Company Notes Digest 9.20.13

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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

Let Bernanke make himself very clear:

“The criterion for ending the asset purchases program is a substantial improvement in the outlook for the labor market.” ($FED)

Labor data is the key to Fed policy:

“Thus, the first increases in short-term rates might not occur until the unemployment rate is considerably below 6-1/2 percent” ($FED)

It’s not his fault if the market doesn’t listen:

“I don’t recall stating that we would do any particular thing in this meeting.” ($FED)

On the one hand, the weak housing market necessitates low rates:

“the slow recovery of the housing sector, continued fiscal drag, perhaps continued effects from the financial crisis may still prove to be headwinds to the recovery.” ($FED)

On the other hand, the strong housing market demonstrates how effective QE has been:

“My own assessment is that [QE] has been effective. If you look at the recovery, you see that some of the strongest sectors, the leading sectors like housing and autos, have an interest sensitive sectors” ($FED)

The Fed may be comfortable testing rising rates:

“we do want to see the effects of higher interest rates on the economy, particularly in mortgage rates on housing” ($FED)

Meanwhile in the real economy…

Railroad KSU seeing an uptick in volumes:

“end of August, early September, we saw real uptick in various things… I think there is reason to be cautiously optimistic that we’re kind of seeing some growth in the economy” ($KSU)

FedEx battling rising fuel costs:

“I can tell you it was significant. If you just think about how the fuel prices ran up towards the end of the quarter, and our fuel surcharge lags by six weeks, it’s pretty evident that we were paying a lot higher for jet fuel and not able to pass along the surcharge” ($FDX)

General Mills doing just fine in emerging markets:

“while many of you have commented on the softening in emerging market economies overall. I mean I do want to point out that our business continues to be very strong in emerging markets.” ($GIS)

Praxair is another company arguing that Mexico is gaining an advantage over China:

“Chinese wages have skyrocketed, and transportation cost is affected by higher fuel prices, began to rise extremely fast. So in this direction, total land and manufacturing costs for goods made in Mexico are currently lower than in China. In this sense, manufacturers are very optimistic about the future of Mexico” ($PX)


Cereal dominates breakfast:

“cereal is the most popular breakfast food at home by far, featured in a commanding 32% of these morning meals…one out of every eight boxes of cereals sold in the U.S. is a variety of Cheerios.” ($GIS)

But even dominant and seemingly sleepy staples go through periods of negative sentiment:

“In my 21 years at General Mills, I’ve seen growth in the cereal category written-off a couple different times. I will just bring up a couple of examples. The first one is when bagels become phenomenon in the U.S. And everyone has got to move to bagels and no one was going to eat cereal anymore. And then low and behold we innovated on cereal and brought some new taste varieties and new textures into the category and the category rebounded.The second time is when Atkins diet craze came a long and again everyone was going to move away from carbohydrates at that point. And then we brought whole grains to the category. We brought fibers to the category. We tend to be able to innovate our way out of this.” ($GIS)

Companies with small market share shouldn’t be allowed to blame the macro for sloppy execution:

“we have a small market share in a very fragmented market. Unless things are horrific, as they were 5 years ago, we should be able to do all we need to do to grow our business…if we’d executed 100% flawlessly and we were really confident in everything we’ve done and we’d still had a 3.5% comp, I’d say to you, we did a great job, it’s just the macro. But I can’t say that, so I can’t blame the macro.” ($PIR)

Be aware of seafood inflation over the next few quarters:

“Seafood inflation was nominal, but we now expect double-digit inflation in the second, third and fourth quarters primarily related to the shrimp production issues in Asia” ($DRI)

Small changes can have big effects on operations:

“When you change every point of sale or POS terminal inside a restaurant, there is a distraction to every single employee. And until they become unconsciously confident with that, your service standards will drop a little bit.” ($DRI)


I have never been a fan of Steve Ballmer, but I must admit, I was pretty impressed by what he had to say at MSFT’s analyst day:

Smart-phones are not the final frontier:

“The PC was a new user interface and a new form factor. And Intel and Microsoft made a lot of money. If you will, touch and low power was a huge change in the way the user interface paradigm worked. And Apple and Samsung and Qualcomm made a huge amount of money. We are not done seeing fundamental shifts in the user interface and kind of hardware approach to devices. And I believe that too represents a form of high value activity.” ($MSFT)

The future will be about how well companies can integrate hardware and software. There are only two, maybe three players who have invested in all the pieces:

“Hardware and software will need to kind of evolve together, somebody whether it’s wearables or what’s going on with screen or input technology without the right hardware and software skills, without the right machine learning and cloud infrastructure, without the right focus on applications and platforms, without the right appreciation of consumer and enterprise, I think it’s hard to do. And when you write down the list of companies that have the capabilities that I listed, you would certainly put Microsoft, you probably put Google. We all have certain different strengths. And then after that you might say, hey, Apple is there in many dimensions, but they don’t have the investment in cloud infrastructure, they don’t have the investment in machine learning, and then it just starts to slide from there” ($MSFT)

Building cloud infrastructure takes more than just capital. Only three players are investing:

“Cloud infrastructure to me, and this has become clear really over the last 4 years or 5 years, it’s a pretty fundamental investment and it’s not as simple as saying, let’s go build a bunch of datacenters. It’s really learning how you architect these things to be low cost and at scale… there is sort of this almost Dr. Strangelove kind of arms race that goes on at least amongst people who operate datacenters…And in a sense there is only really a couple or 3 companies that are really pursuing that at scale. Amazon is, we are, and of course Google is.” ($MSFT)

There are three categories where you can make money in tech, Consumer services is the toughest:

“devices, consumer services, and enterprise services. The two that are most easily monetized, in fact, are devices and enterprise services. Consumer services, as we say, are tough. Other than phone companies, there really aren’t many technology, large subscription consumer services, and outside of Google and maybe Facebook it is hard to find a business that is significant that is ad funded” ($MSFT)

Consumers don’t want to pay for services:

“consumers just don’t spend the lot of money after the device and the subscription with the operator. Consumers never did. If you look at our Office business today, our Office business is 15% maybe from the consumer 20%. So maybe 20% of our Office business kind of looking back into a licensing world, maybe 15% to 20% came from the consumer, despite the fact that the consumer buys 67% of the systems” ($MSFT)

Apple and Microsoft make money from devices, Google from ads. Nobody knows how Amazon intends to make money:

“Google happens to say let’s not have any profit be in the device. Let’s move it all into search. We and Apple kind of have a different view of the world. Amazon, I don’t know where they want to put market profit. They don’t seem to put the profit anywhere and that’s not a shot. It’s just I can’t tell you what profit stream is important to them the way we can about us or Apple or Google.” ($MSFT)

Google deserves some scrutiny from the justice department:

“I do believe that Google’s practices are worthy of discussion with competition authority, and we have certainly discussed them with competition authorities…suffice it to say that I think they need pressure from competition authority.” ($MSFT)

Materials, Industrials, Energy

KSU sees slowing automotive volumes on their rails:

“I would imagine that our growth will be somewhat muted in our carload standpoint in automotive for the rest of the year. Should be positive, but not anywhere near the double digit that we’ve been used to” ($KSU)

The grain harvest is going to be healthy though:

“The real good news is the grain. The harvest — we knew two or three weeks ago that no matter what happened at this point, no matter what numbers came out USDA, the crops in our area were there” ($KSU)

Joy Global thinks we may have seen the worst for mining CapEx:

“I think we’ve seen the worst of the equipment CapEx reductions and I think that we’ll slowly start to see improvement in CapEx” ($JOYG)

New mining projects are starting to tick back up:

“we track the prospects that our customers are working on and we put that on our prospect list of those projects that we expect to come to equipment selection in the next 12 months. And in that list, that list has ticked up more recently. So we’re seeing some projects being taken off the list as those projects get reevaluated, but we’re seeing new projects come on the list. And more recently we’re seeing more projects come on the list that have been taken off the list” ($JOYG)

Miscellaneous Nuggets of Wisdom

Know what you’re good at and stick to it:

“We’re strictly a mining equipment company. We’re not going to be diversified industrial. We may broaden our exposure in the mining space, but we’re not going to be, you know, we do one thing really well and we sell and support mining equipment. We’re going to continue to do that because we do it well.” ($JOYG)

Develop a culture of continuous improvement:

“We simply cannot achieve the type of productivity that we achieve year in and year out without a strong commitment to continuous improvement” ($PX)

Improved productivity comes from the sum of thousands of little projects, it has to be in your DNA:

“to use the baseball analogy, it really is a game of singles…We have thousands of people doing thousands of projects, delivering the productivity. And it’s really that granular approach that we believe is the differentiator. We don’t have a special name for our productivity program. We don’t even call it a program, it’s just what we do. It’s part of the DNA of the company” ($PX)

Ballmer gets the final word.  Real money comes from providing really important services:

“look the place you create real money is when you do something that is really important to your customer. If you are not doing something that’s really important to your customer, there is probably not a chance to make a lot of money” ($MSFT)