Company Notes Digest 7.18.14

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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

There are signs everywhere of an improving economy

“As we have strong positions, leadership positions across consumer and commercial companies in the Americas, we have a view into the key indicators of an improving economy which shows signs everywhere of improvement.” ($BAC)

BAC doesn’t see any retail funk

“our underlying consumers, they have increased their spending. We can see in our data that the retail volumes on debit and credit cards were up 4% from last year’s second quarter but more importantly up 8% from the first quarter of this year showing increased momentum in spending among our card customers.” ($BAC)

Consumers are breaking out their credit cards to spend on discretionary items

“if you look at the discretionary growth which is growing even more strongly though in the double-digit territory it’s across the board, it’s travel, it’s restaurants, it’s retail, it’s across the board so consumers are spending very strongly in both categories.” ($JPM)

Businesses may be loosening up too:

Comerica notes that deposits shrank in Texas as businesses withdrew money to make investments

“Texas deposits were down $150 million as middle market companies used their excess cash to invest in their business. ” ($CMA)

JP Morgan’s customers have been accessing their credit lines to expand inventories.

“Utilization is usually a pretty good measure of companies starting to expand and early on it’s receivables and inventory.” ($JPM)

Intel confirms that its customers are more optimistic and building inventories

“What we’re seeing from our customers is more optimism on the back half than we’ve seen in the last couple of years for the consumer segment…if you recall last year what we saw is that our customers were managing inventories very, very lean. I think they had very little confidence in a back half seasonal selling season and so part of it is just the year-on-year comparison. What they’re doing now is putting in more of a normal build for a more seasonal back half.” ($INTC)

However, companies are not spending on CapEx quite yet

You haven’t really seen in capital expenditures yet and if you look at the U.S. capital expenditures in total including big businesses they are kind of flat to down, that will ultimately be the driver of real growth. So if you start to see that you are going to hopefully see a stronger economy but utilization is I think is the first sign.” ($JPM)

Comerica saw slowing loan growth as the quarter progressed

“We are optimistic for the back half of the year, but we are mindful of the recent monthly trends that we’ve seen, where we saw more robust growth in April, followed by a slowing in both May and June” ($CMA)

And credit quality can’t stay perfect forever if credit is growing

“I don’t think as an industry we’ll get a package of a bunch more growth and just still like record low credit…we would bet against additional reserve releases going forward.” ($COF)

Meanwhile in capital markets…

Larry Fink says that markets are complacent

“The 10-year treasury is back to near 2.5%, the Fed continues to ease their bond buying efforts, and even in light of some of the recent volatility, the VIX is hovering near pre-crisis lows. Markets have been complacent in the face of this risk with down days quickly followed by elevated buying trends.” ($BLK)

…that the gains of the past several years have been driven by central banks

“the positive environment and the market gains we’ve seen in the past several years have been driven primarily by accommodative policy decisions and coordinated central bank actions.” ($BLK)

…and that we’re going to need earnings growth to sustain these levels. So far, so good though.

“More of the same won’t be enough to move market forward from here. Corporate results and earnings growth will be needed to become larger drivers of valuation. That’s where our attention has been, and in the past couple of days, we’ve seen second quarter kickoffs with some bellwether names, posting very strong results.” ($BLK)

Steve Schwarzman at Blackstone thinks that multiples are still reasonable compared to some companies’ growth prospects

“we’re investing in much more than before, higher growth companies and that’s — and I don’t think those multiples are particularly pricy often for the growth.” ($BX)

When cash gets trapped overseas because of taxes, the US loses out on investment dollars

Google is finding ways to make investments in assets abroad

“overseas cash was about kind of 60% and 40% in the U.S…We do have great opportunities outside the U.S. as well to actually invest our cash whether it be through acquisitions. You’ve seen a number of acquisitions in the last year that were made internationally as well as we’re building datacenters outside of the U.S. where our headquarters in Ireland continues to grow and we’re investing quite a bit of money there as well and to the real-estate…we actually have pretty exciting plans for our international portfolio both in APAC and in Europe. And so there’s a real kind of great case to actually continue to keep this amount offshore.” ($GOOG)

Intel builds factories with overseas profits

“We generate cash all over the world but we also make investments all over the world. We have factories in Ireland and Israel and China and the U.S. and so we consume cash. We don’t end up with the same kind of trapped cash problem that companies do that have minimal operations outside the U.S.” ($INTC)

Abbott notes that there are huge strategic, logistical and political benefits to building a local presence

“you’re a lot more economically able to serve if you are in market or close to market and responding to the desires and the needs of local consumers…having our manufacturing in countries helps us in effect self-hedge exchange as currency fluctuates in countries around the world. It’s clearly a strong commitment to the country, which helps us from a regulatory standpoint, it helps us from a cost to serve and freight standpoint.” ($ABT)


JP Morgan continues to warn that banks need to be prepared to deal with heavy deposit outflows when the Fed raises rates

“the Fed whether they use repo or just sell securities that will reduce deposits. It’s a factor with an absolute formula. The question is who’s deposits, what kind of deposits and when they might do something like that…some of the deposits will come out of non-operating wholesale deposits…some will come out of retail and just people will need to be prepared for it…if we are right about the liquidity drain in QE you will see a bunch of deposits flow out essentially in the second half of next year” ($JPM)

Citigroup thinks its deposits are relatively safe

“I’d say that, when you think about the potential impact of the FED’s actions on deposits, one we’re probably less exposed than others on this, don’t forget, we’ve got of our $968 billion of deposits, it’s just a little over $400 billion are domestic deposits. So it’s not the biggest part of our book…[we’ve also] been able to achieve is an improvement in our quality of deposits, both internationally but specifically domestically, over the course of the last several years.” ($C)

But we’re headed for a whole new world

“I think we’re going to end up in a new world that none of us have lived through before nor has the FED.” ($C)

This has been a really tough environment for banks

“I think candidly the most challenging part of it has really been the revenue side of things, it’s been the environment. I think a combination of the economic, the regulatory and the political nature of things around the world has probably made things more challenging than we certainly would have liked” ($C)

The competitive environment hasn’t changed: it’s still highly competitive

“I don’t think that we have seen the competitive environment get relatively worse or more competitive over the past quarter or two. But it is very, very competitive.” ($CMA)

Low volatility is bad for market making operations

“Over the course of the second quarter, there was a lot of focus across the industry on the challenges facing market-making businesses. Most importantly, how an environment defined by low volatility weighed on client activity and risk appetite.” ($GS)

M&A activity is brisk though

“we continued to see an increase in CEO confidence and a significant pickup in M&A activity…when we were doing this call a year ago, there was a lot of concern or question around, look, almost — for lack of better language, will M&A ever come back? And now we sit here in an environment where there’s lots of activity.” ($GS)

The regulatory environment is burdensome

“institutions with over $50 billion in assets are required to operate under significantly heightened regulatory and compliance standards…We have already added staff and we will continue to do for the rest of 2014 and next year to meet these higher standards.Based on current estimates, these higher level of staffing technology cost along with the elevated consulting fees will result in a near term increase to our efficiency ratio in the range of 60% to 62% beginning this quarter, and likely last until the end of 2015.” ($FRC)

JP Morgan is ceding market share in mortgages to protect itself from future run ins with the government

“Key drivers behind the share loss were the continuation of our strategy to reduce our participation in lower FICO and high LTV government loans as well as the burn out of HART” ($JPM)

Everyone is trying to just move on and put the financial crisis to rest

“We believe that this settlement is in the best interest of our shareholders and allows us to move forward and to focus on the future in serving our clients…we went through the negotiation, we felt to get this behind us that this was something that was in our shareholders’ best interest to move on from.” ($C)

There are $225 trillion worth of global financial assets

“there’s $225 trillion in global financial assets. Assets that are being managed by investment firms, managed $62 trillion of the $225 trillion. So over 70% of the financial assets are owned and managed directly by the owners.” ($BLK)

If you can get low double digit returns, you’re going to get asset flows

“if you can deliver 10, 11, 12 returns to institutions who are really focused on making 8, and if you can do it with real safety, you will have good flows there” ($BX)

European banks are getting increasingly dis-intermediated

“Let me add one other thing, Luke, which I think is not fully understood by the investment community, and that is the substantial growth in mutual fund sales in Europe. As you know, banks continue to deleverage, more and more activities are going onto the capital markets, greater confidence in Europe and the Europe’s future with a huge amount of savings in Europe. And so we’re seeing much greater penetration across the board in European retail.” ($BLK)


Brands are putting digital at the center of their campaigns

“What was actually interesting this year was how much the conversation with brands has changed from years past. Whereas digital used to be just one channel, today’s brand are putting digital at the center of the brand building campaign.” ($GOOG)

Advertisers want to advertise on beautiful products

“advertisers always want to advertise on beautiful products. And the fact that we have done a lot to improve the usability, the beauty and the value proposition to our end users is something that they really respect.” ($YHOO)

It took McDonalds 8 years to make money in breakfast

“McDonald eight years to make money in breakfast. We are already at above breakeven…this category is very tough. You got to have constant innovation and to be able to innovate across all the important day parts to drive the same store sales versus just the traditional lunch and dinner day part.” ($YUM)


Enterprise spending drove PC sales

“The second quarter exceeded our expectations. The improving economic environment, PC refresh, form factor innovation and the end-of-life of Windows XP combined to drive better than expected demand.” ($INTC)

Consumer PC segment still weak, especially in emerging markets

“While there are some signs of renewed consumer interest and activity, the consumer segment remains challenging, primarily in the emerging markets.” ($INTC)

Intel’s next generation of chips will help continue to blur the line between tablets and laptops

“Those are going to be devices that we think will start to transform how people think about a two-in-one device in the PC versus the tablet. That’s what we focused on.” ($INTC)

Intel argues that they’re already starting to take market share back from tablets

“I think it’s pretty clear to us that we are gaining some share and it’s not just from the traditional competitors. I think we’re seeing at these price points some shift back of tablet where we’re shipping a really nice two-in-one type touch enabled clam shell into these price points.” ($INTC)

Google may agree that the PC is not dead: we live in a multiscreen world

“We really are living in a multi-screen world. You start on mobile, you hop on tablet, you go to your desktop, you kind of come back to your television, you kind of Chromecast back to your TV, that’s the world in which we live” ($GOOG)

50% of small businesses still don’t have websites

“over 50% of SMBs still don’t have a website.” ($GOOG)


Healthcare utilization trends remain weak according to Johnson and Johnson

“In medical devices, we’re still seeing that utilization rates in the U.S. remain depressed both in admissions and surgical procedures but we continue to believe that as the economy recovers and healthcare reform gains momentum, utilization rates will increase.” ($JNJ)

Worldwide healthcare spend is $8 trillion, 30% is spent on products

“The worldwide market is immense with an overall spend of over $8 trillion. At $2.4 trillion, products account for nearly 30% of the spend, growing at about 3% to 5% a year.” ($JNJ)

The ACA is driving significant growth in Medicaid

“UnitedHealthcare is seeing significant and accelerating growth in Medicaid. 380,000 more people in the quarter and 635,000 through the first half of the year. Coming from expanded access to Medicaid in about half the states we serve, the launch of Florida’s planned Medicaid expansion, and core program growth from already established markets and programs.” ($UNH)

There is no sign that employers are “dumping” employees onto health exchanges

“We continue to believe that the employer dumping will be somewhat moderated, it was moderate this year. We are not sure next year is any year that would be much different than this year as these exchanges establish.’ ($UNH)

UnitedHealthcare is ready to expand further on exchanges

“In the individual market, we plan to grow next year as we expand our offerings to as many two dozen state exchanges…we always anticipated a more modest participation this year and then ramping in the 2015-2016 time period and that’s exactly how this is playing out” ($UNH)

Miscellaneous Nuggets of Wisdom

Stay focused on your own efforts

“I got to tell you, I have not spent any time looking at what our peer institution put out there, so I apologize.” ($C)

Stock repurchases should not be thought of like a dividend

“one of the things in terms of the way we approach the capital planning is we really don’t want our folks and our investors to think of stock repurchase as a dividend. So one of the things we don’t do is we don’t announce our stock repurchase capacity at the beginning of the year because we treat it dynamically, it’ll be environment-driven.” ($GS)

Good businesses find a way to adapt to negative developments

“when we started trading government bonds on Tradeweb, everyone said that business was over, just like, by the way, they said the same thing when the euro was created. And over time, these businesses have generally — we’ve been in a position where we’ve been able to provide more value to our clients, enhance liquidity to our clients.” ($GS)

There are ways to continue to build value in the slow parts of the cycle

“For us, during the slower part of the cycle, the slower part of the cycle was really aimed at making sure that we stayed connected with our clients.” ($GS)

Don’t manage your company for the quarter

“I can’t overemphasize this, we do not run the company for quarterly profits. We make long-term decisions on people, systems technology, products services, stuff like that and lot of things drive short term profits, but the profit you have in any one quarter relate to decision you made for the last five years and so we feel great about these companies.” ($JPM)

It’s a complete waste of time to look at quarterly performance

“I honestly I mean I don’t care whether the FICC was up 10% or 15% or down 10% the next quarter. I actually think it’s complete waste of time.” ($JPM)

Sell solutions, not products

“this is something that many of the other issuers of ETFs really don’t think about. They are out selling products. We’re selling a solution. An ETF is a part of that solution” ($BLK)