Company Notes Digest 7.12.13

posted in: Notes | 0

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

John Stumpf has an upbeat view of the economy:

“While commercial loan demand is still modest, jobs are being created, consumer confidence is increasing and the housing the market continue to demonstrate strong momentum.” (Wells Fargo)

He’s particularly upbeat on housing:

“we have a unique and pretty grounded way have seing real-estate across the country. And the view is better everywhere, has been better everywhere for going on some cases two years surely in the past year.” (Wells Fargo)

“The thing I hear most about when I am out in the marketplaces, the lack of inventory. So, we are expecting that prices will continue to improve I mean not to level to have in the past but housing surely has a strength to it.” (Wells Fargo)

Housing is more than just housing, it’s an important economic driver:

“When housing improves, people feel better. I mean two-thirds of Americans or so own a home. When housing improves, it improves the confidence. People spend more. The multiplier effect on buying washers and dryers and other consumer goods is just – it’s just very special around housing. So when housing gets better, it really lifts all boats on the consumer side.” (Wells Fargo)

Family Dollar is not so upbeat. (The low end continues to struggle):

“the economic backdrop remains very challenging for our customer. She’s stretching her budget and forced to make choices. She’s coming to us for her basic needs, and we’re gaining share in those businesses…We continue to plan our discretionary categories conservatively.” (Family Dollar)

Companies tied to manufacturing also sound gloomy:

“[Customers] have indicated that there’s been no catalyst for increased demand. And that in the meantime, while they’re business remains sluggish, they’re tightly controlling metalworking and MRO spend.” (MSC Industrial Distribution)

“Looking at the results for the second quarter, I think the main story is slow sales growth, and we believe that’s really caused by a few things. One is a slow economic condition…” (Fastenal)

There are some signs of positivity from the industrial distributors though:

Fastenal is HIRING!:

“we were too tight on adding people in the fourth quarter and for the — basically the last 3 quarters…Our plan going forward to try and address that is to add between 100 and 150 FTE per month for the next 6 months throughout the rest of the year, adding 600 to 900 FTE for the year.” (Fastenal)

MSC Industrial says the supply chain is coming back closer to home (N.B.: North America includes Mexico):

“More and more, my discussions with supply chain executives that are a key customers give me growing confidence that significant manufacturing growth is likely for North America over the next decade. As the focus of supply chain moves from strictly a low cost country sourcing mindset to one centered on supply chain speed, flexibility and proximity to customers, the premium is high to keep the manufacturing supply base local to the North American market” (MSC Industrial Distribution)

China

Overall some signs of stability in China, with storm clouds looming

Alcoa confirms its outlook for Chinese demand growth:

“11% demand growth for aluminum in China is really confirmed…So, demand continues to be strong…” (Alcoa)

Yum!’s KFC sales were down because of concerns over the Avian Flu, but Pizza Hut comps were solid:

“KFC sales in China were significantly impacted by the intense media surrounding avian flu…same-store sales decline in June was 13%…Fortunately, the extensive media surrounding avian flu in China has subsided” (Yum! Brands)

“in China, I couldn’t be more pleased with the very strong performance of Pizza Hut casual dining, which delivered solid same-store sales growth in the quarter, up 7%” (Yum! Brands)

Yum! is on the “ya China is slowing but it’s still relatively fast” bandwagon:

“even though the economy is slowing, it’s still the world’s fastest growing economy, and is expected to grow about 7% this year.” (Yum! Brands)

Chinese food inflation is turning to food deflation:

“we had estimated for the China division for the full year was about 3% food cost inflation…we’re now expecting food inflation to be about flat on the year. What we’ve seen year to date is deflation.” (Yum! Brands)

Like many Chinese industries, it seems that the Chinese aluminum industry also needs restructuring:

“We currently believe 41% of all of the smelters are under water…I am pretty confident that we will continue to see restructuring going on and probably in an accelerated fashion under the new leadership.” (Alcoa)

Whatever happens in China, perhaps it’s a good thing that the country is relatively insulated:

“China for us in the aluminum industry is living on a different universe…and they rarely communicate” (Alcoa)

Financials

Banks are locked and loaded for higher rates:

“we’ve been planning for a rising rate environment for sometime.” (Wells Fargo)

Securities portfolios have been managed defensively on duration:

“the value of our available-for-sale portfolio declined less than 2% during the quarter, and tangible book value was unchanged despite a 70 basis point rise in the 10-year treasury rate.” (Webster Financial)

And they are ready to take advantage as rates rise:

“we’re investing more in our securities portfolio because we think given the rate backup the returns are much more attractive.” (Wells Fargo)

JP Morgan thinks that if rates stay here it could be pretty damaging to mortgage origination volumes:

“if mortgage rates stay at or above current levels, the market could be reduced by an estimated 30% to 40%. Although we will adjust capacity, expense reductions will lag volume reductions, and will challenge profitability and production.” (JP Morgan)

Wells agrees in spirit, but thinks it’s pretty hard to predict. Given that Jamie Dimon said on CNBC this morning that Wells is better in mortgages, it’s probably better to listen to Wells:

“one of the things that we’ve learned in the mortgage business is that it’s probably not a good thing to think six months out or nine months out because there can be so much variability. We think volumes are going to be down but whether it’s going to be 30% to 40%? I just don’t know.” (Wells Fargo)

Whatever happens to volumes, share is shifting to purchases over refis:

“Refis were 56% of the originations in the second quarter down from 69% in the first quarter. We have managed for many refi cycles in the past and we will adjust the size of our business based on production volumes through this cycle.” (Wells Fargo)

For now, the procrastinators who still haven’t refinanced are moving with a sense of urgency:

“if anything, those that we’re thinking about refinancing are moving more quickly to do so.” (Webster Financial)

NIMs did not expand this quarter, but they probably will in the future:

“we could continue to see some continued compression in the net interest margin…[because] the balance sheet hasn’t completely repriced…[but] The underlying factors really have changed.” (Wells Fargo)

“NIM was down 23 basis points quarter-on-quarter we acknowledge this is larger than you may have expected but…was principally a result of actions we took to…comply with Basel requirements” (JP Morgan)

JP Morgan saw weak loan growth and competitive pricing (As did Wells):

“[loan growth was weak because of] demand. And…very, very strong competition. And we are, as I said, prioritizing quality over growth. We would rather tactically underperform than chase a deal we were uncomfortable with.” (JP Morgan)

Interestingly Webster, a mid sized regional bank, seems to disagree on both fronts:

“Commercial and commercial real estate loans grew at a 16% annualized rate in the quarter” (Webster Financial)

“Commercial pricing was firm. You saw it was up about 15 or 20 basis points in the quarter, also higher than last year…when we look at business that we’ve passed on, is that about 2/3 of that, the business again we passed on is relative to structure and 1/3 pricing. And if you go back a year ago, it was almost the opposite.” (Webster Financial)

Big banks are still entangled in a regulatory nightmare:

Regional banks would gain some competitive advantage over the big guys with the new leverage rules:

“This proposed rule could have multiple positive competitive ramifications for well-capitalized regional bank like Webster, given the challenges it poses for the big banks, most of which will need to build capital.” (Webster Financial)

And Jamie Dimon obviously doesn’t like that:

“If you have a world where some businesses have to have twice as much capital as other companies, that obviously over time can create huge competitive disadvantages…We have an interest in a safe and sound system, so we’re not against the leverage ratio, but we’re not for a hugely unbalanced competitive playing field.” (JP Morgan)

If the regulators do focus on a leverage ratio that could have an impact on some day-to-day plumbing of the financial system:

“anything which is a low RWA asset, including HQLA, revolvers, certain types of derivatives, those things obviously you’ll look at a little bit differently, because of this leverage ratio asset…we take huge deposits in from countries, and from money funds, etc., that you may not take in because you can’t afford capital against a deposit of a billion dollars that you’re getting from a money fund, that you park at the Fed for 25 days, just waiting to pay the FDIC 10 basis points. You pay the client 5 or 6 or 7 basis points. You’ve got to put 6% capital against it. A whole bunch of things we’ve got to figure out how we’re going to do it, but we want to make sure we manage the client franchise properly. We’ll figure out the other stuff over time.” (JP Morgan)

JP Morgan’s CFO’s thinks Glass Steagall is a total red herring:

“Glass Steagall didn’t have anything to do with the crisis, and our business model allowed us to be a port in the storm. Our customers like doing business with us in the model that we have now, so we don’t spend time thinking about it” (JP Morgan)

Now that the regulatory environment is starting to firm for regional banks, there may be a pick up in M&A:

“to the extent that [solidified capital standards] gives people more confidence to do things now that we have clarity, perhaps it would have an implication for M&A activity.” (Webster Financial)

Consumer

The consumer is spending on improving her living space:

“whether it’s bedding or housewares, we’re seeing some really good stabilization in those businesses.” (Family Dollar)

Exclusivity is good for business at Family Dollar and at Yum (and pretty much everywhere #monopoly):

“Exclusive agreements in segments where there is low customer loyalty, like batteries, are good for our customers, our stores and our profitability…for example, last quarter, we signed an agreement with Procter & Gamble to make Duracell batteries our only national brand in all of our stores.” (Family Dollar)

“It’s pretty nice when you have products that nobody will ever have but us…I think the big thing about Doritos Locos Tacos is no one else has it” (Yum! Brands)

Technology

Applied Materials says that capex budgets in the semiconductor space are headed higher because complexity is increasing:

“with increased process complexity, generation over generation in the next few years we expect that foundry spending will have to increase…longer development cycles are necessary…and earlier engagement with the customers as a result…bendable, rollable, foldable displays will come in a not too distant future. That type of form factor will require new material, new material deposited using high precision material engineering and all of this increases capital intensity” (Applied Materials)

The most important driver of a smart phone purchase is the quality of the display:

“display is a dominating component for smart devices…[first people want] the resolution, then people ask to optimize power, then people ask to optimize form factor.” (Applied Materials)

Some helpful benchmarks on where we are in terms of display quality:

“Typical newspaper print is roughly 200 pixels per inch equivalent on a display, you go to magazine and books, something in order of 280 to 300. And then you go to some glossy pictures that’s roughly 700 PPI. So in fact the human eye can once you start to pay attention to this, you will want high and high resolution devices…to give you a point of reference, the iPhone 5 is 320 PPI roughly and the Galaxy phone is over 400 PPI roughly.” (Applied Materials)

Always worth highlighting when a company specifically says which customers it thinks stand out from the pack:

“When we work with all of the foundry customers, TSMC stands on global foundries and also with Intel. All of these companies are focused on more features, better performance, longer battery life and the transistor technology, 20 nanometer finFET technology, this is the key focus for all of these companies.” (Applied Materials)

Materials, Industrials, Energy

Alcoa had some positive things to say about the truck market:

“Inventories have decreased to 49,700 thousand trucks that’s a reduction of 24%, and that’s a really critical point…we expect the production to trend up…the average age of the fleet is 6.7 years now 20 year average of 5.8 years. So, good news in terms all of pent-up demand coming to realization” (Alcoa)

And it sees coal grabbing a toehold from Nat Gas:

“In Europe, we have seen that gas-fired power generation is getting squeezed by lower priced coal and by subsidized renewables. In the U.S., we see a little bit of a different picture. The natural gas prices have climbed. So coal has been able to claw back some of the market share that gas had been winning before.” (Alcoa)

Turbulent times for gold miners:

“In these turbulent times the most important thing we can do is focus on the things we can control. Everybody at Donlin is completely focused on the permitting and advancing the project.” (NovaGold)

Miscellaneous Nuggets of Wisdom

Spend less time focusing on accounting and more time focused on what really drives value. Accounting is NOT Business:

“This is what the issue is with all this. You spend all this time talking about accounting as opposed to business. The business is deposits, serving clients, doing things, and now we’re talking all of a sudden about AOCI. And we have a lot of asynchronous accounting. And pro-cyclical accounting and stuff like that. We try to explain, but we try to look through all of that and build a business. More clients, more bankers, more branches, happier clients, and so all of our business, that’s how we look at it. We’ll work through the asynchronous accounting.” (JP Morgan)

An example of how financial statements can be influenced by arbitrary factors (But a bizarre explanation for why receivables grew in a quarter):

“Our AR grew a little faster than it should…I don’t know if this is a post office, logistics thing or what’s driving this, but we’re slowly seeing more and more of our cash come in, in the first 2 and 3 days of the week than what’s historically the norm….most of our cash still comes in via the U.S. mail…[2Q ended on a weekend] So if we held our books open until Tuesday instead of closing on the weekend, our AR would look a lot better.” (Fastenal)

People are the most valuable assets a business has. Limit turnover or prepare for headaches:

“We believe that there is a relationship between shrink, inventory levels and store manager turnover” (Family Dollar)

Family Dollar looks for executives with who are experts in their industry and so should you:

“It’s about understanding small-box retail. It’s about understanding, having an in-depth understanding of our consumer and how they’re evolving; our competition, how they’re evolving; our mix, how it’s evolving; our marketing collaboration between marketing and supply chain. And to me, it’s all about leadership, and I don’t know if it’s necessarily rocket science. But I think it’s those types of qualities that we are looking for. Someone’s got a deeper understanding of our business.” (Family Dollar)

When Buffett says he wants executives who tap dance to work, this is what he means. John Stumpf dreams of checking accounts:

“When I wake up in the morning I get here, the first thing I look at is the checking account report from the day before. I love checking accounts, I dream about them…because it’s the formational account for a consumer. And the second probably most important is mortgage, and that’s why we’re almost — we’re obsessive about that, about serving customers.” (Wells Fargo)