Company Notes Digest 9.30.16

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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.

This week’s post: Strong Consumer

Pier 1, a struggling retailer, pointed out that sales trends improved in September. It could be company specific, but it also could be an indication that the consumer was out spending this month. Other consumer oriented companies have tended to echo that the consumer looks strong.

Earnings season will start in a few weeks. Don’t be surprised if we return to earnings growth for the first time in many quarters.

The Macro Outlook:

Consumer spending may have been pretty strong in September

“The improved sales trend that started in August and continued into September is encouraging…We’re not really sure what happened in July…Anyway, we saw sales pick-up in August, comps were minus 1%, and in September, comps are trending positive low single-digits with merchandise margin also ahead of last year…We are certainly not ready in any shape, way, or form to declare victory, but we are pleased to see that the slowdowns in store traffic, the decreases in store traffic have ameliorated over the last nine weeks.” —Pier 1 CEO Alexander Smith (Home Furnishing)

There’s no slowdown for the high end consumer

“what I’d say is that we have not seen a slowdown in the high end consumer…what we are seeing is, it feels like vacation spending in particular has so far been strong and certainly over the summer we didn’t see any signs of some kind of slow down. I think people are still booking trips” —Vail CEO Rob Katz (Ski Resorts)

Carnival Cruise’s booking trends look strong

“In terms of the North America brands in Europe, again our booking curves look strong, and look good as do our pricings” —Carnival Cruise Lines CEO Arnold Donald (Cruises)

Businesses are getting closer to full employment

“businesses are getting closer to full employment and we are seeing the checks per client slow, but we expect that frankly for the last couple of years as people came back from recession.” —Paychex CEO Martin Mucci (Payroll Processing)

Industrial companies have destocked and may be ready to make new orders

“I think largely the destocking has occurred. And I think what will happen is the dealers and the larger distributors wind up having more line of sight to more demand. They are going to bring more inventory in…So, I really think as we move through ‘17, we are going to see some improvement in that general industrial market.” —Actuant CEO Randy Baker (Industrial Components)

No one is expecting much growth though

“The general industrial market appears to have stabilized, but shows little signs of growth. Industrial distributors continue to report sluggish retail order demand. The impact of weak oil, construction, general manufacturing markets have constrained with level of sales improvements throughout the world…Regionally, the U.S. remains the most challenged, while Europe does not seem meaningfully impacted by the Brexit panic.” —Actuant CEO Randy Baker (Industrial Components)

The outlook is for a 2.5% growth environment

” we don’t see anything as we sit here today that would fundamentally change the dynamics that we see in the market, let’s say, as we look out over the next four quarters. We see more of the same. And what we see is an organic market that would continue to grow in that 2.5% range” —Accenture CFO David Rowland (Consulting)

International:

A stable dollar will help companies post better numbers next year, but it will be tough to get back to 2014 levels

“I think now with the currency having stabilized we feel like that positions us pretty well going in to this year in terms of really for those countries where we did see some decline to really kind of moderate those declines if not eliminate them in some cases…That said, with the strong US dollar, I don’t think we can necessarily get back to where we were 2.5, 3 years ago without seeing some shift in currency.” —Vail CEO Rob Katz (Ski Resorts)

Business has picked back up in the UK

“There was a slight slowdown in the sales cycle in the UK when Brexit came out. People were sitting and sort of contemplating a little bit. We saw that and we see that picking up now” —Factset Director Global Sales Scott Miller (Financial Data)

Russia faces different economic challenges than most other countries

“as far as the Russian economy is concerned, we find ourselves in a totally different situation. Unlike many other countries we have high inflation, we have high interest rates, we still have the option of lowering them…the task facing the Central Bank of Russia is different.” —Central Bank of Russia Governor Elvira Nabiullina (Central Bank)

Financials:

Financial services firms are under a huge amount of revenue pressure from low rates

“although we are very pleased with our growth in Financial Services, in banking and capital markets specifically, I would say that is an industry that we are watching…very, very carefully and very closely.” —Accenture CFO David Rowland (Consulting)

Factset is seeing more small investment firms go out of business

” We had a record growth in new client acquisitions…but it was mixed with an increased cancellation rate that was what I would call market related. So, it was clients going out of business, hedge funds going out of business, some of the smaller buy side where they have been shedding employees…We definitely saw an increase in the quarter of the market-related cancellations in that buy side sector.” —Factset Director Global Sales Scott Miller (Financial Data)

Finance is a tech intensive industry

“Financial Services is a very technology-intensive sector, especially if you’re thinking about banking and capital markets, specifically.” —Accenture CFO David Rowland (Consulting)

Consultants benefit from increasing regulation

“the rules keep coming, I don’t think that helps necessarily the business environment in general because of over regulation, but it certainly gives Paychex a lot of opportunities to go and talk to clients about their payroll need and their HR outsourcing need, because small to midsized business is just can’t keep it up with all of these changes. The other thing is that enforcement and the penalty have increased as states and federal governments have looked for revenue sources.” —Paychex CEO Martin Mucci (Payroll Processing)

Consumer:

The Chinese government wants to see the cruise industry succeed

“cruise is in the 5 year plan for China. So that means the government has committed to developing the Cruise industry. The reason for that is pretty self-evident. We’ll employ, overall with port development and infrastructure, and supply chain, and training as well as ship building that will employ millions, and millions, and millions of Chinese. So the government is very interested and they see cruise as an economic engine going forward. So you’ve got the support of the central government and the various provincial municipal governments, so that’s very important.” —Carnival Cruise Lines CEO Arnold Donald (Cruises)

There is a ceiling to how much shopping people will do online

“I think what we do know is from all the research that there is, we’re getting — moving towards a sort of ceiling where the percentage of home furnishings that are bought online starts to — as a percentage of the total starts to slow down very considerably because there’s many, many customers…who like to visit stores” —Pier 1 CEO Alexander Smith (Home Furnishing)

Technology:

Verizon continues to claim that they’ll have 5G in 2017

“I’m going to speed into the 5G world in 2017, and it’ll be just similar to LTE as far as I’m concerned, where we get a leap on all of our competitors. So we’re moving forward. I mean, at least, two of our competitors are still trying to deal with building out their LTE network. I mean, that’s like five years ago already… They’re still dealing in the LTE world. I’m dealing in the IoT world, smart city world, telematics. So I’m moving ahead and they’re still talking about how great their network is in LTE.” —Verizon CFO Fran Shammo (Telecom)

Is it just a marketing tool? Network performance has converged.

“there isn’t much of a difference between network performance today. We don’t profess to have yet the best network but we do feel that our network is good and certainly does not justify a very large premium that the competitive providers are actually charging… we shifted the messaging to say why pay more. And this started to resonate with consumers in the United States” —Sprint CFO Tarek Robbiati (Telecom)

Blackberry is exiting the hardware business

“Coming out of Q2, I feel that we are reaching a good inflection point where our financial picture is stable and our pivot to software taking hold. In line with this pivot…we have decided to discontinue all the handset hardware development, only hardware, and to leverage third-party partners to provide that function” —Blackberry CEO John Chen (Smartphones)

Industrials:

Nike says it is revolutionizing manufacturing to allow for greater personalization

“we took major leaps toward…the promise of personalized performance. Our connection to the consumer through Nike+ is core to that vision. But equally important is disrupting the business model that supports it or as we like to call it, our Manufacturing Revolution or Man Rev… We’re continuing to scale our transition from cut and sow where precision is at the stitch level to digital design where precision is at the pixel level. We’re leveraging the power of computational design that uses algorithms to create highly tunable innovations very quickly. This summer in Rio, athletes such as Allyson Felix, Elaine Thompson and Mo Farah claimed gold wearing our latest track spikes. Each were developed using computational design, 3-D printing and Selective Laser Sintering, which allowed us to create and refine prototypes in hours instead of months and aligned with the athlete’s specific training programs and competitive needs.” —Nike CEO Mark Parker (Apparel)

Materials, Energy:

Budgets are still constrained for oil companies

“Despite oil prices beginning to stabilize, companies continue to operate in a budget constrained environment and recent global events have caused additional market uncertainty.” —IHS Markit CFO Todd Hyatt (Data Provider)

It may be two more years before there is a recovery in agricultural equipment markets

“Off-highway mobile equipment continues to be very weak, particularly in agriculture. While major manufacturers are reducing their inventory due to low crop prices and weak model year 2017 order writing. I expect we will now have at least two full planting seasons before we see improved end market activity” —Actuant CEO Randy Baker (Industrial Components)

Ag equipment manufacturers are still sitting on a lot of inventory

“I think you follow the ag market pretty close like we do. And what we have seen is that the major distributors around the world are sitting on a lot of inventory. And so as the major OEMs have completed their order writing campaigns for combines, spring equipments, planting and seeding equipment it is a weak order demand. And I think you would have heard that from our major customers” —Actuant CEO Randy Baker (Industrial Components)

Miscellaneous Nuggets of Wisdom:

Operating leverage starts at the top line

“On the SG&A leverage, it all starts first with topline growth. The minute you get good top line growth, you get leverage on all of the other SG&A costs that we have in the P&L.” —Pepsi CEO Indra Nooyi (Sugar Water)

You can always find something to worry about if you want to

“every year there’s geopolitical tensions. There’s some kind of disease consternation. There’s macroeconomic malaise…Every year in some markets around the world, those things happen and it’s part of our business. So we manage that. We anticipate it. We change deployments…to us it’s normal business.” —Carnival Cruise Lines CEO Arnold Donald (Cruises)

Full transcripts can be found at www.seekingalpha.com