Company Notes Digest 6.3.16

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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: Strategic Directions

Companies were presenting at conferences again this week, which gave CEOs the opportunity to talk about long term goals beyond just quarterly results. In particular, Intel and McDonalds each had interesting conversations with analysts at the Sanford Bernstein Conference.

Meanwhile, macro economic insights continue to point towards an improving economy, but Silicon Valley appears to be increasingly finding itself on the defensive.

The Macro Outlook:

Ford finished May with a strong Memorial Day weekend

“Memorial Day weekend was pretty strong. I mean we closed the month up pretty strong, had a good last weekend, call it four, five days, Friday through to the close yesterday across really cars, trucks and SUVs.” —Ford VP Mark LaNeve (Automobiles)

Healthcare demand in the US has remained strong

“consistent with what all the hospitals are reporting…overall healthcare demand in the U.S. is something that is on an upward trajectory…probably some of it is just natural demographics which provides this. The other is probably we are seeing some of the impact of the Affordable Care Act” —Medtronic CEO Omar Ishrak (Medical Device)

Capital markets have started to reopen

“Capital markets have started to re-open a bit after a period of substantially lower activity.” —Goldman Sachs COO Gary Cohn (Investment Bank)

“I think there is some signs of recovery, if I look at the — month of IPO in the second quarter is larger than the total amount of IPOs in the whole first quarter.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

Some companies are clearly still concerned about macro volatility though

“we did mention that we’ve seen…a lot of macro volatility…I think from a sentiment perspective of our customers it has them more cautious then they had been in the past and they’re doing more inspection on deals, it’s taking longer from a deals sales cycle as they look at different things…they’re putting more attention and focus on what they’re going to spend and how they prioritize that.” —Palo Alto Networks CEO Mark McLaughlin (Enterprise Software)

International:

It’s imperative that international companies grow in the US and China

“if you are a global growth company, if you don’t grow in the United States and China, you have an issue. It doesn’t matter if you grow very well in Chile and Norway and Sweden and Finland, it doesn’t matter, you have to grow there, but you must grow in the United States and China.” —3M CEO Inge Thulin (Conglomerate)

3M’s CEO said that China isn’t really moving from an export to domestic economy

” I view China is the following way. It’s the second biggest economy in the world. It will be big and it is big and it’s growing. It’s also wrong perception to say that they are going from export to domestic. They’re not. They are continuing with export and they complement and build out domestic businesses. That’s what they do.” —3M CEO Inge Thulin (Conglomerate)

Economies outside of the US have more middle market companies

“When you look outside the U.S. many of the large economies are frankly mid-market economies, Germany as an example is full of mid-market sized companies.” —Workday CEO Aneel Bhusri (Enterprise Software)

Financials:

Few people expect long term interest rates to rise any time soon

“we have set ourselves up not to be too reliant on the prospect of the next move…because who knows how long it takes before we have a normalization of policy rates.” —Wells Fargo CFO John Shrewsberry (Bank)

The market appears to be pricing in a July rate hike but isn’t expecting a Brexit

“I think that the market is now pricing, that the Fed go probably in July and there is a high probability of that, that is being priced in the market and the market is not pricing a lot about the Brexit, so a negative event could really produce some correction in the market.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

Jamie Dimon warned that auto lending may be getting over stretched

“Auto is clearly a little stretched, in my opinion. Someone is going to get hurt. We don’t do much of that.” —JP Morgan CEO Jamie Dimon (Bank)

The active vs. passive investment management debate is cyclical not secular

“if we ended up in a world where you saw active managers outperforming index by many, many basis points, net of fees, you would clearly see a migration back into those active portfolio managers…So, I do believe that that is much more cyclical. And you will see active management at some point potentially outperform index.” —Goldman Sachs COO Gary Cohn (Investment Bank)

Banks which survived the financial crisis have gained market share in trading

“clients need to trade wherever they need to trade, and there is less players, they have to trade with whoever is available. So I think that by definition, that will produce a redistribution of that wallet into the bank that is still in that business.” —JP Morgan Corporate Bank CEO Daniel Pinto (Bank)

Fixed income trading will become increasingly electronic

“While electronification has been unfolding in equities for some time, we have also seen an electronic evolution across certain FICC products with regulation helping to accelerate this shift. In the future, we expect fewer voice trades and more automatic pricing and execution.” —Goldman Sachs COO Gary Cohn (Investment Bank)

Bank of America’s private wealth division is benefiting from an uptick in business succession planning

“we are benefiting from a lot of the succession planning going on. So we are seeing a lot of business owners monetizing their business” —Bank of America, US Trust President Keith Banks (Bank)

Consumer:

Cosmetics are bucking the trend of weak retail sales

“I think at the end of day beauty as a category is great price to be as and it’s a healthy category and it’s fairly we think insulated from some of the factors that are effecting maybe retailers broadly” —Ulta Beauty CEO Mary Dillon (Cosmetics Stores)

Americans Love SUVs again

“Segmentation of moving passenger cars into SUVs…is now a very strong five-year trend with no indication of slowing down anytime soon…consumer preference right now is what’s really driving the segment…five years ago, six years ago, passenger cars were about 53% of the overall industry. Last year, I believe they were 42%; this year, it’s looking like close to 40%. ” —Ford VP Mark LaNeve (Automobiles)

Retailers are scrapping plans to expand stores

“expanding the stores…hasn’t been a great return for us. So I would tell you that we’re not going to do that. That’s kind of over with. There will be a handful of select locations where we’ll do that but you’ll be able to count those on your two hands and they’ll be more flagshippy type things…Where we did them in more regional locations it really didn’t provide the uplift from a profitability standpoint that we were anticipating. So unless we see something changing on that, that will not be part of our strategy going forward. And in terms of outlets in North America, we’re basically done at this point. I think there’s one or two more that we’re going to open and it’s over with. And that’s pretty much worldwide also.” —Kors CEO John Idol (Apparel)

Technology opens new potential service paradigms for McDonalds

“technology suddenly provides us with a whole range of ways that we can put more choice and control in the hand of the customers. So, instead of them having to fit around our business model, which is either line up at the front counter in a way that we prescribe or go for the drive in a way we prescribe. That’s really the only two service options we provided for 60-years. In the next three to four-years, there could be another four or five different ways that customers can choose to order and you put control in their hands.” —McDonalds CEO Steve Easterbrook (Chicken McNuggets)

Technology:

Silicon Valley companies seem to be increasingly on the defensive

The SEC is watching Non-GAAP reporting closely

“As it relates to the SEC, we are very attentive to ensuring that we have the right disclosures and the right compliance around any adjustments we make between GAAP and non-GAAP. And I think we take it very seriously and we take great pride in ensuring consistency in our non-GAAP results.” —Splunk CFO Doug Merritt (Enterprise Software)

Stock based comp is also under elevated scrutiny

“So from a [stock based comp] perspective as you noted, we’re here in the heart of Silicon Valley in a very, very competitive talent environment and we’re very fast growing company. So the combination of those two things has meant that to support the growth we’re hiring a lot of people and we do that where you’re granting them equity to put make them part of the team and that’s ownership skin in the game…As we think about that into the future, the SBC will come down. I certainly expect that to be the case and I would expect that to start next year as a matter of fact.” —Palo Alto Networks CEO Mark McLaughlin (Enterprise Software)

The draw of startups from a hiring perspective is not what it was a year or two ago

“I actually think the hiring environment is pretty attractive right now, the draw for many of the startups in Silicon Valley is not what it was just a year or two years ago.” —Workday CEO Aneel Bhusri (Enterprise Software)

The price of glamour stocks have realigned but management and shareholders may not have readjusted their expectations yet

“the prices of biotech have realigned to somewhat. I’m not sure that even now management and shareholder expectations in biotech have readjusted to the alignment.” —Pfizer CEO Ian Read (Pharmaceuticals)

Companies have decided that the public cloud is more secure than holding data on premise

“I think what’s happened in that marketplace is they’ve come to a conclusion, there’s cloud actually far more secure and private than anything that was being done on premise and I think the same thing is happening with finance.” —Workday CEO Aneel Bhusri (Enterprise Software)

Box’s CEO mentioned IBM as a public cloud option

“We’ve been working on the architecture for Box Zones for over two years which allows us to leverage public cloud providers like IBM Cloud and Amazon Web Services…” —Box CEO Aaron Levie (Cloud Storage)

Healthcare:

Health insurers claim that prices are rising because Obamacare restricts their ability to select their patient pools

“you are seeing insurance companies avoiding adverse selection. They can’t do it by not covering, so now they are trying to do it by applying large co-pays and all coinsurance to avoid adverse selection in the risk pool” —Pfizer CEO Ian Read (Pharmaceutical)

There is a trend in surgery towards more minimally invasive procedures

“The other thing I would reference beyond just the increase in overall volumes, the other thing that we are seeing is a mix shift, a much greater growth in the [minimally invasive] procedures” —Medtronic EVP Michael Coyle (Medical Device)

Dental offices are digitizing

“Dental offices that are embracing digital dentistry are looking for partners they can make, integrating these technologies into their practice environment, and supporting them seamless.” —Patterson CEO Scott Anderson (Dental Equipment)

Industrials:

Jeff Bezos said that Amazon does not want to take over last mile delivery but does have to supplement it

“We are not aiming to take over last mile delivery. We are looking to supplement it heavily…We have to plan, just like any company would, to have capacity not for the average load but for the peak which is usually around the holiday season.” —Amazon CEO Jeff Bezos (E-Commerce)

Materials, Energy:

$50 oil isn’t a game changer for credit quality, but M&A is a good sign

“I don’t think it’s a game changer…the sign that we have been looking for in energy is the unfreezing of the asset level M&A activity that’s going on in the oil field…It feels like it’s happening more naturally now and I think that will help people figure out where value is…and that will help people to understand how far there is to go in this cycle before it’s over.” —Wells Fargo CFO John Shrewsberry (Bank)

There are signs that commodity markets are rebalancing, but mining remains under significant pressure

“Although there were a few positive signs that emerged during the quarter that suggested some commodity markets were moving closer to rebalancing, the overall mining market remains under significant pressure with continued reductions in capital expenditures and deferral of maintenance activities in particular with U.S. coal.” —Joy Global CEO Ted Doheny (Mining Equipment)

Miscellaneous Nuggets of Wisdom:

A lot can change in a few years

“Remember three years ago when I became the CEO tablet’s were growing at 30%. People were really worried tablets were going to replace PCs…what happened though is in that three years tablets have rolled over. They are actually declining somewhere 10% to 20% now depending on whose numbers you get and what they see.” —Intel CEO Brian Krzanich (Semiconductors)

“when I came here six years ago, if you think about six years ago, at that time the developing world looked different for everyone, right. We talked about BRIC, if you think about BRIC today, you’d wonder where did they go, right; Brazil, Russia, India and China, right…you think about United States today, we thought six years ago, we were not overly excited about United States or West Europe. You look upon it today in relative terms United States and West Europe is okay, slightly better than okay.” —3M CEO Inge Thulin (Conglomerate)

A business without reinvestment opportunities is a rotting asset

“I’ve learned through painful experience that without ample reinvestment prospects, you’re generally looking at a rotting asset.” —Markel CEO Tom Gaynor (Insurance)

The best way to handle criticism is to develop a thick skin

“As a public figure, the best defense to speech that you don’t like against yourself is to develop a thick skin. It’s really the only effective defense because you can’t stop it. You are going to be misunderstood. If you’re doing anything interesting in the world, you’re always going to have critics. If you absolutely can’t tolerate critics, than don’t do anything new or interesting than you can insulate yourself.” —Amazon CEO Jeff Bezos (E-Commerce)

Find what inspires you

“Life can’t be just about solving problems. You need things exciting and inspiring that make you glad to be alive.” —Tesla CEO Elon Musk (Automobiles)

Phil Knight hates to lose

“I hate to lose, it’s not about winning so much. It’s a tough emotion. I take losses personally. They affect me.” —Nike Founder Phil Knight (Apparel)

Business comes down to people

“The people factor is something that you really have to work hard at. Most people think of business as selling a product and you have a very good product to sell or you have a special strategy and after I found out that attracting good people to work with me, I found out that it was more powerful than what you were doing or what the product was. As a team, you will find something interesting to do.” —3G Capital Founder Jorge Paolo Lemann (Private Equity)

Full transcripts can be found at www.seekingalpha.com