Company Notes Digest 6.21.13

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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.


Still seeing signs of a choppy economy:

“While there are signs of a better economy, the improvement is not robust. Customer sentiment is gradually improving but remains fragile. We continue to see high variability in sales comparisons between days and weeks.” (Kroger)

“positive developments in quarter four however did not fully offset sluggish economic growth and customers’ preference for international economy services.” (FedEx)

Food inflation is stable:

“the inflation we saw in the first quarter was very similar to what you saw in the fourth quarter. And while there’s a little push and take in what department it fell in, it was very similar and quite moderate” (Kroger)

Labor markets are improving but not significantly:

“I think we’re definitely seeing tiny signs of hiring, but it’s not one of those things where it feels like a market of several years ago.” (Factset)

China is weak:

“We continue to see pressure in China as you read across most of the other tech companies described we saw that.” (Oracle)

The growth of international trade has slowed in the last five years:

“the last several years I have seen a sea change in international trade and in international transportation. And it has been caused by, number one, the increased price of fuel…Secondly, you have policy choices that have been made in China, in the United States and in Europe that have had big effects on the growth in world trade.” (FedEx)

The recent move in rates is probably not large enough to have a material effect on most non-financial companies, especially considering 2.5% is still historically low:

“I don’t really see any effect on my operating expenses as it relates to the backup in rates. Even the — it’s interesting to talk about a 2.4% 10-year treasury or so as the backup in rates because it’s still a historically low treasury rate. And even if I had to refinance the debt I have coming due at these rates, I still wind up leveraging down the weighted average cost of my debt portfolio.” (Kroger)

Retailers still love to talk about weather, but pretend that they don’t:

“thanks for the question. I mean, as far as the weather is concerned, you’ve never heard us ever use weather as the reason for either good business or poor business, and we certainly wouldn’t do it this quarter. But your comments are absolutely right. We’ve had really very disruptive weather patterns throughout the spring and actually, in many, many markets. And that’s, of course, bound to have some impact.” (Pier One)


The financial sector, especially functions supporting active investment management continue to really be hurting:

“The sell-side, particularly equity research, has been under significant pressure for some time…they continue to contract, both in terms of headcount and purchasing, to focus significantly on cost savings. On the buy-side, they’re still hesitant to make large purchases because given market volatility, they cannot be certain where they’ll wind up for this year in terms of performance.” (Factset)

One company that isn’t hurting though is Blackrock. This AUM number always makes my jaw drop:

“BlackRock has the deepest and broadest product set in the industry, managing $3.9 trillion of investments on behalf of our clients.” (Blackrock)

But even passive managers make active decisions. There is no such thing as passive management:

“We’re making active decisions in our index funds every day, every month, every year, and those decisions add up over time.” (Blackrock)

Even in an organization as large as Blackrock, good investment management depends on small teams acting decisively. Big organizational research is more a hindrance than an advantage:

“We do not subscribe to the theory that central research is an effective tool for a firm of our size… You want the alpha generators to be sitting with our analysts in their teams, discussing the very risks they’re taking, not calling up to somebody on a different floor who serves 17 different teams and who they can’t get hold of on a particular day and who reports to somebody else.” (Blackrock)

Not only is a big investment organization really just a collection of small teams, but there are likely a few small teams that manage the bulk of the assets:

“Investment management is in many ways a blockbuster business. And what I mean by that is that our results are really often driven by a very limited number of different products and offerings that we provide.” (Blackrock)

Decreased leverage at investment banks has a big effect on fixed income markets, because fixed income isn’t traded on exchange. Reduced leverage means reduced inventory:

“I would suggest that the logic for the fixed income ETF is actually more compelling than it is for the equity ETF. Why? Because the equity markets don’t have the problem of investment banks and their intermediation function shrinking. Basel III, the Volcker Rule and financing costs have all made investment banks’ balance sheets shrink. And the way that the bond market traditionally works is you go through an investment bank and their inventory. Investment bank’s ability to do that is shrinking. Bid/ask spreads are widening. And that is what is driving the liquidity into our fixed income ETFs” (Blackrock)


Branded packaged food companies aren’t necessarily in as great of a position as their stock prices may imply. They face significant secular competitive headwinds too:

“if you just look at over a long period of time, private label or corporate brands have continued to gain share…CPGs will get a little more aggressive with promotional dollars, which will bring it back down. But what we find is very seldom does the share ever go back to where it was before. There is a permanent loss” (Kroger)

Starbucks had some interesting thoughts on tea:

“Tea is the second most consumed beverage in the world, secondly to water…Coffee to the American consumer tends to be busy and rapid and skewed toward the morning. Tea is a little more relaxing and Zen like and skews to the afternoon and evening and weekends.” (Starbucks)

Digital books aren’t growing fast enough to offset the decline in traditional books:

“Digital books continued to grow, but the dollar growth is not yet offsetting the pace of decline of print books. Digital book revenues are growing very rapidly in Asia and Europe, although growth rates have moderated a little in the U.S.” (John Wiley and Sons)

Students are getting wise to the perils of overpaying for education:

“students are an increasingly savvy customer. They are looking at the cost of education and comparing that to the value of their education in terms of return on investment, and related to future employment needs.” (John Wiley and Sons)

The for-profit education companies have a tough time finding the bottom:

“the for-profit [education] sector has probably predicted a bottoming for about 2, 3 years now and that continue to decline, albeit somewhat more modestly. So take that with that.” (John Wiley and Sons)


I don’t have a deep enough understanding of the enterprise tech space to put this in context, but this language from Larry Ellison is uncompromising and seems noteworthy:

“Next week, we will be announcing technology partnerships with the most important –the largest and most important SaaS companies and infrastructure companies in the cloud…We think 12c will be the foundation of a modern cloud where you get multi-tenant applications with a high degree of security and a high degree of efficiency, you at least have to sacrifice one for the other.

Again, I would call them a startling series of announcement with companies like, NetSuite, Microsoft all that happen next week will give you the details. These partnerships in the cloud I think will reshape the cloud and reshape the perception of Oracle Technology in the cloud. 12c in other words is the most important technology we’ve ever developed for this new generation of cloud security.” (Oracle)

Industrials, Materials, Energy

3D systems is making some big claims about 3D printing:

“3D Printing, I believe is poised to change everything how we create, what we make and where we manufacture” (3D Systems)

According to the company these are the benefits of 3D printing in manufacturing:

“3D printing allows you to make that product…form the core up, so you basically don’t have as much waste, the tool is cheaper, the cycle time is faster and that is the holy grail.” (3D Systems)

3D printers appear to be working with an increasing variety of materials:

“Materials that can be processed through these advance manufacturing systems include stainless steel, tool steel, super alloys, non-ferrous alloys, precious metals and alumina for a variety of aerospace, automotive and patient specific medical device applications…And non-ferrous metals include aluminum and titanium, precious metals such as gold, silver and platinum and exotic or rare metals such as cobalt, mercury, tungsten can also be processed.” (3D Systems)

The company claims that the technology is economic and scalable:

“Align Technologies the maker of the Invisalign clear braces that just last year printed over 17 million unique and distinct molds for the manufacturing of their clear aligners…I just wanted to underscore that this movement of manufacturing over the future is economical, it’s scalable, it’s profitable and it’s happening already in the year now.” (3D Systems)

This certainly helps support their claims:

“General Electric that is committing over $3 billion over the next few years to advancing its own integration and harnessing of advanced manufacturing” (3D Systems)

But make sure to note that it’s difficult to be all things to all people:

“We developed and deliver the broadest range of 3D printers from $1,300 home printers to $950,000 professional printers expanding our use of cases substantially. Customer needs and budgets vary greatly and part of our strategy is to democratize success at all price and performance points. We believe that we must continue to deliver to our customers’ best-in-class printers and solutions to address all their design to manufacturing needs…what sets our growth plan apart is our pursuit of two parallel growth paths concurrently.” (3D Systems)

Miscellaneous Nuggets of Wisdom

It can take 20 years for even a well financed global brand to reach critical mass in a new market:

“We have actually been in China since the late 90’s, but we reached something of a tipping point I would say, three or four years ago…I think that was about reaching an awareness in that marketplace” (Starbucks)

Sometimes you have to make investments in growth when the cycle looks weak, so that you can reap the benefits when the cycle turns:

“Historically when these economies turn you do not have enough time to rehire your distribution capability to take advantage of the change in the economy. If that pipe is not sitting there when markets get better you lose out on that expansion. So this is actually, it’s counterintuitive, I know, this is the right time to be in a position with a broader distribution capability.” (Oracle)