Company Notes Digest 6.9.2017

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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.

Global growth is firming up despite the fact that inflation has not picked up broadly. Deflation is therefore a headwind heading into the second half of the year. Still, US Steel users are facing rising materials prices that are compressing margins. Stock prices are very high and there’s a lot of complacency in the market.  High prices and low volatility mean low returns. —Erick Mokaya (@probinginvestor)

The Macro and International Outlook:

The global economy has momentum

“Global activity is firming broadly as expected. Manufacturing and trade are picking up, confidence is improving, and international financing conditions remain benign.” —World Bank

“…a stronger momentum in the euro area economy, which is projected to expand at a somewhat faster pace than previously expected….Incoming data, notably survey results, continue to point to solid, broad-based growth in the period ahead. ” —ECB President Mario Draghi

“Asia continues to be the world leader in growth helped by stronger demand and accommodative policies.” —IMF Deputy Managing Director Mitsuhiro Furusawa

Europe has turned into a bright spot

“the glass is half full I think as it relates to Visa in Europe….So there is an enormous amount of opportunity in Europe….I think we’re off to a good start.” – Visa CEO Alfred Kelly, Jr

Many companies are still fighting deflation

“We continue to experience deflation….The general lack of inflation also caused what we believe to be a short-term pressure on gross margin dollars”  –  United Natural Foods CEO Steve Spinner

“…when I look across our whole portfolio today and I compare 80% of our capital is going internationally into areas that are deflating….if we see persistent inflation that starts to erode the margins, we will allocate capital, the lowest cost to supply highest margin opportunities in the portfolio.” – ConocoPhillips CEO Ryan Lance  

“the economic expansion has yet to translate into stronger inflation dynamics. So far, measures of underlying inflation continue to remain subdued…”  – ECB President Mario Draghi

But there are also areas of inflation (note the impact of trade policy)

“…we are now beginning to feel the impact of rising material costs. The biggest impact is coming from lumber…you can see the spike in January of ‘17 when the previous trade agreement with Canada expired. This put upward pressure on lumber prices” – Hovnanian CEO Ara Hovnanian

“The new administration is being extremely tough on imported steel products and has instituted from anti-dumping tariffs on imports…And so as a result, much of the lower cost source of steel and steel Rebar coming into the country has ceased and so we’re seeing a significant escalation in our cost for steel Rebar.” – HD Supply CFO Evan Levitt

“our margins continue to reflect the near-term headwind of rising steel prices” – NCI Building Systems CFO Mark Johnson

Expectations for new legislation are much lower

“You’ll probably get some tax reform and it will more likely resemble a tax cut as opposed to broad-based reform” – PIMCO Global Chief investment officer Dan Ivascyn

“…I am not expecting some quantum change in the amount of people that are active in healthcare. I do expect quantum change at how they are reimbursed and what” – GE Healthcare CEO John Flannery

There is a very high level of complacency in the markets

“The level of complacency about where markets are today is pretty scary. People are just sort of assuming it’s OK, that it is what it is, and I have to say that I’m a little bit concerned about it.” – TPG Co-CEO Jon Winkelried

Low volatility means low returns

“Instead of buying low and selling high, you’re buying high and crossing your fingers….tell your investors that it’s a changed world, that returns are going to be lower and that if you want to sleep at night, to accept the market as it is. Low volatility requires low returns.” —Janus Bond Fund Manager Bill Gross

Financials

Financial companies can go broke in a day

“when I started in finance, I asked someone, “Why do A-rated financial institutions trade at big premiums, in terms of their debt interest rates, compared to a similarly rated industrial company?” He said to me, “Steve, financial institutions go broke in a day. It takes years for an industrial company to lose its market position and finally give up the ghost.”” —Blackstone CEO Steve Schwarzman

The DOL fiduciary rule was positive for big broker dealers

“The DOL rule by and large is a positive for us, and it sped the movement to fee-based accounts. We agree with the principals of the rule, and frankly from a pure [profit-and-loss] standpoint, we find it to be relatively positive.” —Morgan Stanley Wealth Management co-head Andy Saperstein

Consumer, Retail

When old retailers close their doors, they create new real estate opportunities

“we are continuing to see a lot of flow in terms of things that are being shown to us, if you will, from the fact that Sears, Macy’s, JCPenney, Sports Authority, all these guys are putting space, if you will, on the market.” – Dave and Busters CEO Stephen King

“There is a whole lot of news out there about closures and so that creates great opportunities for us….I like the quality of the pipeline and deeper the pipeline the more picky you can be against it…the deeper the pipeline gives you more flexibility against landlord” – At Home Group CEO Lee Bird

Technology:

Amazon may be the world’s most admired company

“I think first and foremost, what Amazon has done is nothing short of extraordinary. I mean they have set a standard in terms of e-commerce that is just phenomenal….they are very customer centric and they believe in consumer choice and they are not trying to steer people in certain directions.….we’re best served by just making sure that we stay close to them and we’re serving them well.” –  Visa CEO Alfred Kelly, Jr

“So I think that Amazon, first of all AWS is incredible, we use AWS at Cisco, we use a bunch of the other cloud offerings as well. And what you’ll find is they built an incredible sort of APIs, for customers to take advantage of” —Cisco SVP David Ulevitch

Healthcare:

The US healthcare market is in a soft spot

“It’s been soft in the first few months of the year….I am looking at sort of a flattish market in the U.S. There is definitely some uncertainty and wait and watch about the legislative process and proposals and how that might affect us.” – GE Healthcare CEO John Flannery

Healthcare makes up 20% of the US economy

“healthcare now makes up almost 20% of the economy in the U.S.; about 10% in a lot of the other major economies around the world…we got about 40 million people who are at the age of 65. That number is going to go to 80 million over the next 20 or 30 years; and if you look at every age category, from 70 to 80, 80 to 90, you see very similar statistics…the corresponding increase in medical and healthcare consumption with that aging, it’s pretty remarkable.” – Johnson and Johnson CEO Alex Gorsky

Industrials:

Boeing says the global aerospace market has become less cyclical

“…the global marketplace is a much less cyclical market, passenger traffic patterns today are much different than they have been in the past. We have a backlog of seven years instead of two years, a backlog that’s geographically diversified” – Boeing CEO Dennis Muilenburg

Materials, Energy:

There has been a lot of oil found in the US and it’s not going away

“back about 4 years, 5 years ago I was invited to the Vienna meeting. I was on the stage like this in front of all the big OPEC crowd with at the time, Ali Naimi, who is the Minister of Saudi Arabia, the Venezuelan oil minister, the Iranian and I got up and I told them that U.S. would surpass Saudi Arabia in production in 5 years. And I got laughed off the stage…So to put it in perspective, our industry has found over 400 billion barrels of resource in the last 10 years, 400 billion. That’s 10 crude oil days in the last 10 years in this business. And so I think the recognition that’s now coming is one that it’s real, that it is competitive at a $50 barrel price deck and it ain’t going away.” – ConocoPhillips CEO Ryan Lance