Company Notes Digest 6.27.14

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

Inflation was a hot topic this week

“we’ve seen a…shift from historical patterns of deflation in generic drug cost to inflation…in some cases these increases have been significant…we didn’t quite anticipate it…This was really kind of snuck up I think on the industry and us” ($WAG)

“input cost inflation was a bit above our forecast.” ($GIS)

“There is some upward cost inflation specifically in commodities like pepper and vanilla and we’re working with our CCI programs to help to try to offset those” ($MKC)

While the inflation was somewhat unexpected, companies tended to downplay it

“wouldn’t say it’s all around the drug inflation.” ($WAG)

“We also of course are seeing some moderating dairy inflation…we’re encouraged by what we are seeing on that front…we [are modeling] 3% inflation as you know we have a fairly broad market basket” ($GIS)

“we’re not anticipating [taking price] in our consumer business at this point…Obviously if [inflation] gets excessive then we’ll readjust our thinking. But certainly we’re not anticipating anything before the end of 2014.” ($MKC)

If there is inflation there are some barriers to getting it to the consumer. Retailers are sacrificing margins to give consumers deals

“This decrease in the gross profit margin as a percentage of net sales was primarily attributed to an increase in coupon expense resulting from an increase in redemptions and a slight increase in the average coupon amount” ($BBBY)

Lennar blames slow housing market on limited supply and tight credit

“Generally speaking, the market continues a slow and steady recovery that is driven by limited supply of available homes both new and existing that are on the market, limited supply of land available to add to the supply of these homes and constrained demand from purchasers who would like to buy, but are unable to access the mortgage market.” ($LEN)

Lennar argues that banks are still afraid of getting penalized for making aggressive loans

“to the extent that [banks] see put-back risk is great and really political and social risk is also great…it’s hard for the lenders to get back in the business lending on a rational and reverted to normal kind of underwriting standard.” ($LEN)

And says that we are far from 2006

“Every time I hear that we don’t want to go back to excesses of 2006, the fact that they throw that caveat in there is reflective of the fact that they don’t realize just how far field we are from that.” ($LEN)

Still, Lennar argues that fundamentals are strong and that rising rents (more inflation?) will push housing prices higher

“I’ve said a number of times that I think it’s really relevant that rental rates continue to run higher than fully loaded monthly payments on for-sale product and rental rates have continued to move up. So, there seems to be kind of a push on pricing across kind of the platform.”

Several companies had positive things to say about Europe

“We’re definitely very pleased to see the rebound we had in EMEA, which is something we’ve been watching very carefully this last quarter…what I am particularly pleased with is when you look at the countries contributing to EMEA growth both from a consulting and outsourcing standpoint, we have quite largest markets in the country and countries in Europe and think about France, Italy, Germany the U.K.” ($ACN)

“if you look at Europe in particular, the booking patterns have improved. So, people are booking further ahead than they did the prior year. Occupancy is up, yields are up, so that’s all very positive stuff.” ($CCL)

“our EMEA business exceeded our expectations. It’s very good news to see this business beginning to show some top line growth after our prolonged recession in the region” ($SCS)

Chinese quick service restaurants are recovering

“In China what we are seeing is a recovery in QSR, driven I think a lot by our customers having an increased frequency promotions and limited time offers to bring consumers back to the stores.” ($MKC)

Brazil is rebounding too

“we were watching carefully what was happening in Brazil. We had excellent performance for many years and we had a kind of pause almost a year ago literally.So again it’s very encouraging to see that through all the efforts made by our Brazilian leadership, Brazil is back with high single digit growth this quarter” ($ACN)

Financials

Two examples of good old fashioned financial engineering:

Monsanto taking advantage of favorable debt markets to fund a share buyback

“Given the strength of our current balance sheet and our confidence in our growth prospects, we have decided to take advantage of the favorable debt market. By the end of FY ‘15, we intend to target the net debt to EBITDA ratio of 1.5. And one of the ways we will immediately put that structure to work is through a new 10 billion share buyback authorization” ($MON)

Walgreen mulling tax inversion, but it’s not necessarily a no brainer

“We’re looking at everything from what the timing, best timing would be, what the capital structure should be, what our tax structure or what the structure could do to as far as our effective tax rate. So, and that’s complex stuff I guess is what I would say Ricky as we work through this. We are working around the clock to try to understand all the above so that we’re able to make the right decision for the company.” ($WAG)

Consumer

The Millenial homebuyer hasn’t defined themselves yet

“today’s millennial generation has not yet quite defined itself. Is it going to be focused on something that’s more in the middle the city focused or are they going to be building their family by getting married and having children maybe a little bit later in life, but nonetheless still looking for suburban lifestyle.” ($LEN)

Land should be ~20% of the cost of a home

“If you look at our land cost as a percentage of ASP it stayed relatively constant in that 20% to 21% of sales price which allows to have a really strong margin.” ($LEN)

Companies are starting to crack the code on digital marketing:

It’s about creating a dialogue

“An ongoing two-way dialogue with consumers is also a critical element of our digital ecosystem….Through our social media platforms, we leverage the power and passion of sport to deepen our relationship with our consumers.”

Because digital marketing is about creating a dialogue, we may start to see “public relations” take share from “advertising” 

McCormick calling out “Digital and PR” as an advertising category

“Where we are spending our money is about half in TV half in digital and PR and so we are encouraged by what we are seeing.” ($MKC)

Consumer definitions of health are changing–more focus on protein

“The consumer definition of health is changing in the cereal category. Clearly, they are interested in protein, clearly there are things that they – some consumers want to avoid like gluten, and so you’re going to see us build on those trends with new product offerings and continued renovation” ($GIS)

People are snacking more

“clearly snacking is a trend, a positive trend, and so maybe that is a key factor of that and we’re very focused on the snacking trend, and it’s not just the snacks in our snack businesses, we see yogurt becoming more and more of a snack food” ($GIS)

“Our snack customers are continuing to do pretty well and continuing to innovate and we’re seeing that reflected.” ($MKC)

Packaged foods struggling to maintain wallet share

“Our packaged food customers are struggling with core volume and part of the way that they are trying to overcome that is with new product innovation that we are working with them on” ($MKC)

Branded food companies are seeing more startup competition

“what we are seeing is very small inroads from a number of small and regional competitors that are gaining one-tenth of a share point or two-tenths of a share point. Their overall share base is still less than 1% or 2%” ($MCK)

“Our view is just the sheer number of new items and number of new competitors certainly in a – for instance in yogurt space, just lots of people coming in with new items. And so the competition for a limited number of quality display options, I would say is increasing.” ($GIS)

Technology

Among other things, Accenture’s customers are focused on creating industry specific applications

“our clients are focused on four main themes, the digital customer, efficiency in cost optimization, industry specific solutions and advancing the technology agenda, including new technologies, extending ERP and network optimization.”

Athletes want more real time feedback on performance

“Athletes are demanding more real time personalized feedback on their performance. They want easy access to products and services that will help them improve. And they want to be part of a community where they can share and compare information” ($NKE)

Nike an early adopter that sees revolutionary potential in 3D printing

“In New York at the Super Bowl, we launched the Vapor Carbon Elite Cleat, our first cleat to take advantage of the revolutionary potential of 3D printing.” ($NKE)

Healthcare

Still early days for the Affordable Care Act

“it’s still very early to tail around ACA. I mean obviously publicly they have announced 8 million people have joined the ACA. We certainly feel like we’re getting our share of that 8 million people, but certainly some of those folks were former cash paying customers that are now in the exchange.” ($WAG)

Materials, Industrials, Energy

Accenture’s resources segment sees moderate improvement

“we saw moderate improvement in resources with 2% growth. Energy continues to generate strong growth globally, but we did see some moderation from previous quarters, particularly in North America.” ($ACN)

Corn had an ok year from a planting standpoint

“I think corn had a good year not a great year…if you look across the Americas we saw acreage contract and I think a big piece of our numbers reflects that contraction.” ($MON)

Lots of corn acres shifted to soybeans, which are having a record year at Monsanto

“our soybean business is having an absolutely record year driven by course of new products in soybeans and the build out of Roundup Ready to Yield, but also the portfolio advantage we have is those corn acres shifted to bean acres and we picked up on that.” ($MON)

Agricultural productivity will be increasingly important over the next 20 years

“f you look forward than the next 20 years, there are no new acres. With one or two exceptions, there are no new acres and then sustainable intensification yield becomes more and more important. And the way you unlock that on a sustainable basis is providing better advice to the grower that allows him or her to get more bushels on that same footprint.” ($MON)

Miscellaneous Nuggets of Wisdom

Consumer products companies are marketing companies

“We are marketing company so our job is to understand the change and capitalize on it” ($GIS)

Marketing is about understanding what your customer wants and giving it to her

“[having] a better understanding of what exactly the consumer wants there, we will get better at giving them, giving those products to her” ($GIS)

You have to earn your relationship with your customer every day

“The key to unlocking this potential is and always has been to focus on the consumer. Our relationship with the consumer is something we need to earn every day.” ($NKE)

At its core, cost cutting is about raising labor productivity and reducing wasted materials

“there is a whole range of supply chain and manufacturing initiatives in place all the way from the evolutionary to the revolutionary. And the objective there is to raise the productivity of labor to reduce waste of materials and produce even more premium product.” ($NKE)

New business units should need to prove success to earn additional investment dollars

“We’ve again taken the philosophy that we…we pay as we go. So as the business earns its ability to invest then we’ll make the investment” ($MKC)

There’s always room to take price when you have a strong brand

“we think we can continue to raise prices, particularly around product innovation and brand strength.” ($NKE)

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.