On the other hand, newly insureds from expanded Medicaid are high utilizers, and are having a clear impact

“A little bit of a different story in the Medicaid. In the Medicaid expansion states, we’ve seen strong script growth, as Frank mentioned in his comments, particularly when you compare them to the non-Medicaid expansion states, where there isn’t much growth. So it’s clearly had an impact.” ($RAD)

Health insurance companies are narrowing networks

“I do think the narrow network thing continues to build a little bit. And I think we see it not only in our managed care plans, but also probably in Medicare Part D plans as well.” ($RAD)

Miscellaneous Nuggets of Wisdom

You can only fight the current for so long

“we tried and succeeded relatively well to hang back from [promotional activity] for a long time, but you’ll recall, when we released our Q3 earnings last year, we talked about this a lot and the conclusion we came to, Brian, is that we just couldn’t be — we couldn’t afford to be giving away market share.” ($PIR)

It’s fun to buy a competitor you admire because then you get to learn what made them so good

“Well, it’s really been fun to have someone who was a competitor that you admire. And now you can actually see what they do, how they do it, but as Rodney mentioned, they have been really strong on some of the matrix better than us in several markets. And so to learn how they do, what they do has been actually really a lot of fun and we are integrating some of that into some of our operations today throughout Kroger.” ($KR)

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.