Company Notes Digest 08.05.18


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.

Optimism abounds as the boom times in the economy persist. As a result, companies have lots of positive commentary and reasons to be excited. Despite this, talk of trade war hangs over the markets.  Few people talk about risk, but history dictates that markets are cyclical. 

The Macro Outlook:

It’s booming times out there

“In terms of strength, I mean it’s booming times out there. So whenever you want to look: construction cranes, trying to hire somebody, looking at labor markets, trying to get a hold. Was there any one of those measures that you want to look at? The conditions are about running as hot as I could remember in a long, long time” – Markel Corporation (MKL) CEO Thomas Gayner

“The economy looks quite strong. Consumers are in good shape. Balances are in good shape. There are no potholes out there, lending has been pristine. Capital expenditures have been going up. More people are going back to work, unemployment may hit a post-war low at one point this year. Those are all positives” – JPMorgan Chase (JPM) CEO Jamie Dimon

“On the positive side, it’s a very long list…about everything we do is in the positive bucket.” – Parker-Hannifin (PH) CEO Thomas Williams

This cycle can extend longer than many think 

“the cycle can extend longer than many people think as companies are in good shape, particularly in the U.S. and the consumer is strong while carrying only modest debt levels…the risk of recession in the next year remains low” – Third Point Reinsurance (TPRE) Founder Dan Loeb

But don’t lose sight of cyclicality

“notwithstanding the positive environment that we are currently experiencing, we do not lose sight of the fact that economies will cycle, rates will cycle, rates will move and markets will fluctuate.” – Goldman Sachs BDC (GSBD) COO Jon Yoder

There was evidence of increasing market volatility this quarter

“Despite these challenging conditions for investing, we did see evidence of increasing market volatility in the liquid credit market beginning in late June, and has continued.Under the weight of strong new supply and deal activity, investors began to push back on both pricing and terms in the liquid loan markets” – Ares Capital Corporation (ARCC) CEO Kipp deVeer

“There’s been increased volatility in the markets, as everyone is aware, and that’s sidelined some issuers. Just to put some color around the increase of volatility, the average VIX for all of 2017 was 11. The average so far for 2018 has been 16. So, 2018 has been 16, so pretty significant move up just in terms of the total market environment volatility there.” – Moody’s Corporation (MCO) VP Stephen Marie

Sometimes there’s anxiety over rising interest rates but that seems short lived 

“There’s a little bit of anxiety that kind of comes in from time to time as the ten year moves around and touches 3% but that in the end doesn’t seem to – hasn’t seem to have had much impact and when there is an impact it seems to be relatively mild and relatively short. And then overall I would say there’s just – there’s as much or more dry powder targeting commercial real estate at this time than at any time that we can remember. So it feels like pretty healthy dynamics” – CBRE Group (CBRE) CFO Jim Groch

Some people are hedging

“With stock prices largely recovering from their February lows, and the ever-present threat of a global trade war, we are seeing growing demand for market hedges” – Cboe Global Markets (CBOE) CEO Ed Tilly

International:

The possibility of a no-deal Brexit is uncomfortably high

“I think the possibility of a no-deal is uncomfortably high at this point. It is highly undesirable. Parties should do all things to avoid it.” – Bank of England Governor Mark Carney

Certain softness in the Chinese economy

“the customer want more value right now or in the anticipation that there’s certain softness in economy that we need to respond to or prepare for.” – Yum China Holdings (YUMC) CEO Joey Wat

Politics:

The Trump administration views itself as free traders

“President Trump is an ardent free trader. Zero tariffs, zero subsidies, zero barriers. He’s looking to rebalance these relationships….perhaps it’s a multilateral arrangement. But more likely, it will be a series of bilateral arrangements. They tend to prove more effective, better for the American people. And they’ll get the outcome that President Trump is demanding. He’s simply looking for fair and open and reciprocal trade” – U.S. Secretary of State Mike Pompeo

Tariffs are a tax on consumers

“our view on tariffs is that they show up as a tax on the consumer and wind up resulting in lower economic growth and sometimes can bring about significant risk of unintended consequences.” – Apple (AAPL) CEO Tim Cook

The tariffs have had little impact so far but have created uncertainty

“in the conversations that I’ve had with our customers, their sentiments are…that they’ve seen so far very limited impact on volumes in their business or either the total amount of the volume or the origination and destinations for the volumes… there is uncertainty, that they feel just about what – ultimately how these tariffs are going to play out and what does it mean over time…it’s adding uncertainty, but everyone really is taking a wait-and-see attitude” – Triton International Limited (TRTN) CEO Brian Sondey

Financials:

In easy money times the advantage of public companies is non-existent

“in easy money times such as this, which may be coming to an end but may not be, the advantage that the public companies have access to capital does not exist. Private companies have as much access to capital, if not more.” – Vornado Realty Trust (VNO) CEO Steven Roth

It’s been a tough few decades to be a value investor

“This has been a frustrating environment for us and for value investing styles. AllianceBernstein recently reported that value-investing strategies are performing in the bottom 1 percentile since 1990. Reality is that the market is cyclical and given the extreme anomaly reversions to the mean should happen sooner rather than later, we just can’t say when.” – Greenlight Capital Re (GLRE) President Einhorn

Consumer:

Consumers are more skeptical of private label brands in emerging economies

“We have seen private label development around the world, probably most developed in Europe, but still low single-digits negligible in the United States, and in the emerging markets almost a nonexistent because our consumers have serious doubts about quality of certain products in those marketplaces. So, we’re very attentive to it” – Colgate-Palmolive (CL) CEO Ian Cook

Someone will probably try to take Toys R Us’ old market

“it would shock me if there’s not a toy retailer that you know re-emerges from the Toys”R”Us debacle…I mean, that toys thing was a debacle of massive proportions, but there is no question and there’s a number of people that you know that are out there, that are thinking about how to create a new generational toy a physical toy retail experience” – Simon Property Group CEO David Simon

Brick and Mortar isn’t dead just yet

“While I am certainly not calling a bottom, there is noticeably increased retail activity in doors” – Vornado Realty Trust (VNO) CEO Steven Roth

Technology:

Shortages of passive components are expected to persist into 2019

“shortage of passive components has created major supply chain challenges…In addition, we are experiencing temporary price increases on certain components for our new cameras due to the shortages. As you may have read in other reports, the industry-wide shortage is expected to last into 2019” – GoPro (GPRO) CFO Brian McGee

Tesla is designing its own chips to run neural networks

“we did a survey of all of the solutions that were out there for running neural networks, including GPUs. We went and talked to other people like at ARM that were building embedded solutions for running neural networks. And pretty much everywhere we looked, if somebody had a hammer, whether it was a CPU or a GPU or whatever, they were adding something to accelerate neural networks. But nobody was doing a bottoms-up design from scratch, which is what we elected to do…I’m a big fan of NVIDIA, they do great stuff. But using a GPU, fundamentally it’s in emulation mode.” – Tesla (TSLA)

Slow moving industries are finally entering the digital age

“financial services institutions are increasingly using iPads to deploy digital signature solutions for customer consent, compliance requirements, new account openings and services transactions.” – Apple (AAPL) CEO Tim Cook

“we’re moving to online ordering. We’re creating a portal so our customers can do online ordering today. Frequently, they phone us or even still fax us. And let me just say, fax machines aren’t the most efficient way to take an order, as you can imagine.” – Ecolab (ECL) CEO Doug Baker

Industrials:

Shipping container utilization rates are high

“the higher utilization is coming from a few things, and none of them are extraordinary. It’s coming from solid trade growth and really just coming from the fact that our customers continue to rely more heavily on leasing and they’ve been reducing the container purchases themselves. Our view is that those things are likely to continue, that trade growth is going to remain solid, and that our customers are unlikely to start buying containers very aggressively. I think as long as those things remain true, utilization should remain very high… we do think utilization is going to remain strong for the foreseeable future” – Triton International (TRTN) CEO Brian Sondey

Materials, Energy:

Many factors are driving oil capacity down, prices up

“On the whole, we continue our steady march out of the worst oilfield downturn of a generation…We believe that 3.5 years of E&P underinvestment; depletion-driven well declines; strengthening, synchronized global economic growth; and geopolitical flashbang events are all conspiring to drive the world-wide excess production capacity cushion down, and oil prices up” – National Oilwell Varco (NOV) CEO Clay Williams

Miscellaneous Nuggets of Wisdom:

There’s no excuse for bad manners

“I’d like to apologize for being impolite on the prior call. Honestly, I think there’s really no excuse for bad manners and I was violating my own rule in that regard. Certainly, I have some excuse. There are reasons for it in that I’d gotten no sleep and been working sort of 110-hour, 120-hour weeks. But, nonetheless, there’s still no excuse. My apologies for not being polite on the prior call.” – Tesla (TSLA)) CEO Elon Musk

Get one thing right first

“I remind people of jeff bezos, when he started amazon, he may have had visions about the everything store, but he started with books and he spent ten years getting books right. So we may spend a bunch of time getting one piece of it right before we—and testing various things to see what works”.- JPMorgan Chase (JPM) CEO Jamie Dimon

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 8.18.17

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.

Earnings season is wrapping up and retailers are the last to report. The environment was described as a “perfect storm” and “hyper-competitive” with no signs of slowing down. Retailers are trying to move into omni-channel and putting on a good face, but “the definition of loyalty in the retail business for the consumer is the absence of the better alternative.” Consumers will shop wherever they can find the lowest prices at the greatest convenience. At the moment Amazon is the elephant in the room.

Next week begins the summer doldrums for earnings, so we’ll likely take the next two weeks off. Be back again in September.

The Macro Outlook:

We are beginning to see some inflation in food

“after several quarters of lower commodity costs, we are beginning to see some inflation. We anticipate this will curtail some of the hypercompetitive discounting we have seen in recent quarters.” —Jack in the Box CEO Lenny Comma (Restaurants)

The transition has been a little more rapid than normal

“the transition from deflation to inflation has been a little more rapid than normal, and there are certainly some categories where we are seeing more than 2% to 3% inflation…I wouldn’t say we are seeing anything out there today that would be overly difficult for our customers to pass along.” —Sysco CEO Bill Delaney (Food Distributor)

Millenials are becoming key decision makers in businesses

“Most of our chefs and operators in our customer’s kitchen are millennials. They want different type of equipment.” —Middleby CEO Selim Bassoul (Kitchen Equipment)

Financials:

Home Depot feels good about housing markets

“You know we continually look at months of supply, there is 4.3 months of supply in the market of housing availability against a historical norm of six, that clearly is helping to drive improvement in home value appreciation…So, we see this housing favorability continuing as we look forward. And I think the watch out for us is, you wouldn’t want to see affordability become an issue, but that at this point doesn’t seem to be a concern for us at all.” —Home Depot CEO Craig Menear (Home Improvement)

Mall rents are falling

“we think real estate prices a couple years from now are going to be less expensive than they are today. We’re starting to we’re seeing that as we renegotiate leases or relocate stores. The rents are coming down in all but the true A malls. So, if you take a look at the true A malls we actually think rents in those malls might actually go up…because they’re going to be in such high demand” —Dicks CEO Ed Stack (Sporting Goods)

Consumer:

The retail industry is in a perfect storm

“The retail market is currently in flux. The environment is highly competitive and dynamic…It’s a perfect storm right now” —Dicks CEO Ed Stack (Sporting Goods)

CEOs are trying to stay optimistic

“I also know that we operate in an environment of intense and disruptive competition, and that our customer has more shopping options than ever, and we need to provide her with a compelling and a unique proposition. So winning in this environment requires us to act with a great sense of urgency to make changes in how we operate and to move faster. And as we do this, I am confident that Macy’s will win again.” —Macy’s CEO Jeffrey Gennette (Dept Store)

They argue that omni-channel is essential

“The customer is clearly telling us that brick-and-mortar retail continues to be an essential part of the shopping experience and certainly when it is executed right with the right values. All of this gives us confidence in our long-term global store growth potential.” —TJX CEO Ernie Herrman (Off-Price)

Out of sight out of mind

“there is an impact on a market when you have fewer stores in it and share of mind is therefore decreased, and as a result, those areas where we’ve closed stores, the rate of growth in our omnichannel business has been a little less…Everything that we’ve learned from that store closure pilot has been that reinforcing the importance of a great physical footprint. And we’ve said over and over again, and we have seen nothing that doesn’t support this. In fact, I think the thesis is growing stronger.” —Kohls CEO Kevin Mansell (Dept Store)

But everyone is trying to match Amazon

“I think we are in the time of hyper competition. People are out there trying to get market share. They are doing things that one typically wouldn’t do in a business. I guess, the elephant in the room there, you know who it is, is doing an awful lot of things without regards of the bottom line and is getting rewarded for it. And so there are an awful lot of other people trying to do the same thing. So yes, I think there is margin opportunity. I think we could get there, but I also am very, very aware of the hypercompetitive space that we are in.” —Urban Outfitters CEO Richard Hayne (Apparel)

The price competition is impossible to avoid

“We tried to not be promotional. We didn’t want to be the price leaders in the industry. And as things got competitive and somewhat unpredictable, the consumer told us that they felt that we weren’t priced competitively in the marketplace.” —Dicks CEO Ed Stack (Sporting Goods)

Retailers are doubling down on promotions

“when you look at the marketing strategy…number one, we’re going to remain very promotional. And what we’ve spent a lot of time on is reducing the overlap of promotions, reducing the amount of overlap of discounts on top of each other. But we’re doing that all the way through the back half and that really is a big focus of ours.” —Macy’s CEO Jeffrey Gennette (Dept Store)

Consumers are only as loyal as your prices

“We didn’t start the promotion, but we can’t sit around and pretend it doesn’t happen. We need to engage in that. And our customers have told us, you need to engage here in today’s marketplace…I’m a firm believer that the definition of loyalty in the retail business for the consumer is the absence of the better alternative.” —Dicks CEO Ed Stack (Sporting Goods)

The competition shows no signs of slowing down

“The pace of change in the consumer and competitive environment doesn’t show any signs of slowing down.” —Target CEO Brian Cornell (Big Box Retail)

If anyone can challenge Amazon, it should be Walmart

“We continue to gain traction in e-commerce with Walmart U.S. GMV up 67%…we continue our transformation to become more of a digital enterprise that moves with speed and agility…We’ve seen strong results from the rollout of online grocery…Marc Lore and the team delivered another quarter of robust topline growth” —Walmart CEO Douglas McMillon (Big Box Retail)

Technology:

Home Depot spends half its advertising budget on digital

“Our overall advertising spend is up, lower single digits, but as we’ve essentially made more significant pivot to digital marketing it’s over half our marketing right now. That’s a medium that you can get good insight on the return on your spend and as Craig said, the team just done a great job continuing to increase the return on that spend, so leveraging that low single digit to a much more productive return on overall ad spend” —Home Depot EVP Ted Decker (Home Improvement)

Apple products sold well at Target

“on the Apple comments, they weren’t just driven by tablet, they are driven across the board in categories. And we had really strong showing in Q2 on the iWatch which we worked with Apple on clearly. And we have a lot in our plans for Q3 and Q4 with potential new launches as I have outlined.” —Target CEO Brian Cornell (Big Box Retail)

Online video has tailwinds to revenue, but headwinds to profitability

“more and more people are watching online video at longer and longer time, on a daily basis…and at the same time, advertising revenue has been increasing, and there is also an increasing willingness from consumers to pay. So, the subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of this is the cost of content has been increasing, even faster. So, what we see is that over time, we believe the content will continue to increase, but the rates would probably be lower. And the subscription, as we continue to increase, would deliver higher revenue per active user. So, we will get closer to a more equilibrium between cost and revenue at some point in time. But I think unfortunately at this point in time, the net loss of the business is still increasing.” —Tencent President Martin Lau (Chinese Internet)

Neural Nets are improving at a double exponential rate

“A neural net in terms of complexity is approximately – not quite, but approximately doubling every year. And this is one of the exciting things about artificial intelligence. In no time in my history of looking at computers in the last 35 years have we ever seen a double exponential where the GPU computing model, our GPUs are essentially increasing in performance by approximately three times each year…And…on top of it, the neural network architecture and the algorithms that are being developed are improving in accuracy by about twice each year…And so you’ve got these two exponentials that are happening, and it’s pretty exciting. That’s one of the reasons why AI is moving so fast.” —Nvidia CEO Jen-Hsun Huang (GPUs)

The next revolution of AI is at the edge

“The next revolution of AI will be at the edge, and the most visible impactful evidence will be the autonomous vehicle. Our strategy is to build a ground-up deep learning platform for self-driving cars, and that has put us in pole position to lead the charge” —Nvidia CEO Jen-Hsun Huang (GPUs)

Industrials:

All in all there was good industrial activity in the quarter

“positives around oil and gas…infrastructure, aggregates, cement positives; seeing positives in machinery OEMs, transportation equipment and paper and food…all-in-all, we saw good activity in the quarter” —Applied Industrial Technology CEO Neil Schrimsher (Distributor)

Materials, Energy:

Dry Bulk shippers are starting to feel more positive

“We’re generally positive about the market from the second half 2017 onwards and we believe that every subsequent year will fare better than the year before…environmental regulations will thereafter not only contribute to a transition towards a cleaner environment, but it will also assist shipping in reducing vessel supply and will therefore lead us to better markets as of 2020 onwards.” —Star Bulk Carriers CEO Petros Pappas (Dry Bulk)

Miscellaneous Nuggets of Wisdom:

Take care of your customer on their terms

“What we’ve learned is a customer comes with a return, that’s their errand they have to do, and the more efficient, the faster we are in doing that, the more free time we’re giving back to the customer. And oftentimes, they take that free time and start shopping. So we’re really looking to take care of the customer on their terms, and if they have a great experience in our store with a return, we certainly believe that ends up in good news for us.” —Nordstrom President Erik Nordstrom (Dept Store)

Full transcripts can be found at www.seekingalpha.com