Company Notes Digest 7.25.14

These are some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

Construction. Is. Back.

“for construction, North America has been an area of strength and you might be surprised to hear so is our EAME region particularly Europe in the second quarter, it’s been better as well” ($CAT)

“we’re finally seeing activity in terms of builders coming back in for a call down of lines for development of lots, there’s a dearth of lots out there now which we kind of projected was coming in and that’s happening so we’re seeing lot developments. And pure construction lending by some of our local strong builders that survive the crisis not that many did, but once it is survive a very strong and so it’s fairly broad based, for all I say and frankly I think it’s got legs for a good while to go.” ($BBT)

“in certain pockets of the country, there are areas where the economy is zooming. And let me give you an example. Miami is booming right now. There’s all kinds of construction. There’s no glut of condos anymore. All of that has been absorbed and there’s 50 condo towers being built in Miami alone. That said, that’s not indicative of every place.” ($BRO)

“construction products shipments were up 15% as demand for aggregates and cement continue to be strong, particularly in Texas and California.” ($UNP)

“we continue to see an uptick in new construction with about 54% of our mix being in new construction in 2014 versus just 43% last year during 2013, and that’s helping our real estate team to find attractive new locations.” ($CMG)

Labor is back too

“The demand for skilled talent continues to outpace the supply in many of our specialty areas…we saw greater demand for our professional staffing and recruitment services in the second quarter. This was the case among our small and midsize clients, in particular.” ($RHI)

“what we’re basically saying is fairly high hiring numbers, fairly high attrition rate [...It’s primarily retirements...], and the net number will ultimately be driven by what the volume ends up being because we still squeeze out and expect to squeeze out productivity. But it’s a high-class problem for us as volume grows for us to continue to increase our hiring levels” ($UNP)

Beginning to see some wage inflation

“So the good news on Bill rates is that whereas last quarter bill rates were up 2.6% year-over-year, this quarter bill rates are up 3.5% year-over-year. So we are beginning to see some wage inflation.” ($RHI)

“I’d say on the labor side and our land still continues to be a benefit because we were early movers and in terms of our stick and brick costs we are seeing some pressure on the material side. But more so on the labor side its specifically in those local markets where we’ve seen pretty good growth in volumes.” ($DHI)

Demand for loans is booming

“We are constraining loan growth in some cases by self imposed risk concentration limits particularly on some types of commercial real estate loans. If we did not have these risk management limits, but we do, loan growth rates would be stronger as there is demand out there.” ($ZION)

“this was a very good loan growth quarter. We indicated that we’re optimistic about pipeline and things that we see. But I want to be careful about sort of taking this quarter and extrapolating it long term, because it was a very, very particularly good quarter.” ($STI)

Florida tourism is going “gang busters”

“All the data we see on Florida and the time I spent there is positive. Tourism industry is sort of going gang busters. Net in migration back in to the state at a pretty high clip.” ($STI)

Even Cash America says that its pawn loan customers are feeling much better

“consumers are feeling better about the economic environment that they’re in with respect to a similar employment situation and the overall economic prospects for them. We’re seeing them back borrowing money at a higher rate than we’ve experienced for the last couple of years. And they’re also spending with us at higher rates than we’ve seen for the last couple of years. So you really can’t conclude much other than the fact that people are feeling better about their economic situation.” ($CSH)

CEOs seem to be increasingly confident that things could stay good for a while

“If you look at the last three quarters, year-over-year we were up 1.7% then we were up 2.6% and now we’re up 3.5%, so its clearly going into right direction, but it still below the sweet spot that we’ve experienced in the past and when we’ve gotten to that sweet spot in the past, we stayed there four, five years.” ($RHI)

“we’ve had a few years of improvement in North American construction. This has been actually a pretty decent year. But even through all of that, we are still thinking this year is kind of unit basis, we are still thinking this year is going to be sort of 15% to 20% below the ’06 peak. So there is still a lot of room I think to run in construction in North America.” ($CAT)

“the lodging sector is hitting record occupancy but the U.S. economy overall is showing no signs of overheating. This is very good news for us. It means that in this cycle we could enjoy full hotels and rising rates for some time before the rest of the economy catches up with lodging” ($HOT)

“We see this protracted spotty recovery as beneficial to us. A growing economy is critical to our success. However too fast and heated is not helpful because it dictates unhealthy behavior from companies who are bloating their hiring doing things in an irrational way and clearly a much more heated recovery flings out a lot faster at a much faster rate.” ($MAN)

“we don’t believe we are at a peak of cycle at all.” ($DHI)

Chinese construction is weak though

“construction sales in Asia Pacific were down slightly and that includes weaker sales in China. Now in China we started the year 2014 with the improving construction equipment demand but over the second quarter it weakened a bit.” ($CAT)

Retail is still slow too

“Well, look, the fact is the consumer generally is still very cautious and we see that across the board. There is no denying that, from – as you know, a number of retailers, both low and medium and even high-end, are all seeing somewhat of a cautious consumer. And that’s certainly is affecting retail sales in our properties.” ($SPG)

Retail may be a red herring though. These aren’t really important months for retail

“I would say mall traffic is generally flat, the summer months are not big until late July and August because they’re back to school. June is not an important month. Early part of July is not. So we’ll see what happens.” ($SPG)

Geopolitics really only affects Energy; however, even there, there are positives with the negatives.

“we are seeing…delays in getting contract approvals through the [Iraqi] government…[but] I have to believe that rights itself over a period as long as two years because of the importance of hydrocarbons in that markets and to the government et cetera.” ($HAL)

“Well it’s interesting in Europe, we have actually seen an increase in our activity level and looking at unconventional plays, we’ve done some work here just in the quarter in Germany, revisited some work in Poland. So I think that the geopolitical climate may be precipitating a relook at some of these unconventional plays, especially those tied to natural gas. So early days for that, but we do have some indication that some of the operating companies are looking at that pretty hard again.” ($CLB)

Still, companies are trying to stay nimble

“in the conversations with the companies that I had, I can tell that they are facing incredible pressures to become more agile in their workforces” ($MAN)

“we’ve tried to do with our cost structure as you say make it more flexible and that means being able to take out costs when volume goes down and add cost when volume comes back in other words, try to make more of the cost structure as variable as we can.” ($CAT)

Financials

Retail investors aren’t trading much, but they’re still engaged

“even though we’ve seen trades come down…retail logins are essentially flat, and so people are still engaged, but they just haven’t been trading as much.” ($AMTD)

And where they are engaged, they have a bullish bias

“we haven’t seen any change in the new clients coming in, but what we are seeing is our existing clients are definitely moving into the market with the improvement in the market and their attitudes” ($AMTD)

Investment Advisors definitely have their clients fully invested

“there’s no question that the RIA’s have their client’s investments pretty much fully invested here and are keeping very little in cash. So we are definitely seeing and I would say relative to history, the RIA channel is more fully invested than the retail channel on a relative basis, even though retail will normally keep a lot more in cash.” ($AMTD)

TD Ameritrade’s CEO has a hard time believing that when QE ends there’s not going to be more volatility

“whenever [QE] starts to come out, I have a hard time believing we are not going to see volatility, given how much stimulus we’ve had and the longer-term nature of it” ($AMTD)

Non performing assets may finally be clearing off of bank balance sheets

“I would point out though that while we may see a bit more of the cloud, we probably have kind of a base floor or normal level of NPAs. Now when you kind of get down to the bottom, you have a certain amount of natural flow. So I don’t consider NPA to be a storyline at this point. They just tell you, it’s kind of be what they’re going to be in the normal operations as we go forward.” ($BBT)

“Non-performing assets improved by about 14% from the prior quarter and equaled 95 basis points of loans and REO the first time it’s fallen below 1% since 2007.” ($ZION)

We may have seen the bottom for Net Interest Margins

“if you assume that rates don’t fall anymore from where they are today, I do think NIMs will start to stabilize in 2015.” ($STI)

The Commercial lending market is the most competitive that many bankers have seen in their careers

“I’ll point out that, that market is extremely tight, spreads are really tight. It’s more competitive than any of us have ever seen in our careers.” ($BBT)

ZION agrees with JPM that deposits are likely to flow out when the Fed raises rates

“I will refer you to the CFO of JPMorgan Chase, who laid out pretty explicitly what she thinks is going to happen, but I think kind of we are directionally in the same place she is, which is that the Fed will drain a lot of liquidity out of the system…I think we are being more conservative on that front than a lot of peers and more explicit in publishing what we are modeling.” ($ZION)

Insurance companies have much more capital discipline than they did 20 years ago

“I think much better management in the industry than wasn’t the case 20 years ago. You look at capital deployment philosophies; it’s different than it was 20 years ago…But I said, coming close to probably 8 or 9 years ago, I thought that the amplitude on the way up as well as the amplitude on the way down were going to be much more narrow…I think the leadership in this industry has come to understand that attempting to grow market share by marginally changing price, and actually creating share holder value from it is impossible…we’ve all learned within our own cultures and our own environment and our own strategies, how to manage our businesses to create shareholder value, that’s what we’re supposed to do.” ($TRV)

Consumer

The retail environment is exacting its toll. More bankruptcies

“There’s going to be a little volatility in through it, because there are some – we have a little bit more bankruptcies this year than we did the last couple.”

Demand is creating tight supply for grass fed beef (and other natural food options)

“From many months now, we have struggled to get all of the beef we need from cattle raised without use of antibiotics for added hormones…We believe we found that solution by sourcing some grass fed beef from Australia.” ($CMG)

Ford has a new CEO, but same “ONE Ford” plan

“I had the opportunity to sit side-by-side with Alan for the last eight years in terms of developing the strategy and then the implementation of that. So the indication that there has to be a new strategy, because there’s a new person sitting in the chair, I wouldn’t necessarily assume that.” ($F)

Technology

VC funding is at its highest level since 2001

“In the second quarter, VC funding reached its highest level since 2001 at $13.9 billion across 974 deals. In the first half of 2014, U.S. VC funding grew to $23.9 billion, a 71% increase over the first half of 2013.” ($SIVB)

Silicon Valley bank does not believe this is a bubble though

“we don’t believe this is a bubble, but the valuations of some companies and a few industries reflect very high expectations.” ($SIVB)

The CEO seems to disagree with Janet Yellen–media and biotech companies are not overvalued

“media and ad tech have experienced some frothiness…but the potential for this type of company to disrupt and dominate entire industries on a global basis appears to set them apart…despite some frothiness among small-cap biotech companies, mid- and large-cap biotechs appear to be appropriately valued based on their very high growth rates.” ($SIVB)

Valuations seem high, but it’s because we’re focused on the best performing companies

“he innovation economy is thriving, and it’s generally the disruptive companies, the best performers and those with the largest market opportunities that are achieving the highest valuations…the company’s performances that we’re seeing with these growth stage and later stage companies is incredible. I mean, it’s the best performance that I’ve seen, highest growth is collectively in my 21 years at the bank” ($SIVB)

Startups are incredibly liquid

“we’re seeing, on a regular basis, rounds of financing for private companies that are $30 million, $40 million, $50 million, $60 million, $70 million on a regular basis. That’s something we haven’t seen — I haven’t — I actually have never seen that consistent number of companies raising that level of capital…a lot of these companies are just keeping it on their balance sheet for liquidity…they have so much liquidity and they’re asking themselves, why would they want to borrow money even at today’s interest rates for doing acquisitions or anything else. They’re just using cash to finance it.” ($SIVB)

iPhone is gaining back share in the US

“In the U.S., iPhone accounts for 41.9% of the smartphone subscriber base according to the latest data from ComScore, up from 41.3% in the previous measurement period. Also based on the latest survey by ChangeWave…among responders planning purchase a smartphone within 90 days, 50% planned to purchase an iPhone, up from 42% in the March quarter and 44% a year ago.” ($AAPL)

iPad sales were disappointing, but the enterprise is the key to growth

“our theory…that the tablet market would eventually surpass the PC market…is still intact. I just think we have to do some more things to get the business side of it moving in a faster trajectory and I think we’re now on to something that can really do that…we win if we can drive that penetration number I spoke about from 20% to 60%. That would be incredibly exciting here. The walls would shake.” ($AAPL)

Interestingly, tablet sales were still robust in emerging markets–a mirror image of PCs. Perhaps this is a wealth gap issue.

“the market’s very bifurcated on iPad. In the BRIC countries, iPad did extremely well. The growth was very high. Like in the China it was in the 50%s, in the Middle East it was in the 60%s…In the developed countries like the U.S., the market is clearly weaker there. It’s interesting to note however that the U.S. as an example, we had a very, very strong Macintosh market in the U.S. and so there is probably a bit of higher add kind of stuff beginning to play out too, where higher add is clearly still very much notebook oriented.” ($AAPL)

AT&T’s customers are shifting away from buying phones via subsidy

“The shift is in no-device-subsidy model is unmistakable, more and more customers are choosing the simplicity of Mobile Share Value plans and AT&T Next. This model shift is driving impressive results. Postpaid churn was a record low 0.86%, the best ever for AT&T and likely and industry best this quarter.” ($T)

That’s not really a bear case for Apple though. Only 1/4 of iPhones are being sold on subsidy now anyways

“And actually last quarter, as we estimated and this is subject to estimating but we’re estimating that less than one out of four iPhones were sold on a traditional subsidy plan. And so that number is markedly different than it would have been two years ago” ($AAPL)

More people are buying insurance with their phone–a negative for case manufacturers?

“we are seeing people take insurance, almost sort of 50% clip on our Next sales. So that’s going to help and we continue to find satisfaction of those insurance rates anywhere from $7 to $10 a month. We see really good results there.” ($T)

Verizon saw strong growth in machine to machine (internet of things) connections to their network

“I will tell you, this was one of the highest connection quarters we had from a machine-to-machine on a companywide basis which would include Verizon Wireless, Hughes Telematics and some of our enterprise customers. And that fueled that 50% year-over-year growth. So machine-to-machine continues to be a critical component.” ($VZ)

Satya Nadella laid out his vision for MSFT. Very enterprise, cloud, mobile focused

“We accelerated our commercial cloud business to a $4.4 billion annual run rate. And perhaps more importantly we made bold and disciplined decisions to define our core as the productivity and a platform company for the mobile-first and cloud-first world.” ($MSFT)

Facebook has unreal user engagement

“1.32 billion people now connecting on Facebook each month, and 63% of them visiting daily…people on the Facebook in the U.S. spend around 40 minutes each day using our service, including about one in five minutes on mobile. This is more than any other app by far, but overall people in the U.S. spend about nine hours per day engaging with digital media on TVs, phones and computers.” ($FB)

Facebook is interested in messaging because that’s where growth is–there are only so many photos that you can share with your friends

“like right now I think at some level, there are only so many photos that you’re going to want to share with all of your friends. We still think that there’s more to do there but it’s like the amount of messaging and how quickly we see that growing, it’s crazy. Because like there is just a lot more that people want to express and that they need the tools to express with smaller groups of people, not just one person at a time but smaller groups as well.” ($FB)

Buying Oculus was about being engaged with whatever is the next platform of computing

“one of the things that I care really deeply about on some of the tenures arc for the company is having a different relationship to whatever the next set of computing platforms are and investing accordingly now to make sure that when the next set of computing platforms get defined, we can help define what the next generation of computing is going to be.” ($FB)

Could we be headed for website blackouts?

“in cable industry there has been constant conflict between the networks and the cable distributors leading to black outs and brown outs trying to figure out pricing. And we would hate to see ISPs brownout or blackout certain Internet sites in while they tried to extract payments. That just ruins the consumer experience this idea that when you sign up the Internet you can get everywhere.” ($NFLX)

Materials, Industrials, Energy

Halliburton has finally seen capacity tighten in North America

“We’re seeing all the right signs as capacity starts to tighten which we’ve seen fall below sort of 10% spare capacity. We see activity increasing at breakneck rate, we’re seeing some pass through, cost increases at this point and probably most importantly we have clarity of our frac calendar through the end of the year.” ($HAL)

They had to stop retiring old equipment because activity was so great

“we did during the second quarter stop the retirement of some of our equipment just because of the activity levels were so great” ($HAL)

It’s time to increase capacity

“In North America, we are past feeling the turn, we are in the turn and we will be accelerating our Q10 build in the order to meet customer demand.” ($HAL)

They’re not crazy enough to overbuild though

“Of course we’re not going to be crazy enough to add equipment into the market if we see that it’s going to have an impact on our margin expectations from the direction that they’re had it right now. We build to market expectations.” ($HAL)

Halliburton may not be the only one building though

On Core Labs’ call, one analyst mentioned that there are a lot of new rigs coming to market. Core Labs says new plays will have to work for them to be absorbed

“So keep an eye on how the — the TMS, the SCOOP, the Codell, how these other plays evolve. If they continue to evolve as they have well with some of the expectation of the some of the E&P companies that are in there, the answer is probably yes [the rigs can be absorbed]. But I think it is very contingent on what the size and the development and the success in these emerging plays would be.” ($CLB)

Caterpillar seeing signs of strength for oil service equipment too

“Last year was a down year for our servicing. But I think they’ve gone through maybe the excess inventory they’ve had that plus a little bit lower supplies of, proper supply of gas supporting prices it looks like, it looks in good orders on our standpoint, it looks like it’s going to be a pretty good business.” ($CAT)

The mining sector may be starting to show some green shoots

“Our resource industries segment which again is mostly mining was down 29%…However, this was the first quarter since 2012 that resource industries sales were higher than the previous quarter. So that means second quarter of 2014 sales were about 6% higher than the first quarter” ($CAT)

Union Pacific is seeing strong coal demand

“As you said, we are seeing strong coal demand…the inventory levels are still below where the utilities would like them to be, I mean, if you look at it on a 5-year average. So as we are in the throes of the winter — or excuse me, the summer air-conditioning burn season, with low inventories, we think that gives us increasing opportunities.” ($UNP)

Miscellaneous Nuggets of Wisdom

You need to have “sponsors” at an acquired firm to help integrate cultures

“it’s very important when we have an acquisition that there is a person in the organization who is responsible for kind of ushering them into the system. And so you could use the term sponsor. You could use whatever term you want to use. But that person helps share additional parts of our culture and talking with people internally and encouraging them to come to the right events where they would be exposed to other people, like-mind, to share ideas and learn additional things.” ($BRO)

Don’t make acquisitions just for the sake of acquisitions

“t’s not my goal to acquire certain number of companies or spend a certain amount of money. We want to do things that help us make great products that are great for our customers and so forth.” ($AAPL)

You can do things fast, or you can do things right

“so while we might be able to get to markets more quickly if we did a single portfolio sale, we would rather do this right and take a little bit more time and sell hotels individually in the way that we think is best fit for our long term fee business and for our brands.” ($HOT)

You really never know what opportunities will work and which will fail

“to be quite honest like California some years ago, California went from a developing market to a ‘never mind we won’t build in California’ market and then overnight became a proven market and now is the state in which we have more stores than any others” ($CMG)

Don’t react, anticipate

“over the years, we have really shifted our approach. We have become much less reactionary and much more anticipatory. And so as we see things starting to develop on the horizon, we immediately start a planning phase that says, “We’re going to mobilize materials. We’re going to mobilize people where they need to be. We’re going to be doing some alternative scenario planning as the way to minimize disruption to our network and to our customer service levels.” ($UNP)

Learn something from every event

“we learn something from every event. We learn something from every thing that happens on our railroad, and our goal is to take that and work it into our planning structure so we become even more effective and better going forward.” ($UNP)

Do the right thing because it’s the right thing to do

“many customers, including a number of our own customers do not fully understand the issues of the food system that still heavily influences the decisions we make….I think that we do a lot of these things, from food with integrity to the way we think about — the way we build our buildings and to the way we think about just doing the right thing by way of our people culture and the way we select our leaders for our company. All of these things are things we do because we know that they’re the right thing to do.” ($CMG)

Full transcripts can be found at www.seekingalpha.com

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.