Company Notes Digest 6.22.16

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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.

This Week’s Post: Winding down Q2

We’re in the slowest part of the earnings cycle for the next few weeks, but there were some companies speaking here and there. Among the newsworthy items of this week: Carmax saw weakness among subprime auto borrowers, homebuilders are positive and the oil industry sees a bottom, but a slow recovery.

The Macro Outlook:

Janet Yellen does not see a high chance of recession

“I think [chance of recession] is quite low. I think the US economy is doing well…we are watching this recent slowdown in the job market carefully, but my expectation is that the US economy will continue to grow…I remain quite optimistic. The kinds of conditions that have been associated in the past with US recessions, often that occurs when inflation is in the economy is overheated and inflation has been quite high the Fed has had to tighten monetary policy. We do not have any such conditions now.” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen increasingly seems to cite longer lasting factors for slow growth

“although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future.” —Federal Reserve Chair Janet Yellen (Central Bank)

“We have looked very closely at investment spending and try to understand why it has been so very depressed in the aftermath of the crisis. I think one reason for it is simply that the economy has been growing slowly. Sales growth has been slow and many firms have found that they actually do not need to invest very much in order to satisfy the demand growth that they are seeing” —Federal Reserve Chair Janet Yellen (Central Bank)

International:

Trade creates net benefits but there are winners and losers

“I guess I would just say that in the view of most economists, more open trade creates net benefits, but that does not mean benefits for everyone. There are gainers, but there are also losers and that is certainly…I think it’s important to have policies that address the losses.” —Federal Reserve Chair Janet Yellen (Central Bank)

Chinese buyers continue to invest in California real estate

“We are seeing a sustained interest, particularly in the Asian or Chinese buyer. We haven’t seen that fall off. So if you look at a place like Irvine, where it’s been very significant. We have good data at the Great Park. That’s remains very consistent and healthy, same thing in the Bay Area marketplace, so we’re seeing consistency there.” —Lennar CEO Stuart Miller (Homebuilder)

Financials:

Carmax is seeing increased losses in subprime auto lending

“Over the last 2 years though we have been expanding at the lower end…we did have some unfavorable experience in the quarter as I mentioned due to – partially due to that expansion and partially due to the wholesale recovery rate.” —Carmax CFO Tom Reedy (Auto Dealership)

Santander stopped lending to subprime auto altogether

“In the quarter though we did see one line in particular a pullback and it was Santander I mean you have seen them out in the public domain, talking about how they are pulling back in sub-prime auto, letting other business to other folks.” —Carmax CEO Tom Folliard (Auto Dealership)

Homebuilders are bullish on rental markets even though they’re getting over-heated

“everybody is starting to hear that there might be a little bit more heat in some of the rental markets…we’re probably coming to the later innings of…the first game of a double header. We might see a little bit of softness for a period of time but it looks like and it feels like absorption is going to outstrip any kind of oversupply in fairly short order and we think that there’s a lot of run rate for the multifamily markets, for the rental markets going forward.” —Lennar CEO Stuart Miller (Homebuilder)

Home affordability is getting more challenging in coastal areas of California

“The California market can ebb and flow. And what we’re seeing right now is continued strength along the coasts, both north and south, that’s moved pricing up, and so it’s an affordability challenge in the more expensive coastal areas and it pushes demand further inland..” —KB Home CEO Jeff Mezger (Homebuilder)

Consumer:

Millenials still like to shop in stores

“We know from research that the millennial generation, the largest generational cohort in American history is not going to stop going to stores…e-commerce is fantastic and its going to continue to grow…but…it’s not going to…eliminate retail. What it may do is change the character of retail.” —FedEx CEO Fred Smith (Package Delivery)

Mondelez is excited about the potential for advertising on Facebook’s messaging platform

“Mobile is the most profound disruption we’ve ever seen in business. People are living their lives on mobile. It’s changed the way we discover, experience and share. It’s also changing the advertising industry, and messaging will have an even greater impact on how brands engage with consumers than social media has.” —Modelez CMO Bonin Bough (Packaged Foods)

Technology:

The internet helped musicians but hurt the record labels

“The internet helped artists even though it hurt the recording industry. Beyonce is huge in Columbia because of the internet, not because of the old gatekeepers. We just want to make sure we’re in every channel of live entertainment possible.” —Livenation CEO Michael Rapino (Ticketmaster)

Materials, Energy:

Oil companies are beginning to call the bottom of the oil cycle

“The Permian [basin] has bottomed out.” —Pioneer Resources CEO Steve Sheffield (Oil)

The recovery is expected to be slow though

“We think at this point in time in the cycle the market itself will be – we’re coming off of the bottom and we feel like we have kind of at the bottom at least in North American and approaching a bottom internationally. But that the recovery itself is going to be a lower slope recovery than maybe some others have been.” —Halliburton CFO Mark McCollum (Oil Service)

And oil prices are not expected to return to their previous highs any time soon

“The current downturn is now 20 months long since the US land rig count peaked in October 2014. It already outpaces that of 1986/87 and estimated E&P spend for 2016 is now about a third below that of 2014. At such levels, continual growth in production capacity cannot be maintained, and production lost to decline cannot be fully replaced. E&P capital expenditure has been cut with exploration halted, development aggressively curtailed, and service industry prices relentlessly squeezed. While this playbook might have allowed the business to return to normal in the past, we do not think that oil prices will return to their previous high levels any time soon, short of a major supply upset, given the greater availability of lower-cost Middle-Eastern supply and the progress that has been made in the cost of unconventional resource development in North America.” —Schlumberger President of Operations Patrick Schorn (Oil Service)

Iron Ore markets may not come back into balance for another 10 years

“One of the markets that will take longest to come back into balance is the iron ore market. The reality is we’ve settled down now to a price that we would say is more realistic on the basis of fundamentals of supply and demand. We’ve had such a long boom. To walk that through, in my view, may take another 10 years.” —BHP CEO Andrew MacKenzie (Mining)

Miscellaneous Nuggets of Wisdom:

Create “win-win-win” situations

“I just think that you should think about the business in such a way that you simultaneously create strategies where all your major stakeholders are winning. And if you’re not doing that, you’re not creating very good strategies. But once you take on the framework that your responsibility as a leader is to find strategies where you’re not making stakeholder trade offs but you’re actually creating stakeholders synergies, then you’re on the right track.” —Whole Foods CEO John Mackey (Grocery)

Develop personal relationships with your team

“You’ve probably heard the phrase ‘it’s business, it’s not personal.’ That phrase makes absolutely no sense. It’s a cliche that everyone uses. It’s sort of absurd when you think about it, people actually are the ingredient to creating amazing results in business. The reality is that it is business AND it’s personal. You need to understand what motivates your team and how you can deliver on that. You need to understand what people value, what their strengths are, and how you can enable them put their strength to use. As a leader, you need to develop a personal relationship with your team. As a leader, you’ve got to push yourself to develop those personal relationships. And there’s something that’s even a little more powerful, what’s more powerful is when you push yourself to share that same dimension about yourself with the team. When you’ve got members of the team that have a deep understanding of what motivates you. And when you do that, the results are phenomenal, you get to a level of understanding and trust amongst your team which drives you to results even faster than you imagine.” —Nike CFO Andy Campion (Apparel)

Relationships are everything

“The most important thing I would tell you is that relationships matter. What I have learned in my career is how important is relationships are and how you treat people and your relative success. There’s this perception amongst some that the way you get ahead is to backstab others. It doesn’t work. What matters is that people, in every relationship you have, you have to treat people with respect and dignity.” —American Airlines CEO Doug Parker (Airline)

Full transcripts can be found at www.seekingalpha.com