Company Notes Digest 9.13.13

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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

Consumers are spending, but showing signs of holding back:

“We’ve seen very good spend from the high spenders, the transactors, as we refer to them. So they are spending a lot. Our spend metrics are good, but they pay us back every single month.” ($USB)

Home building season wasn’t as strong as lumber dealers were hoping for:

“A lot of dealers in the U.S. build up inventories in anticipation of a strong home building season while we did see a pretty strong home building season so maybe not quite as strong as they had hoped. So [lumber] prices rolled over” ($PCH)

Is excess capacity narrowing?:

Ecolab sees more opportunities in existing facilities than in greenfield projects:

“right now, we have some greenfield in terms of new capacity going in and really in Latin America and China and Southeast Asia. And so that’s been very beneficial for those markets. But for the most part, it is about going out and gaining share.” ($ECL)

Potlatch sees idle capacity in lumber mills, but takes a long time to get back up and running:

“it’s not easy to get that late capacity to come back on line again…there is somebody that recently bought a mill in our operating area down in our Arkansas…it’s going to take them almost a year and half to get this mill up and running again, and if you think about it and we are just mills and sitting, they are not running for four years is probably, the machinery is probably gotten rust, you have probably lot of motors that need to be replaced [etc.]…I think it’s a lot harder to get these mills back up and running than we might think” ($PCH)

US Bank argues that investment demand will be sparked by rising rates:

“until interest rates are believed to be moving upward, the general population of our customers believe there’s no reason to move quickly and take any action now…I can’t even say how many CEOs today in our company are not hearing from their CFOs down the hall, hey, boss, rates are record low. They’ve been longer than they’ve ever been. I don’t know when they’re going up, but they’re probably moving up. Let’s start getting involved. Let’s buy it, build it, acquire it, add to it, whatever. And they’re not.” ($USB)

Steve Madden sees Chinese factories still hungry for business:

“We have seen labor cost going up in China of course. However, our overall cost of goods out of China, that inflation has been fairly benign as well. And I think that, frankly, the global demand environment still remains somewhat weak and these factories are hunger for business that we’ve been able to keep the prices in check.” ($SHOO)

Perhaps because supply chains are moving to Mexico:

“In terms of sourcing, I think the big thing that we’re doing is we are moving a lot more to Mexico…Not only has Mexico gotten more competitive with China in terms of price, they have real expertise [in our products]…And perhaps more importantly there is a real speed advantage. And that’s so crucial for us.” ($SHOO)

Financials

European banks are almost done with restructuring:

“we are coming close to the finish line [on the restructuring]” ($RBS)

PNC argues that the banking model has fundamentally changed:

“on the retail side, what’s clear is that the model on which the industry is operated for decades; just it’s not sustainable today.” ($PNC)

USB sees banking as just a reflection of the economy:

“banking actually is only a business of everybody else’s business. We don’t build it, fix it, make it, move it, acquire it, change it, paint it or name it. Our entire balance sheet virtually is everybody else’s balance sheet. Our loans are somebody else’s obligations. Our deposits are somebody else’s money. We could pay for moving things around and protecting it, but basically, everything we do is somebody else’s. But all we do is risk manage.” ($USB)

Consumer

Online retail has become extremely competitive:

“stevemadden.com is a real important part of our strategy as well. It’s become increasingly competitive though. I will say it’s become a challenge as everybody has gotten so aggressive including Nordstrom and Macy’s and everybody else.” ($SHOO)

Ten years ago you might have thought that people wouldn’t buy shoes online:

“I think that’s one of the things that we’ve al been — I mean maybe somebody wasn’t surprised about it, but people are surprised about it, how strong of the category shoes is online. I think that there was maybe a decade ago, you would have thought no, shoes won’t be great, you want to try them on, you want to walk around, so you tell in the end, but that was certainly proved that wrong.” ($SHOO)

I don’t want to accuse Comcast’s CEO of being backward looking, but…

Not a believer in over the top (internet streaming) of television:

“Well personally I’m skeptical that over the top is a good business. I looked at it many, many times and with or without high def or 4K or new technologies I’m just skeptical it remains to be seen maybe I’m missing something but I’m not sure over the top it’s a real business.” ($CMCSA)

And still believes in the theatrical movie experience:

“My belief is that the theatrical experience going into a movie theater is going to be around for very long, long time as long as boys and girls who want to get away from their parents and go out and see a movie and parents want to get away from their kids and everybody wants to share that magic that you get when you’re inside a theater.” ($CMCSA)

Healthcare

30 million more Americans are about to hit the healthcare system:

“the Affordable Care Act will — is a tailwind for our business…over the next several years, something like 30 million Americans will have now coverage and coverage will drive additional utilization from a prescription drug perspective and that’s good for our business at the end of the day.” ($CVS)

The way we buy health insurance may be on the cusp of a big change:

“the buying decision [for health insurance] used to sort of be do you have every hospital and every doc in the network and if you did not, then that was a problem. Clearly now it’s not only a cost issue but I think the ability to managed care in a more effective way can happen in a smaller system” ($AET)

Insurance products can be more tailored to an individual (rather than group) buyer:

“in a very simplistic sense in an exchange sort of consumer-oriented world, the consumer does not care as long as they’re doc and hospital is in the network, right? So they don’t necessarily even may not put a lot of value on a broad network.” ($AET)

And brand recognition is key. Right now Blue Cross is arguably one of the few recognizable consumer brands in health insurance:

“brand recognition, we have analyzed slice and dice from every possible perspective what we’ve uncovered is that there is a distinct advantage to the blue [cross] brand…we average about 30% market share across our 14 states. But if you would had delve deeper and actually curve out where the individual consumer makes the buying decision which is what the exchange was going to look like, the average of 47% market share.” ($WLP)

Underwriting will change too, from trying to target only healthy individuals, to understanding the health needs of a whole community:

“when you are thinking about pricing product and you are moving into this new market density matters. It just really matters because you are no longer in a medical underwriting world and you are trying to price based on statistical averages of what the population health status might be.” ($WLP)

Hospitals have been in a holding pattern, and are currently fighting declining operating trends:

“I think in the U.S., there was a great deal of anxiety and worry with ObamaCare kind of kicking in and a lot of hospitals went into shutdown mode, just really didn’t want to spend. We’ve also continued to track and see that the admission rates in hospitals have continued to decline, that — and surgical procedures are down in the hospital as well, so that obviously has a pretty direct impact on us.” ($ECL)

This has led to mergers to try to control costs:

“hospitals are under enormous cost pressure, right?…They’re merging because trying to go alone is getting tougher and tougher from a cost standpoint.” ($ECL)

Medical device companies have been lacking in innovation:

“We desperately need innovation in the system and we’ll continue to drive it and you know medical device companies that are heavily focused on innovation, but there has been a lot of sort of product proliferation that wasn’t innovative” ($CAH)

Materials, Industrials, Energy

EOG sees US oil production growth slowing:

“the Eagle Ford just recently passed the Bakken in total oil growth, and then if you look at the Bakken curve the other thing you will note there is the rate of growth is starting to slow in the Bakken, which is typical when these plays start maturing. So we are not expecting that oil growth in the U.S. will continue at these rapid rates. I think you will start to see the oil growth in U.S. start to slow as we go forward.” ($EOG)

The Permian isn’t going to be as big as the Bakken or Eagle Ford:

“What’s going to drive the oil growth in the U.S. and North America is going to be the Bakken and Eagle Ford… the Permian won’t have the same impact on a national scale that the Bakken and Eagle Ford have had.” ($EOG)

The Chinese are making an effort to replace coal with natural gas too:

“it’s clearly a national effort [in China] to replace coal and oil with natural gas and expect the gas plays a substantially larger role in their next five-year outlook.” ($HAL)

There could be a land grab on the horizon in Mexico:

“With respect to Mexican reform I mean obviously this is as excited as I’ve been about it in my career. I think we’re as close as we’ve ever been to seeing real reform in Mexico and opening up that market” ($HAL)

Mountain pine beetle infestation is typically not the type of risk you control for in an investment:

“The mountain pine beetle has decimated the forest in British Columbia and the trees are basically dead…roughly 20 to 25 large saw mills that will be closing in British Columbia. These are big mills, these are not typical small mom and pop mills that you might find in the U.S. These are large mills, and so when they comes down, there will be less supply coming out of British Columbia, which ought to help the outlook for the industry.” ($PCH)

Miscellaneous Nuggets of Wisdom

Technology is best used to enhance employees’ productivity rather than replace them:

“Technology, we love it because it makes our employees more capable. It makes our company smarter. We do not like technology because we think it replaces any part of the human side of the banking. It just accentuates it.” ($USB)

You’ll get the most out of a workforce that is proud of the company they work for:

“this is a business of people…If the people who do the job of the bank are proud to do it under that banner, proud to be bankers, training is almost secondary to their ability to convey remarkable experiences.” ($USB)

Culture should be inculcated with religious fervor:

“I promise you that amongst the things you’ll hear today, our ability to inculcate that level of religious leadership uniqueness will be as core and centered to the success we will deliver in the next 3 years as other things have been to our recent success in the past many.” ($USB)

If you make an acquisition take the time to actually consolidate the company:

“from a structure standpoint. We have a single processing platform. We have one consumer loan system, one commercial loan system, one credit card system, one trust system. Think of the advantage that offers you…one of the reasons we’re able to do that is, we fully consolidate every single acquisition…It’s an investment at x0 to get that done, but it pays in the long run.” ($USB)

The easiest way to grow is to deepen your relationship with existing customers:

“in 2007, Richard sent a message to the organization, and the message was: we’re going to focus on customers, we’re going to make investments, we’re going to grow revenue…What can we do to deepen the relationship that we have with our customers?” ($USB)

Look for companies that exhibit prudence:

“we’ve also used the word prudent. I like the word prudent because it means that you’re actually thinking about what you’re doing, you’re evaluating it. That’s what we do, we evaluate the risk.” ($USB)