Company Notes Digest 7.30.18

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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.

The Optimism in the US economy is evident and some say that fundamentals are strengthening, not softening. Many companies are battling inflation, but there are some signs that the pressure may have peaked. Fears of trade wars are probably more bark than bite and the outlook for 2019 appears bright. Are there risks building in the economy? No one seems to be focused on them.

The Macro Outlook:

Optimism is evident

“optimism is evident in our conversations with our clients, indicating resilience of employer confidence…Our Q3 ManpowerGroup Employment Outlook Survey…showed favorable hiring intent in 43 out of 44 countries surveyed.” –Manpower CEO Jonas Prising (Temp Staffing)

“I will tell you that consumer sentiment, consumer confidence is increasing an awful lot.” –Group 1 Automotive Earl Hesterberg (Auto Dealer)

The middle market economy is doing well

“the middle market economy is doing well. Customers feel good about their prospects going forward and are investing in their businesses through increased hiring and capital investments.” –Brown & Brown CEO Powell Brown (Insurance Broker)

Fundamentals seem to be strengthening, not softening

“Fundamentals in our markets are strengthening, not softening…we and the brokerage community predict continued rent increases in all of our markets over the next few years.” –Kilroy Realty CEO John Kilroy (REIT)

Many companies are struggling with inflation though

“Topic number one is inflation…you can’t pick up a newspaper without reading about it or turn on the news and hearing about it.” –WR Berkley CEO Robert Berkley (Insurance)

“We began this year expecting pressure from raw material prices and foreign exchange rates…The challenge has become significantly greater than we originally expected, and we believe it will continue in the second half of the year.” –General Motors CEO Mary Barra (Auto)

“freight, yes; plastic resins, yes; metal in all its various forms for many reasons, including tariffs. So there is some broad-based push on input costs that have kind of come in and affected us and many other industries as well. ” –Coca Cola CEO James Quincey (Beverage)

But inflation may have peaked

“on the price raw materials, we are likely seeing that our commodity prices and the increases we’re seeing there likely at a peak level.” –3M CFO Nick Gangestad (Conglomerate)

Wage inflation is still muted

“I think the overall wage environment in the U.S. in terms of wage inflation is still reasonably muted, I mean it somewhere between 2% and 3%.” –Manpower CEO Jonas Prising (Temp Staffing)

Overall the economy doesn’t seem to be running that hot yet

“Well, if you just look at objective data and you would look at wage inflation and bill rate increases…we’re nowhere near where we were. And so by that measure, we’re hardly – it’s hardly – it’s not running as hot as it ran during [2007], which gives us optimism that this has some legs.” –Robert Half CFO Keith Waddell (Temp Staffing)

And 2019 looks like it will be humming

“I do know with certainty that 2019 is going to be humming. I mean, we’re looking at demand that’s already on the books.” –Halliburton CEO Jeff Miller (Oil Service)

Risk? What’s Risk?

“My view is right now we don’t see anything on the horizon, but kind of given where we are both in the length of the cycle, given where we are on the funds flow of capital into the industry and just what’s happening around, I think anyone that doesn’t have a little bit of a caution to say that things are moving really well, I would say probably not being that thoughtful about the real risk in their business.” –SVB Financial CEO Greg Becker (Bank)

Politics:

Most CEOs don’t want to see a trade war

“free and open trade environment and good relations between China and the U.S. is not only beneficial to the aerospace business, but in turn the aerospace business is beneficial to the economies and jobs of both countries.” –Boeing CEO Dennis Muilenburg (Aerospace)

Unless you’re in the steel industry

“Countries are no longer taking advantage of the United States in trade thanks to…Peter Navarro, this guy that has been expanding United States out there, and we appreciate that. And I appreciate what President Trump did as far as supporting trade.” –Cleveland Cliffs CEO Laurenco Goncalves (Iron Ore)

Tariffs are only a concern to the extent that they damage psychology

“I don’t think yet we’re having specific discussions or we’ve got specific concerns about tariffs per se. I think it’s the second order impacts potentially on sentiment and optimism that concern us more. But at least to this point, there’s very little, if any, impact on that.” –Robert Half CFO Keith Waddell (Temp Staffing)

“at the end of the day, we don’t see a major event or any direct impact other than some minimal impact [from tariffs]” –Texas Instruments (Semiconductors)

Trump is the new normal

“I just got back from a trip to Europe…And what was interesting to me is from a year-ago where I spent a lot of time trying to explain Trump to Germany…Nobody even bothered to ask anymore.” –Moelis & Co CEO Ken Moelis

International:

The French economy has slowed

“When we speak to our clients what they say is that, the French economy is growing very quickly and their manufacturing output and activity was very high at the end of 2017 and coming into 2018. But as they saw a little bit of a slowdown.” –Manpower CEO Jonas Prising (Temp Staffing)

Brexit continues to hang over the British economy

“we do remain concerned about the potential impacts of Brexit. Consumer confidence in the UK has been declining, and we are seeing some deceleration in UK retail sales growth rates year over year, according to our SpendingPulse data.” –Mastercard CEO Ajay Banga (Payments)

At some point Brexit will be clarified

“At some point, late this year and early next year, Brexit has to be clarified. It is a confusing subject to everyone, even people who follow it. But at some point, the UK is going to leave the EU and life will get back to normal” –Group 1 Automotive Earl Hesterberg (Auto Dealer)

Financials:

Effective tax rates are very low

“Our corporate effective tax rate was 12.8% for the second quarter and 8% for the first half.” –Moelis & Co CEO Ken Moelis

Verizon is using tax benefits to pay down its balance sheet

“As we stated at the beginning of the year, we intend to use the majority of the benefits from tax reform in 2018 to strengthen the balance sheet.” –Verizon CFO Matt Ellis (Telecom)

Commercial Real Estate supply and demand is not out of balance

“supply remains largely in balance with demand relative to previous economic cycles.” -HFF CEO Mark Gibson (CRE Broker)

“Currently, there’s only one Class A contiguous block of space greater than 100,000 square feet remaining in the south of market [San Francisco] area today, and brokers are reporting that there are currently 24 companies looking for at least that much space in the city.” –Kilroy CEO John Kilroy (REIT)

Insurance rates are flat (despite a bad loss year last year)

“Rates for most lines continue to be flat with the exception of automobile…Cat property rates are flattish with some downward pressure on the best accounts” –Brown & Brown CEO Powell Brown (Insurance Broker)

The litigation funding industry is a concern for insurance companies

“litigation funding is, and I think we may have talked about this a little bit last quarter is certainly somewhat of a concern, I think, to the industry. They are sophisticated and they have a lot of money.” –W.R. Berkley CEO Robert Berkley (Insurance)

Technology:

Venture capital investments are on pace to break their former record

“Venture capital funds invested $57.5 billion in the first half of 2018 which puts investing on pace to potentially exceed $100 billion for the first time since 2000.” –SVB Financial CEO Greg Becker (Bank)

Industrial and automotive are the fastest growing semiconductor markets

“Industrial and automotive demand remains strong due to broad based growth…Personal electronics grew low single digits…Communication equipment declined from a year ago…we continue to focus our strategy on the industrial and automotive markets…This is based on a belief that industrial and automotive will be the fastest growing semiconductor markets.” –Texas Instruments (Semiconductors)

Healthcare:

More small employers are offering health insurance to their workers

“now even smaller employers, employers with businesses with 50 to 500 workers, are now offering a greater share of their employees than the year before offering health insurance” –HCA CEO Milton Johnson (Hospitals)

Materials, Energy:

Oil prices aren’t high enough to spark renewed interest in deepwater exploration

“Deepwater, as I’ve always said is sort of the last to come back into the frame. And I think deepwater still is push to the right as far as widespread recovery…the exploration that we’re seeing so far has been certainly more focused around sort of step outs and things that are near to existing infrastructure, generally speaking” –Halliburton CEO Jeff Miller (Oil Service)

Oilfield CapEx is still 40% below peak levels

“Projected 2018 U.S.-related CapEx is still running approximately 40% below 2014 peak levels when record amounts of capital was being destroyed” –Core Labs CEO Dave Demshur (Oil Service)

Miscellaneous Nuggets of Wisdom:

Great products win

“one thing that is certain that we’ve learned over our 20-some-year history as a company is that great product wins.” –Under Armour CEO Kevin Plank (Apparel)

Full transcripts can be found at www.seekingalpha.com