Company Notes Digest 7.19.13

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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

Bank of America sees its customers ready to take more risk:

“you’ve seen growth in our lending across the board, and that indicates that people are willing to take risk. I think if you looked back a year ago, people were not using lines, and were not asking for a lot of lines, and that’s changed in the last couple of quarters.” ($BAC)

But Abbott argues that problems faced by developed economies are serious and will take more time to heal:

“I think the natural tendency is to always forecast they are going to recover faster than they do. They recover gradually, and I think that’s what we are going to see here…I think, optimism and hope and so forth have driven a lot of wishful thinking that is going to happen faster than it does, but frankly the problems of Europe or even the U.S. have been more serious and deep.” ($ABT)

There’s a disconnect between valuations and fundamentals. Abbott can’t find anything worth buying at these prices:

“I don’t think there’s a particularly robust…opportunity set [for M&A] out there today…There might be a lot of things for sale, but they may not be for sale at a reasonable valuation..if valuations are too high or we can’t make a strategic argument…then we don’t make the move” ($ABT)

Comerica hasn’t seen the rising stock market really have a significant positive impact on business sentiment:

“frankly, we haven’t really seen a significant change in terms of, I would say, the wealth effect in terms of business owners.” ($CMA)

Apparently Retailers aren’t the only ones who can blame the weather:

“we were faced with unusually widespread wet and cold weather conditions across the multiple regions, including North America and across Northern Europe and India all of which impacted our industry.” ($KO)

Europe remains weak according to Manpower (temp staffing company):

“Europe, while it has become a bit less volatile, clearly has not righted itself…They’re going to take austerity and moderate it a bit. And as a result, you’re going to get some of the confidence back, get some of the spending back and this will start to grow and — but our view would be yes, it will grow and just grow at a very moderate pace.” ($MAN)

Coke saw weakness pretty much everywhere. Social unrest in Brazil, but things returning to normal there:

“The weak economy continues to be a key factor affecting our performance in Europe…China’s economy has slowed and this is now leading to soft consumer spending…we saw things in Brazil that we hadn’t seen before, the economy slowed, there were social unrest. It didn’t last very long, things are slowly getting back to normal.” ($KO)

Encouragingly, Citi not seeing a deterioration in credit trends in EM yet.

“[in emerging markets] outside of some individual portfolio quirks, there’s nothing in the credit statistics in the early bucket delinquencies that gives us any extraordinary cause for concern.” ($C)

But Mexican homebuilders got a little ahead of themselves:

“[in Mexico] some of the home builders got a little over extended in putting supply where people don’t necessarily want to live anymore.” ($C)

And Ingredion (formerly Corn Products) is watching Argentina “implode” in hyperinflation:

“The cautionary comments [we made]…that if Argentina imploded, we could not hold the range, unfortunately, are playing out…we’re seeing…what we would consider hyperinflation. The unofficial inflation rate is probably between 25% to 35%…While we still maintain pricing power, limited pricing power in Argentina, it’s not enough to cover the rate of change in the cost structure.” ($INGR)

Argentina implode? Sounds scary, but been there, done that:

“In 2001 when Argentina blew up, it took us about 12 months to recover…as they go through their elections this fall, the pressure on the existing sitting government will be intense. There is — our belief is there’s a likelihood that the government will change. Currency will devalue, which will then make it easier to do business in Argentina…I would expect that, as we got through the second half of 2014, we see the cost pressures ease and we would see volume pick up.” ($INGR)


Last month’s interest rate move was nice, but it would be more helpful to banks if the Fed would raise rates:

“as you know, we typically price with the shorter end of the yield curve…And as you know, LIBOR really hasn’t significantly changed…So as you’re seeing a steepening in the yield curve, that hasn’t had as much kind of impact on us.” ($CMA)

“I think the rate move that we saw was certainly nice, that the industry certainly needed it. So thank you, Mr. Bernanke. However, what the industry really needs is move up in short-term rates to take us back to the profitability levels that we enjoyed before the crisis.” ($STI)

Rising rates are incentivizing borrowers save some money with ARMs. Penny wise, pound foolish:

“We’ve seen that both in our single-family and our income property loans are coming in for five-year as opposed to seven-year ARMs, because people are going for the lower rates.” ($FRC)

The evolving regulatory environment is still crowning winners and losers in Banking:

“The new rules have changed pretty substantially from the previous proposal…in the previous proposal, there were multiple tiers of risk weightings for mortgages, including 1 tier that was up to 200%. The new rules basically put all mortgages into 2 tiers, 50% and 100%. And as a result…you ought to see banks that have mortgage exposures do better than banks that don’t have mortgage exposures.” ($STI)

Credit quality and capital have healed even for two of the hardest hit banks from the last crisis:

“The credit quality story continues to be a good one, with nonperforming loans and net charge-offs hitting their lowest levels in over 5 years. Nonperforming loans declined by over 50% from last year and this quarter’s net charge-off ratio improved to 59 basis points.” ($STI)

“Moving to Basel III, fully phased in basis under the advanced approach, and based on final rules, our tier one common ratio was 9.6…our preliminary analysis indicates that at the holding company, our leverage ratio for the second quarter of 2013 was in the range of 4.9% to 5%, which positions us very well relative to the 5% minimum.” ($BAC)

Bank of America is sitting on top of tremendous value in deposits. Ready to flip the switch on the mortgage market:

“we have roughly 12% deposit market share throughout the country…we clearly would expect over time that that mortgage market share can grow from the 4 that we started at a year ago to the 5 that we’re at today, up to a high single digit market share… about 70-odd percent, 72-74% I think it is, of the activity that we do in mortgage is really off the customer base.” ($BAC)

Things have gotten so much better, that the fastest growing banks are actually seeing liquidity constraints to growth:

[analyst comment] “Is there a loan to deposit ratio target that you’re shooting for in terms of how we think about how much the deposit costs will go up going forward? I mean, you are 107 this quarter.” ($FRC)

Suntrust (probably the perfect sized acquirer) still sees better opportunities outside of acquisition:

“Never say never for acquisitions, I guess, but we’ve got so much opportunity, Brian, to run our company better and become more efficient, to focus on our clients and just do more business. That’s really what we’re focused on.” ($STI)


Coca Cola, like all good CPG companies is a marketing machine leveraging entrenched distribution:

“our business, we have said many times, is about brand…I think that is what this business is all about, adding value through brands to our system” ($KO)

Chipotle’s competitive advantage is its speed of service:

“We are committed to doing all we can to maximize this important strategic advantage that Chipotle has over all of our competitors…the name of the game is to put through more people during that busiest time” ($CMG)

It can’t hurt that Chipotle has an enlightened long term view of the brand-building too:

“we’ve always taken a longer term view in our marketing approach and rather than put out campaigns that will spike up sales or contribute to a quick comp, we would rather ensure that we’re building the business consistently and long term. We think that’s ultimately better for our shareholders and for the business” ($CMG)


Google sounds crazy:

“Project Loon, which we launched in June, is a great example. Bringing affordable, balloon-powered Internet access to remote areas is an idea that Sergey and I had been thinking about for over a decade” ($GOOG)

Crazy like a fox:

“We’ve now activated more than 900 million Android devices worldwide…Chrome, even though only four year old, has over 750 million users worldwide and growing.” ($GOOG)

Google and Yahoo each had disappointing quarters in a shifting online ad environment:

“Clearly mobile has some effect on [CPCs] and we’ve talked about that in the past, so it’s just one of the many factors that are at work.” ($GOOG)

“Our display business has felt some negative impact, particularly due to the shifts around programmatic buying.” ($YHOO)

Advertisers are still getting their bearings online, but they seem to be more comfortable with video:

“the other thing that really makes us very excited about video is that advertisers really like it, it’s something that translates really well from the format that they are used to, so an advertising can start on television, makes the jump to online and also ultimately be viewed on tablets and smartphones.” ($YHOO)

Yahoo acquires talent, not products.

“The acquisitions we have made to-date have all been smaller what we might call tuck-in, talent acquisition that’s really been about making an investment particularly in mobile, in fact most of our acquisitions have been mobile but they have been small teams that have been able to come on and immediately take on as a team that already knows how to work together well…A lot of the talent acquisitions that I have talked about we actually have shut down their products and favored having them work on some of Yahoo’s core products” ($YHOO)

As a result they may drop $1 Billion on a company that doesn’t add revenue:

“we don’t believe that Tumblr, for example, will provide meaningful revenue this year. There will be some, but it won’t be very meaningful” ($YHOO)

IBM was ok in software and services, but pressured on the hardware side:

“we see improved prospects for our services revenue base as we go into the third quarter. Ongoing signs in our software base. We do think that hardware will still be a challenging equation” ($IBM)

Speaking of hardware, the PC is apparently dead (…he typed on his laptop…):

“Intel was slow to respond to ultramobile PC trends…The overall PC market segment for 2013 is expected to be weaker than we forecasted at the beginning of the year” ($INTC)

“our Windows business declined as the device market continued to evolve beyond the traditional PC.” ($MSFT)

Intel and Microsoft are both scrambling to adapt:

“We are working to transition the business into this modern era of computing taking advantage of the new scenarios enabled our Windows 8…I want to be very clear, we know we have to do better” ($MSFT)

Intel has a lot lined up for the second half, can they deliver?:

“We have an unprecedented line up of products coming to market in the second half of this year across all the segments of our business. Haswell delivers a historical increase in battery life across a diverse line up of ultramobile form factors by two-in-one convertibles, tablets and other touch enabled devices.” ($INTC)

Intel argues that its customers want them in mobile:

“I think the things that were positive for me is that our customers…want Intel to get into this expanded ultramobile market. They are looking for Intel to get stronger and have a better and more capable product up there…and they’re excited about the products that we have coming there, Haswell and Baytrail. So I’d say the key message that they’ve been giving us was, we really want you there, we see the products coming, we want even more and we want a faster line up following those.” ($INTC)

They may have some unique advantages:

“The fact that X86 works on both Android and Windows is a real advantage to our OEM base. They look at that and say that they can have one architectural design, one set of products and use both operating systems. So, it’s a unique feature that we are able to provide.” ($INTC)

However, Taiwan semiconductor sees no reprieve in the second half. Inventories are bloated:

“the lower than expected sales of PCs and several smartphone models have again caused the supply-chain inventory to become higher…This is an early indication that the fourth quarter may be a down quarter because we expect the supply-chain to take serious action to manage their inventory in the second half.” ($TSMC)

Attention Apple shareholders: iPhones held 51% share at Verizon:

“The smartphone mix was fairly balanced; roughly 51% of the activations were iPhones.” ($VZ)

Get ready for VoLTE:

“We’re still on course for VoLTE. We will start testing and have our first handset in the market at the end of the year. And then we will probably commercial launch sometime next year. But again, as I’ve said in the past, the critical piece for us is that we have to make sure that our 4G LTE coverage footprint from a VoLTE standpoint equates to our 3G footprint, because the VoLTE call is not backwards compatible with the CDMA network. So when you establish a call on VoLTE, within our network, if you move outside of the LTE network, you will have a hard drop on that call. And obviously that’s not something that our customers would expect from a premium provider like Verizon Wireless.” ($VZ)

Content companies struggling to figure out how to adapt business models to a mobile streaming environment:

“[ESPN] realizes that the linear model will not work as it does in TV in the wireless market. You can’t assume that someone’s going to pay $8 a sub on 100 million subs, so that model does not work. So we are looking at other models, but the barrier is how do you measure everything to get back to the advertisers for the perceived value on that content?” ($VZ)

Beware of public WiFi networks:

“You’ve heard me talk before about wifi networks are not secure in the public domain…our customers are very concerned about their privacy and security. That’s why they ride the LTE network as much as they do.” ($VZ)


Healthcare utilization still low:

“While there are some indicators of general economic improvement, the healthcare market data we see in terms of utilization is still relatively flat over the prior year” ($JNJ)

Hospitals have been in a recession for the last 10 to 12 quarters:

“in discussions that I have had with hospital CEOs and with other people in the marketplace, I have seen a couple of things. One is, clearly there has been a recession now for, I believe, almost 10 to 12 consecutive quarters, where we see that admissions in the hospitals as well as numbers of procedures being flat to negative…secondly, people are waiting to see the full impact of the Affordable Care Act…Third, we are seeing is that patients, frankly, and customers as being more demanding about the data that is supporting justification for new approaches, new procedures and innovation…So that’s the way I would describe the overall CapEx environment as it related to hospitals.” ($JNJ)

With budgets tight Governments won’t spring for more expensive treatments. If you want to create a product that is standard of care, it had better be cheap:

“I think that what we have to acknowledge is if we want that product in broader workhorse use…the only way we do that is not to be an incremental burden to the budgets that have to pay for those products, as a philosophy” ($ABT)

United Health says Medicare Advantage will be pressured for the next two years, but after 2016 could get much better:

“we expect pressure on 2014 Medicare Advantage margin. The severe underfunding of the MA program for 2014, combined with the ACA tax impact and continued sequestration effects are too significant a burden to ask seniors to bear alone and still expect this important franchise to remain attractive to them…I think our outlook on Medicare Advantage in the long term is so positive because, in essence, we have to navigate through these next couple of years where some of the mechanical funding actions will take place…But from 2016 forward, that neutrality should then baseline this program and it will be Medicare Advantage with its, I think, compelling advantages compared to the Fee-for-Service system. And we think the prospects for growth after that are quite compelling.” ($UNH)

Thankfully, contrary to what the pundits said, employers who currently offer insurance are probably not changing insurance offerings under Obamacare:

“In terms of the delay of the employer mandate, we don’t really think that, that’s going to have a significant impact. Employers who currently offer insurance are going to continue to do that and that’s been the course of our discussions.” ($UNH)

Materials, Industrials, Energy

In the US, the oil boom may be starting to flatten out:

“the decline curve never sleeps and the decline curve always wins…we continue to be reasonable in the U.S. – I wouldn’t say bearish, but just based on scientific fact, decline curves, recovery rates, we see the increase in the amount of oil production in the U.S., it’s increase starting to decrease and ultimately flattening out here, over the next if not several quarters, over the next six quarters. And globally, we still feel that we are at the plateau.” ($CLB)

Even in the Middle East Core Labs sees declining oil production starting to catch up to the national oil companies:

“The amount of EOR work that is going to be requested [in the Middle East] over the next couple of quarters is surprising to us…and might be an indication that the national oil companies there now realize that their reservoirs are not exempt from the laws of physics and thermodynamics, and they need to start concentrating on enhanced oil recovery projects to indeed keep their production levels where they are at today.” ($CLB)

Schlumberger seems to agree on US declines, but is waiting to see more data:

“For the early production trends, I think we need more information to look at the production of these wells over a longer period of time and I think we also we need to look at the initial rates or the inflow performance for the wells that the operators are started to drill outside of the fairway” ($SLB)

Bottom line is that oil prices >$100 per barrel are justified by the fundamentals:

“Overall, the market continues to support Brent prices over $100 per barrel.” ($SLB)

E&P companies may be shifting more CapEx dollars towards new wells:

“E&P companies that potentially are or will be facing cash flow issues, we expect them to be likely to shift more of the spend within the E&P spend from more infrastructure related projects towards more well CapEx. So that obviously will be good for our business.” ($SLB)

Baker Hughes says decreasing rig count masking higher efficiency per rig:

“The ongoing trend to continue increasing wells per rig is a fantastic opportunity for a technology-driven service company such as Baker Hughes.” ($BHI)

US Farmers had a tough spring planting season:

“It was a tough spring planting season for farmers here in North America. Warm weather came very late and just six months after drought battered the 2012 crop, the spring of 2013 brought [thrashing] rains to most of the Corn Belt.” ($MOS)

But should still see strong profits:

“prices remain high enough to deliver good farm profits, especially given the affordability of crop nutrition and other inputs. And let’s not forget that farmers balance sheets and cash flows remain exceptionally strong as a result of many years of compelling economics.” ($MOS)

According to Mosaic, India has some pretty extreme subsidies for locally produced Urea:

“As a result of the nation’s unbalanced subsidy program, Indian agricultural soil is suffering and at some point the subsidies will need to change to avoid increasing pressure on the food supply…we’ve seen prices on both DAP and on potash nearly triple over the last 18, 24 months, while there has just been a couple of rupees increase in the price of urea.” ($MOS)

Miscellaneous Nuggets of Wisdom

Coca Cola has no problem with “not invented here”:

“we always believe here in the Coca-Cola Company, the best ideas are outside.” ($KO)

Constant improvement is in Schlumberger’s DNA:

“company wide programs addressing execution improvements they are not really sporadic or episodic with us. They are a way of life.” ($SLB)

When entering new lines of business it’s ok to move slowly to ensure quality:

“you kind of want to crawl, walk, run not necessarily because that’s what we should do in order to manage it, it is more you really want to make sure that the systems and the customer support models that you have are in place to handle the volume that you are really taking on.” ($INTC)

Everyone always thinks they have a hit, so if you’re a factory it’s ok to build a little less capacity than your customers tell you they need.

“remember what I said earlier that we don’t always build capacity — build as much capacity as they would like us to build. Everybody, I think, tends to be a little optimistic about his own new products or whatever, new markets and so on, yes.” ($TSMC)

“Don’t read the Damn papers”:

“It’s difficult to have really good morale in France and Italy because when they’re reading the papers, it’s pretty tough, general business news and world news. So I’ve suggested to our French and Italian colleagues, don’t read the damn papers, just focus on our business and — because we’re doing fine.” ($MAN)

Abbott’s earnings call was a gold mine for valuable insights on business:

In my opinion this answer receives an A+ on how to be successful in M&A and investing (remember that Abbott was the company that said that valuations look stretched right now):

“One of the things that I think has been a hallmark of our success, at least on the M&A side, it has been that we have done a lot of study, we followed businesses, we follow the market, and follow various things that we are interested in the target for a long time, done a lot of due diligence and so forth and by the time the opportunity drifts into the radar screen in the right way, with the right stars aligned and circumstances, we generally are pretty ready with a fairly well-developed point of view on valuation and so on and will act on the opportunity. The problem is, you can’t always predict when that’s going to be.” ($ABT)

Be brutally honest with yourself, especially when you’re underperforming:

“We think we are underperforming and by any measure whether we look at competitor performance, our performance, market performance, share, et cetera, we are underperforming. It pains me to say it but we are.” ($ABT)

Something is always wrong somewhere. It’s your choice whether or not to obsess over it.

“I think, if you are over obsessed about China, you would over obsess about China. If you are over obsessed about Brazil or India, or Russia or somewhere else, you get over obsessed about any one of them. Is there a headache every day? Yes. Somewhere.” ($ABT)

Improving profitability starts with Gross Margin:

“the longer-term sustainable improvement in profits, frankly, tend to be above that gross margin line and the real cost or pricing, the mix of your products, how you manufacture, all those sorts of things.” ($ABT)

Plan long term, manage volatility daily. Reality will never coincide with plan, but adjust to the bumps in the road and you’ll thrive:

“in the backroom here we are managing volatility every day…we got to be always kind of preparing plan B and what are you going to do and contingencies and so forth and that is a fundamental part of our whole planning and budgeting process all the time. And, if you look this year, six months, seven months end of the year, has the year gone like you would expected? The answer is no. Have we delivered the earnings we committed? Yes. We’ve exceeded them. So, I think you got to kind of plan that way every year.” ($ABT)