Company Notes Digest 8.2.13

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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

Lakshmi Mittal gets the opening statement:

“My opening point would be that while the second quarter market trends were not favorable, the outlook today is better than it was a couple of months back.” ($MT)

Marriott’s occupancy rates are back to peak levels:

“Occupancy rates and room rates were largely at 2007 peak levels or higher.” ($MAR)

Which means that new development is coming back to the market:

“In the last 24 months, our worldwide development pipeline has increased 40%, from 100,000 rooms to more than 140,000 rooms.” ($MAR)

Corporate customers remain tight for now though, especially government:

“Corporations are watching their bottom line and given the economic climate, are cautious about discretionary spending. Not surprisingly, austerity is even more pronounced among government meeting planners.” ($MAR)

Cummins sees pent pent up demand for truck engines:

“we do believe based on talking to customers in things that there is — there will be a point when people will buy more trucks than they’re retiring for some period of time in order to kind of restock to some level. We just don’t know when it’s going to be.” ($CMI)

Green shoots in the Eurozone:

“In the Eurozone, leading indicators confirm the beginning of a slow turnaround in Europe.” ($MT)

Especially in the UK:

“on business confidence, it’s quite interesting. I mean, I have said repeatedly last year that I was not seeing the U.K. economy going down. If you remember, I was not seeing a double dip. I was seeing the economy stable. From the beginning of the year, that I told you, I think the economy is recovering. And I can now tell you I think the signs are even stronger. So I do not expect a very quick or strong recovery. But the signs are much stronger in terms of breadth of the recovery and direction of the recovery” ($LYG)

There continues to be surprisingly positive color on China:

“The Chinese economy looks to us to be performing. Maybe it’s growing a little bit weaker than it did a year or 2 ago, but still broadly recovering, with really powerful trends in domestic travel, particularly in China.” ($MAR)

Even in steel intensive industries:

“While manufacturing has slowed, the whole steel-intensive segments have continued to grow relatively strongly during first half ’13. There’s a robust growth in auto production, and infrastructure investment continues to benefit from previous stimulus measures. Housing starts have also begun to pick up recently. Therefore, despite high steel production level during the second quarter, inventories at mills have been reduced so that the prospects for efforts and [ph] demand in the second half are better than previously expected.” ($MT)

India, not so much:

“Moving to India. Business conditions remain weak” ($CMI)

Most surprisingly, Apache claims business as usual in Egypt:

“During the second quarter and throughout the recent political unrest, our operations have remained uninterrupted. In fact, I traveled to Cairo, last Thursday night I was in Cairo Friday through Tuesday of turning our quarterly operational review at an opportunity meet with the new minister of petroleum in a number of new administrations who have reiterated the importance of Apache’s investment in Egypt. Frankly, it was business as usual. We are currently running 26 rigs in Egypt. This morning we announced several impressive discoveries across our vast position in Western Desert.” ($APA)

And says that Americans are way more concerned than Europeans:

“The rest of the world has a different view of the events in Egypt than folks in the United States. Europeans and other parts of the world have a different view of Egypt. They see truthfully a little less risk there than U.S. investors, but not saying the right or wrong or the U.S. investor is right or wrong, that’s just – that’s a perception.” ($APA)

Marriott seems to take an American point of view:

“On the negative side, we’ve got Egypt, which is falling apart. And I probably shouldn’t say it that way, but from a hotel perspective, it’s not looking very good, why don’t I say that.” ($MAR)

Financials

Rising Japanese bond yields are enticing Aflac to reallocate its investment portfolio back to JGBs:

“Additionally, we are re-weighting the current asset allocation for new money investments in Japan. You’ll recall at the analyst meeting, we discussed that our plan was to designate two-thirds of our new money to U.S. corporate bonds and one-third to JGBs. Our investment team is revisiting our asset allocation for new money investments and expressed to allocate the majority of the third quarter cash flows to JGBs and underweight in the allocation of the U.S. corporate bond hedge.” ($AFL)

Consumer

The current dynamics of the Pay TV industry are unsustainable:

“frankly, the balance between content providers and distributors is out of whack. And therefore, further industry consolidation does make sense to help address what I think are unsustainable cost increases for the average customer…it’s pretty clear to me, this is not sustainable for any length of time beyond the next couple of years. I mean, something’s going to have to give.” ($DTV)

According to DTV the content providers are being unreasonable:

“in terms of the Pac-12, look, we’ve continued to have dialogues with them. But frankly, as long as they want to insist that you put more in the bundle that’s already too big and tax all of the customers at a rate that we don’t believe is fair for the customers that don’t care about it, and are unwilling to entertain any discussion of letting the customers choose, we probably won’t be able to carry it.” ($DTV)

And customers are starting to get fed up:

“I mean, I’ve seen more customer complaints this year about the price increases that we took than other years. So there’s no doubt that customers are noticing and aren’t happy about it.” ($DTV)

But it may be harder than you think to cut the cord completely and just go IPTV:

“Clearly, there’s no question that there are spectrum limitations. Even if you wanted to do television in the home, over the Internet, you did 3 TVs, you’re going to have a problem. Okay? I mean, if they’re all HD, I mean, you’re just going to have a problem with the Internet, and you’re going to have a huge increase in your broadband charges from your broadband provider. So frankly, every time I look at this subject, there are all kinds of tradeoffs, and when you net it all out, I mean, I could — in theory, I could put DIRECTV over the Internet. We don’t have the rights to do that, but in theory. And you’d end up having to double your broadband charges roughly, I suspect. And by the time you got done, you’d be at the same price points, and it wouldn’t matter. You’d kind of be six of one, half-dozen of the other because the satellite is still a pretty efficient way to deliver signal.” ($DTV)

For now, streaming video out of home is more hype than reality:

“I think even in terms of usage, you hear more hype about watching video on mobile devices. But actually, most of it is either WiFi or streamed in the home versus out of the home so far.” ($DTV)

Surprisingly HH Gregg (regional electronics retailer) continues to see interest in larger TVs:

“You clearly see continued demand and interest in large screen television as where you see continued weakness in midsized 40-inch, 46-inch, anything that’s under 40-inch has a continued weakness associated with it” ($HGG)

Healthcare

Impact of newly insureds on the healthcare system remains uncertain:

“the uncertainty of health care reform, there’s 2 main drivers…One…how many — at what rate and how many of the uninsured will sign up for coverage in the exchanges…And then second, of those that do come into the marketplace and go into the exchange, how many will we capture?” ($HCA)

Emergency Rooms seeing increased competition:

“[In ER] we actually had a decline in the lower level, the lowest levels of acuity, and that was fairly broad-based across the company…There are increased competitors in both the urgent care space, as well as the emergency room space in a lot of our markets, whether that’s coming from hospitals or freestanding entities, and we think that is yielding some pressure on the overall demand in this particular area.” ($HCA)

Fast growth in rural patients traveling to metro centers for care:

“we monitor what we call the in-migration of business from the rural markets into these major metropolitan markets. And that segment of our business is the fastest-growing segment of admission activity on the inpatient side.” ($HCA)

Just three reasons that increasing scale is important to hospitals. Consolidation to come:

“we still think that given health care reform and over the longer view that there will be consolidation in the industry” ($HCA)

Materials, Industrials, Energy

There’s a lot of interest in nat gas engines for trucks but, temper expectations:

“there is lots of interest [in natural gas engines]. As you know, the products are really just now getting in the market. The feedback on them is terrific. And so there’s a lot of excitement for it. I think just putting it in perspective, we still see over the next couple of years, that’s 2% to 3% of the total truck market. And longer term, we’re thinking 5% to 10% over a 5- to 10-year period.” ($CMI)

Apache seems to imply that the amount of oil in the Permian may not be fully appreciated yet:

“the future of the Permian is still an emphasis, because there is a tremendous amount of oil in place there and you see quarterly and including ourselves trying new ideas and going horizontal in new plays and you really have a real tremendous potential in the Permian basin that is untouched. People haven’t even thought about it yet.” ($APA)

Cummins thinks we’re close to a bottom in mining:

“I think we’re close to bottom, but I think there’s still some pressures to take that down. I mean, all the mining houses have balance sheet problems now. They’ve turned over their leadership. They’re trying to get — they’re driving to take capital down and so I think we’re close to the bottom, but there could be another small step there down.” ($CMI)

Iron ore demand growth caught people off guard:

“what happened in the first half — because if you want, we could also see from the raw material price, specifically iron ore price, that everyone was expecting that the iron ore prices would drop in the second half, so there has been also destocking in the first half of this year. But since the demand continued to grow and there had been a strong production, we are seeing that the iron ore prices have not dropped as much as everyone was expecting and still it is moving around $130, $128, and — which means that now, there will be some restocking” ($MT)

Some positive signs for thermal coal:

“On the domestic thermal front, we believe that we’re in early stages of a multiyear recovery from PRB. Natural gas prices are less of a headwind. Weather has normalized to some extent, and power demand’s up. Coal has regained ground in the electric generation market. U.S. production is down, and coal stockpiles at PRB soar” ($ACI)

Structural demand growth figures to be supportive for thermal:

“If you look globally, there’s 280 gigawatts of new coal power generation that are being built. I mean, these aren’t being discussed, planned. They are being built and are going to come on over the next 3 or 4 years, needing 800 million to 900 million tonnage of additional supplies. So all of those things, we think, will drive improvements in the market.” ($ACI)

But Metallurgical coal still in oversupply:

“As we look at the market, we continue to see the short-term outlook for hard coking coal pricing under pressure. We are being confronted with low operating levels at most steel mills, oversupply of hard coking coal in the market and an exchange rate, which is favoring Australian supply.” ($WLT)

Arch and Walter both agree that somebody’s going to have to be put out to pasture before we’re done:

“I can tell you there’s a lot of high-cost met out there, whether it’s in the U.S., Australia or Canada. And those are things that some people are going to face between now and, say, over the next few quarters. So we think there’s rationalization coming.” ($ACI)

“you’re going to end up with some of those third and fourth quartile mines just aren’t going to make it. So it’s just — it’s still just a matter of time to where those tons come out of the market.” ($WLT)

Miscellaneous Nuggets of Wisdom

In Europe it takes two years for cost savings from head count reductions to flow through to financial statements:

“Remember, that as we reduce headcount and all, it takes a year or 2 for that to show up because of severance programs in Europe and how that operates versus the United States. So the payouts are a little longer.” ($LYB)

Low margin businesses can have favorable returns on capital too:

“around the dual-eligible population. And the margins are less, but the actual dollar per case is much greater as a result of the conditions that, that population brings to needing services. And so, the way we look at it, the absolute dollars that comes to the bottom line are much greater. And so, we look at that as a good returning business. The exchanges are a little different. They’re smaller dollars, but there’s less capital that you put out as a result of the less premium there. So the — so we — but those are great examples where the margin is impacted. But both for strategic reasons and for long-term returns, it’s a good business to enter into.” ($HUM)

When the s–t hits the fan, companies become inward facing:

“I got to tell you everybody in this environment is pretty inwardly focused, I would say. Not that you won’t see some M&A, but everybody’s focused on managing their balance sheet, making sure they get through this tough period, and let’s just see where goes.” ($ACI)