Are Equities Really Cheap to Fixed Income?

In the ongoing debate over whether or not the market is “cheap” or “expensive,” a favorite argument of the bulls is that equities are still cheap compared to fixed income.  The logic behind the argument is that the forward multiple of the S&P 500 (based on 2014 earnings estimates) is ~14.5x or about 6.9% in terms of earnings yield.  In comparison, the yield on the long bond is currently 3.63%, meaning that equities sell at a “spread” of 327 bps.  The problem with this analysis is that the 30 year bond represents a risk free rate, while equities should have a risk premium baked in.  The analysis below is an attempt to estimate what that risk premium should be relative to assets with similar risk.

True risk has nothing to do with price volatility, it has to do with defaulted cash flow streams.  So, in order to measure the riskiness of equities, we have to come up with a proxy to measure for how much the S&P 500 has missed its “promised” earnings by.

The method here was to look at the cumulative earnings of the S&P 500 over the past 12 years and compare that to the cumulative earnings that an investor would have expected to receive from the index if earnings had continued to grow at the historical average rate of 6.9% (going back to 1960).

At a 6.9% annual growth rate, in the year 2000 an investor would have expected to receive $1108 in earnings from the S&P 500 over the next 12 years.  In actuality the S&P 500 earned $936.43 over the 12 year period 2000-2012, which amounts to a 15.5% cumulative shortfall.

S&P Foregone Earnings

How does that “default” rate compare to fixed income assets?  Based on the default tables published in this Moody’s study (page 14; un-adjusted for withdrawal), below is an estimate of expectations for the cumulative missed coupon payments from differently rated bonds over a 12 year period.

Interpret this table as:  If a basket of bonds were supposed to pay $10 in coupons for 12 years a perfect cohort would pay $120 over that time frame.  Based on the Moody’s default tables, an investor in a basket of Ba bonds would expect to receive about 91.8% of that amount cumulatively over the 12 years.

Cumulative Lost Coupons by Credit Rating



Combining the two charts, the S&P 500 missed the equivalent of 15.5% of its earnings/coupon payments over the course of the previous 12 years relative to a 6.9% “promised” growth rate.  That puts it somewhere in between a group of Ba and B rated bonds in terms of missed cash flows.

The current option adjusted spread on the BB Merrill Lynch benchmark is 310 bps and on the B benchmark it’s 415 bps, which means that the 327 bps spread of the forward earnings yield of the $SPX to the 30 year Treasury Bond is also somewhere in between.  On that basis, factoring in a deserved risk premium, equities aren’t exactly cheap to fixed income, and the “cheapness” or “expensiveness” of equities is more reflective of the absolute value of securities markets in general, especially fixed income.

(Some notes on methodology: I didn’t adjust for any recoveries on defaulted bonds, or factor in how the defaults would affect final portfolio value.  The figures above are based on summing the coupon payment from current bonds in each year.  I would argue that any bias caused by that shortcut may be offset by survivorship bias in the S&P 500.  Also I haven’t time-discounted any cash flow streams for the sake of simplicity.)

Putting Internet Market Caps in Context

Facebook shareholders have had a wild ride in the hours since the company reported earnings yesterday afternoon.  The company posted gaudy 60% revenue growth year over year, bringing 3Q revenue to $2 B from $1.26 B in 2012.  That’s truly spectacular growth on a percentage basis, but relative to the company’s market cap, it’s a little ho-hum.  $FB still trades at a huge premium to revenue implying that the market is looking for much more growth to come.  Facebook isn’t the only internet company that is pricing in seemingly limitless growth, but how likely is that growth to materialize?

The interesting thing about ad supported internet models is that they are not pioneering a new market so much as rapidly taking share in an existing one.  The global advertising market is well defined, so the real question is how much share is internet spending going to take?  Global ad spend is forecast to hit $503 B in 2013.  Internet ad spend currently represents 18.3% of that pie, or $92 B.  By comparison, the ad supported internet businesses listed in the US have a combined market cap north of $590 B, which is greater than the total advertising market.

If you assume that internet ad revenue comes with a 30% operating margin, and put a 10x EBIT multiple on that figure, back of the envelope math implies that the current portion of internet ad spend is worth about $276 B in market cap.  Using the same assumptions and working backwards, the $590 B total market cap of US listed internet companies implies that the stocks are discounting ~$200 B in annual revenue for the industry, meaning that current market values suggest that these companies will capture about 38% of global total ad spending.  That’s about the same share that’s currently spent on TV.  Quick note there: the top six global media companies (Disney, Fox, etc) have a combined market cap of ~$460 B, although they also have customers that pay money directly for their content, so not a totally apples to apples comparison.

Global Ad Spend vs. Internet Market Cap

Facebook 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“Now 49% of our revenue comes from mobile and 48% of the people use Facebook in any given day are only accessing it from mobile.”

“Today, only about a third of the world’s population is online and internet’s is growing more slowly than you probably expect less than 9% a year. We want to change that.”

“The news feed has proved itself incredibly useful for people and the most used app on peoples scoring by far, but this is just the start of what’s possible.”

“When we get to the point, where everyone can easily ask any question to Facebook and get it answered by our community. That’s going to be very powerful.”

“let’s talk about the progress we have made towards building the knowledge economy. The key to building the knowledge economy is building tools for everyone to use information to do their jobs better. So in addition to connecting everyone and understanding the world, we are also focused on building new services for businesses as a way to accelerate the growth of this new economy.

The way businesses will experience this effort is that we will keep building better services for them to reach their customers with higher quality ads, more efficient leads with better targeting, better analytics and using richer formats. The way people will experience this effort is that the ads they see will become more and more relevant to their lives.”

“I think there is still a lot of room to improve the quality of our ads and grow our business over time. So this is something that we are going to keep on investing in going forward.”

“n 2013, for the very first time, people will spend more time with digital media than watching TV. Emarketer estimates more than 5.25 hours a day on digital services including mobile compared with 4.5 hours watching TV in the U.S.”

“In the United States, Facebook including Instagram, just one in eight minutes people spend on the desktop, but one in five minutes on mobile.”

“According to comScore, Facebook and Instagram have more mobile time spent than many of the next largest services including YouTube, Pandora, Yahoo, Twitter, Pinterest, Tumblr, AOL, Snapchat and LinkedIn combined.”

“Today, mobile represents 12% of consumer media time, but it’s still only 3% of ad budget.”

“we did see a decrease in daily users specifically among younger teens.

We won’t typically call out such granular data, especially when it’s of questionable statistical significance given the lack of precision of our age estimates for younger users. But we wanted to share this with you now since we get a lot of questions about teens.”

“every one of the AdAge Global 100 have advertised with us over the past year.”

“We have to show brand marketers that our ads drives in-store-sales and we work on that, we work on that client-by-client”

“Particularly for brand advertisers, they also take some rethinking of the ways they have measured ads and ads’ performance before and we work very closely with our clients on that.”

“So our goal is, we want our ads to be as good as the user shared content. Some of them are, a lot of them aren’t. We have a lot of room to grow in improving that quality. But in terms of the excitement you will see or the interest, that is our goal.”

“Before we were asking marketers to come in and choose what ad products they were buying…I think that move of moving more towards using their language and focusing on their business needs is a simpler product for them. It will help gain us more marketers and it helps us work with them in a more efficient way.”

“We have been able to deliver better content and grow business for our customers and ourselves.”

Cullen/Frost 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“During the third quarter, Cullen/Frost also announced a merger agreement with WNB Bancshares. When this merger is completed, it will bring Frost into Midland and Odessa for the first time. The Permian Basin is a significant driver of the state’s strong oil and gas business, and we are delighted to be expanding into this dynamic region to give us additional opportunities for growth.”

“Second quarter 2013 average total loans were $9.3 billion, up 7.1% from the $8.6 billion for the third quarter of last year. Through the first 3 quarters of 2013, we recorded our highest ever level of new loan requests. Year-to-date, new loan commitments are the highest since 2008. Our loan pipeline is higher than last year but down from the previous quarter due to an across-the-board slowdown in requests.”

“American families and businesses need confidence that our elected officials will address the fiscal mess responsibly and put us on a course to end the runaway deficit spending and exploding national debt. The government shutdown is the latest symptom of a larger ongoing problem.”

“we expect loan growth — still expect loan growth, but we’ve lost some momentum.”

“we’re in a time that in 45 years I’ve never seen before, and I’ve talked about this in previous calls, to where commitments, people are preparing to borrow money, but they are not yet ready. And what we saw across this nation and, certainly, our experience, when you get into this kindergarten fight in Washington, because they’re all involved in the fight — and me instead of we in making this country better, you see a great pause because there’s a lack of confidence and the uncertainty.”

“So as we moved through this year and continued to build uncertainty and it was already at a high level, I’m optimistic that the commitments are growing. You can lead a horse to water and there’s plenty of water in the trough. We’ve got tons of liquidity, but I can’t make them drink. I can’t make them advance on the line, but we are growing our relationships.”

“There’s a new term that I’m sure you’ve heard. They call them surge deposits. And people wonder what their surge deposits are, how much they’ll go down. One thing about us is we’re not blind to that, and that’s one of the reasons that our liquidity is being maintained so high. Because I believe the — really and truly, the only liquidity you have going into a crisis is the liquidity you brought into the crisis. And so we’re careful with that. That’s one of the reasons we are maintaining such a high liquidity. And we could see it drop some, as I’ve said, because it’s been lower for longer than it was back when Greenspan cut rates.”

“Again, I will tell you, look at the commitment growth. It’s significant. And companies are sitting on the sideline wanting to buy a company, wanting to expand, but they’re scared to do it when you’ve got such a dysfunctional state of affairs in Washington.”

Applied Industrial Technology 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“These results were below our expectations, as weaker industrial demand continued.”

“We are continuing to experience weakness in our top line sales into October, including certain industry segments like mining, machinery and pulp and paper. We do expect improvements beginning in calendar 2014, which coincides with traditional seasonality in the second half of our fiscal year.”

“So I don’t know a stumbling block but as you know, right, we’ve closed no acquisitions in calendar 2013 to date. We are busy. The M&A team, me personally as well. I’d say we’ve got a strong pipeline. We want to be as active every year as we were in calendar 2012. And so that was 8 acquisitions and $150 million. We’re working around our clear priorities. We continue to raise our sights on kind of the prospect size. We’ve got the financial capability, the operating know-how to move in this. So we do not expect that we will close this fiscal year with no transactions.”

“So I think it’s different. And so in our international markets, a lot of mining exposures. We think about Australia, as we think about Mexico and even Western Canada, potash and the oil sands. So that exposure on that side. It’s a weak environment that people are looking to improve maybe as we move throughout this fiscal year.”

“I think U.S., in particular, I think it’s steady and stable. People are looking to continue to operate. They will serve their customers. They will make modest investments, if it’s got productivity attached to it and most are still doing pretty well from their own cash standpoint. But I don’t think they’re looking to make the most significant investments right now. And perhaps that turns with the calendar year and they see some greater pickup in some of their businesses. I think most are mindful of the broader economic indices but I think many would say, right, some of those ISM manufacturing statistics aren’t necessarily translating into day-to-day business results. I think there’s some belief. There’s some optimism with the typical lag that’s going to happen. But I don’t think they’re moving forward with the most significant side. Now in our Fluid Power side, I’d say more of our segments on the industrial, even some of the ag customers, they’re making some investments. On their product platforms, they’re looking at technology and content and then they’re looking at what new platforms that they can be developing. But I think in ag, right, they’re going to have a mindful eye on — of the markets turnout and what subsidies may look like going forward”

The Final 20 Days of a Bull Market

As shown in the chart below, bull markets tend to end with a crescendo of buying.  The chart highlights the percent change in the $SPX or $DJIA in the final 20 trading days leading up to bull market peaks.

In the 10 bull markets post World War I, the final days of a bull have seen relatively large increases in equity indexes.  The median change in the index in the 20 trading days prior to the peak is 5.5%.  That’s considerably higher than the 0.8% median 20 day change on all other days.

Needless to say, there are plenty of occurrences in which the indexes are up this much over a 20 day period without signalling a bull market peak, so apply this data with care.  However, it’s worth keeping this history in mind as something to be on the lookout for at a turning point.

20 Days Before the Peak

Source: Avondale


Sprint 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“This marks our first quarter of operations after closing our transformative transactions with both, SoftBank and with Clearwire.”

“We continued our steady pace through the third quarter and now have over 26,000 sites on air with over 35,000 sites or more than 90% of Sprint sites completed or under construction. We launched 4G LTE in 130 markets and continue to target approximately 200 million LTE POPs by the end of the year and expect to complete our 1.9 gigahertz network modernization by mid-next year.”

“Our plan is to build a multi-band LTE network that includes our 1.9 gigahertz overlaid by 800 megahertz and 2.5 gigahertz to provide greater coverage, speed and capacity. We expect to use a capital efficient mix of various bands based on factors such as geography and capital needs, the capacity needs.”

“We continue to free up our low band 800 megahertz following the Nextel shutdown and expect this to improve the performance and coverage of our network. We began deployment of voice services on the 800 megahertz band in the first quarter and now have sites on air at approximately nearly two-thirds of our markets. Also, more than 40% of our postpaid base has 800 megahertz voice capable devices. Furthermore, we are starting to turn up the 800 megahertz LTE radios on our sites this quarter in multiple markets where we have spectrum re-banding complete”

“The third layer to the network will be the high band 2.5 gigahertz spectrum that we acquired in the Clearwire transaction which improves speed and capacity. As we have said previously, we expect to complete the 5,000 LTE sites the Clearwire had under construction this year. As we move into next year, we will continue to expand the rollout of 2.5 gigahertz on selected sites across our existing network.”

“In July of this year, we introduced tri-band data devices and plan to launch handsets before the holidays. We expect that going forward all of our postpaid smartphone launches will be tri-band supporting active hand outs across all bands and ensuring data session continuity. While we remain focused on completing the core Sprint network modernization, we are excited about the enhanced capabilities that our multi-band network will provide.”

“We clearly have a strong spectrum position now with 120 megahertz of Clearwire spectrum in 90% of the top 100 markets, plus our 1.9 plus 800. We will look at the spectrum auctions as spectrum becomes available. One of the things that was so important about this architecture. It is that we could add additional bands of spectrum, so we saw that. We could also potentially partner with other owners of spectrum in creative ways and deploy that on our network for additional capacity or other capability, so I used the analogy of the three little pigs network and the complexity associated with kind of ripping up and replacing the entire network to give us that flexibility going forward. But it does give us that, so we have a lot of options and we will consider them.”

“We currently have a total of about 55,000 cell sites. This gets back to the earlier question as well. And you should expect that number of macro sites, I am talking macro only because Steve talked about the potential addition of smaller cells to remain relatively flat for the next few years, we are deploying LTE aggressively on the 1.9 spectrum and we expect to be, as Steve indicated in his comments, to have about 200 million POPs finished by the end of the year.”

“our marketing plan from a messaging perspective right now is really three-fold… One is, on one up and the $65 price point, which we think is a compelling price point …two, unlimited for life…Third… in markets where our customers have experienced some significant network issues in the last year is once we have got gotten to roughly let’s say 70% completion on Network Vision to go tell those customers that the network has improved and to have them try it and have new customers try it”

“In the 1.9 on LTE, as we have said, we are seeing consistently about 6 to 8 megabits per second. And on 2.5 where it’s deployed currently from the original Clearwire build, we are seeing in upwards to 40 and 50 megabits peak speeds right now. 50 to 60, I am sorry. 50 to 60 megabits peak speeds in those cities where it’s been built.”

Baidu 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Again I think for all of the countries or markets you mentioned, China, US, Korea, mobile search is in its early stage. So we are exploring all kinds of different things to better serve our users’ needs.

“Yeah, I think the video games both on desktop and mobile in terms of time spent and video views are growing very, very quickly. Right now it’s not a very profitable business yet, but the traditional, you know, advertising industry is shifting the TV commercial budget to video and we think eventually this will become a very material part of the overall online advertising business. So our focus right now is still to continue to build the best user experience for video both on desktop and mobile. And there’s no doubt that eventually this will become a profitable business for us.”

“One trend we have seen is that mobile users in China increasingly are expecting an end-to-end solution instead of just fact finding. So users are not satisfied enough to just find information or find a link to some website on their mobile phones. They expect to be able to [be served]. For example, when a user search for a movie title, we should be able to let him or her to buy the movie ticket at a theater nearby without leaving the mobile search app. So this is the so-called end-to-end solution, and we’re doing this more and more. We see this as a trend in China.

Whereas for other markets which I’m not very familiar with, so I will just, you know, take some anecdotal things to compare. So in the US, people probably are more used to do this kind of thing through a vertical app or a map service, but in China, I think more of our users prefer to start from the Baidu search box or the Baidu search app.

Also because China’s nature as a developing market, the offline businesses, the traditional business are not very savvy in terms of internet, especially mobile. So we need to do more than the internet players in the developed markets. This also presents, you know, additional opportunity for Baidu. If we do more, we should be able to make more of this kind of services.”

Miscellaneous Nuggets of Wisdom: Business Insights From America’s Best Executives

Each week I write a post called “Company Notes Digest” in which I assemble quotes from the earnings calls that I’ve read during the week.  At the end of the post, I always try to include a section called “Miscellaneous Nuggets of Wisdom” which I believe are the most valuable insights contained in the post. The quotes that I highlight in that section are, in my opinion, timeless and priceless business lessons from the men and women that are in the trenches, operating America’s largest companies. Below is a running compilation of each week’s Miscellaneous Nuggets of Wisdom.


Brilliant quote on liquidity and crisis management:

“the only liquidity you have in a crisis is the liquidity you brought into the crisis.” ($CFR)


It’s tough to really know what your competitor is up to:

“trying to figure out what your competitors do is a Rubik’s Cube.” ($WRB)

In insurance you don’t know your cost of goods sold up front:

“The fact of the matter is that we are in a business where we do not know our cost of goods sold until after the sale has been made.” ($WRB)

Underwriting property casualty insurance is a lot like investing (I strongly believe all investors should study the property/casualty insurance industry):

“what I would suggest to you is that oftentimes where the market has gotten the ugliest is oftentimes where you will see the greatest or the most severe reaction and the pendulum will swing farthest going in the other direction, and you just need to make sure that you don’t jump back in prematurely.” ($WRB)

Cyclical business models necessitate flexible cost structures:

“I mean, this is an industry that goes up quickly, it goes down quickly. What you need to be able to do is flex your costs, and that we’ve worked pretty hard to do.” ($CAT)

Businesses can adapt to a lot of different environments, they just need confidence that the rules wont change:

“I just know that American industry really likes to have some finality in what we do. And if you give us a number, we know how to put our strategies and plans in place to make that happen.” ($RTN)

Short term discounting isn’t a sound long term strategy:

“our belief is that you build categories by building brands, which is a combination of building your base business and adding relevant innovation. We do not believe that the short-term pricing activity accomplishes that nor do we believe it is rational or sustainable.” ($CL)

Price is what you pay, value is what you get:

“In my experience, in price, when you buy that way, you don’t get all the capabilities you want, and so they’re going to have to deal with that…What people don’t realize is that life cycle costs really run into these decisions. And if you don’t take that into account, you’re going to be really sorry with some stuff you bought…you have to almost learn that lesson the hard way.” ($RTN)


People drive products drive revenue:

“Great teams build beautiful engaging products, those products drive increase traffic. The increase traffic generates greater advertiser interest, which ultimately results in revenue growth.” ($YHOO)

The impact of technology is overestimated until it’s underestimated:

“people tend to overestimate the impact of technology in the short-term, yet underestimate the scale of change longer term. For years everyone talked about the multi screen world. Now it’s arrived, but on a scale few imagined” ($GOOG)

You can be the 11th richest man in America and still have a chip on your shoulder:

“We delivered outstanding growth in revenue, cash flow, net income and earnings per share this quarter…Take that you guys who underestimated us.” ($LVS)

When buying companies, focus on people and culture:

“We focus on high quality people that run good businesses that have a cultural fit. So people say, “Well, what’s the cultural fit, as an example?” And there are 3 or 4 things that jump right out, which is how do people treat their teammates? How do people treat their clients? How do people treat their carrier partners? And how do they think about growing their businesses and investing in their businesses? All of those are kind of basic 1-2-3-type things we think about.” ($BRO)

Sometimes the biggest home runs come from doing something that’s not at all obvious:

“When android was still a skunkworks project I used to feel kind of guilty visiting the team. We are a search company and building a new operating system wasn’t an obvious move to most people” ($GOOG)


If you want to exist in your own league, you have to be your own toughest competition:

“while we certainly aren’t cavalier about our competition, we think our toughest competitor is ourselves and we’re going to keep driving that.” ($COST)

Remember who your shareholders are:

“We have shareholders. And those shareholders, by the way, I remind people, it’s not me, it’s veterans and retirees, and mothers” ($JPM)

The terms of a deal can change, especially when you deal with the US Government. JPM learned that lesson the hard way:

“this is very painful for the company. So Bear Sterns, we did do quickly. We didn’t anticipate that we’d be paying anything for prior losses for Bear Sterns. I tell people, even at Bear Sterns, remember I think it was $80 billion of bonds were made good, which would have failed that day had they gone bankrupt.And we did ask. We weren’t completely stupid. We did ask the SEC and only the SEC for would they please agree not to take enforcement actions against JPMorgan for things that happened at Bear, which of course they couldn’t do outright, but they did say they’d take in consideration the circumstances in which the transaction took place.And in Wamu, we don’t believe we’re responsible, by contract. But that does not mean that people can’t come after you. So that was a little bit of a lesson learned, too.” ($JPM)


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)


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)


It doesn’t matter how much market share or history your company has. When you lose a customer’s trust it takes a long time to gain it back:

“in 2011 J. C. Penney did business at least once with over 50% of the families in America. We enjoy a 111 year old tradition of being a trusted destination…This is however a journey. There are no quick fixes to correct the errors of the past. It’s going to take time to get fully back on the right track across the Company” ($JCP)

Always focus on understanding your customer better:

“we continue to focus on who she is and ways that we can continue to outfit her and understand her better” ($URBN)

Give your customers a great experience, because word of mouth is the best form of marketing:

“we’ve always thought the best marketing for us is sort of unpaid marketing, word of mouth. And that really comes from making sure we have great value in the stores, the customer buys the goods, they go and tell their friends, et cetera.” ($ROST)


Experts win:

“You need the subject matter experts. The investment community can’t make decisions as to whether there has been enough infill drilling. They can’t make decisions as to whether the hydrology model rather the geo-technology. They’ve really got to rely on the middle level experts to do that.” ($RIO)

Know-how and experience is integral to leveraging technology:

“I have learned in my career, if you want to transfer technology, if you want to transfer knowledge, the best way to do it is actually to transfer people.” ($RIO)

In tech you have to be fast:

“Now if we’re going to lead in this industry the one thing I have learned over the years is you’re the first mover. We have to very quickly reallocate the resources.” ($CSCO)

Advertising is a weapon. Loved this language:

“[today we have] the added advantage of having greater advertising firepower to ignite our brands” ($EL)

Listen to your customers, and focus on serving them.:

“we will be successful if we deliver a great experience for our customers. And as we talk to customers more and more, and that’s what we’re doing a lot of, we’re doing a lot of listening, what we hear more than any other thing is bring us a great Nordstrom store” ($JWN)

You cannot control the tide:

“Customers — they want to shop how they want to shop. Our job isn’t to dictate how they want to shop. Our job is to serve them as best as we possibly can” ($JWN)


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)


Insurance is not a business for optimists:

“anyone who’s has been in the casualty business for any reasonable length of time, it’s not a business for optimists, and you understand that the good news comes early and the bad news comes late” ($ACE)

It’s easy for financial analysts to forget the real operational challenges to executing a business plan:

“I know it takes you guys a second to update your model, but it actually take years to get permit and construction and do all these things and to spend the money.” ($VLO)

Quote of the week goes to Kevin Plank at Under Armour.  It can take decades to grow a business the right way, and that’s ok.

“The one thing about International and probably lessons learned over the last 17 or 18 years was that anything just takes time. And I think a longer view is what we need to approach any of these markets. I use the story of Japan a lot in sort of articulating how long it takes us, 8 years from 0 to $35 million, and then it was year 9 that they went from $35 million to $72 million and I think the tipping point really occurred…even with larger scale, larger size, well, resources, the things that we have today going for us, it still comes back to an investment, and it’s a prudent model…it’s not going to happen in 2 or 3 years. And if we get lucky and the market catches fire, great, but it’s going to take 6, 8 and 10 years and we’re sitting here telling you that we expect to be around for that much time and more. And we’re going to make the investments that’ll help us be great and be a local brand.”


Coca Cola has no problem with “not invented here”:

“we always believe here in the Coca-Cola Company, the best ideas are outside.” ($KO)

Constant improvement is in Schlumberger’s DNA:

“company wide programs addressing execution improvements they are not really sporadic or episodic with us. They are a way of life.” ($SLB)

When entering new lines of business it’s ok to move slowly to ensure quality:

“you kind of want to crawl, walk, run not necessarily because that’s what we should do in order to manage it, it is more you really want to make sure that the systems and the customer support models that you have are in place to handle the volume that you are really taking on.” ($INTC)

Everyone always thinks they have a hit, so if you’re a factory it’s ok to build a little less capacity than your customers tell you they need.

“remember what I said earlier that we don’t always build capacity — build as much capacity as they would like us to build. Everybody, I think, tends to be a little optimistic about his own new products or whatever, new markets and so on, yes.” ($TSMC)

“Don’t read the Damn papers”:

“It’s difficult to have really good morale in France and Italy because when they’re reading the papers, it’s pretty tough, general business news and world news. So I’ve suggested to our French and Italian colleagues, don’t read the damn papers, just focus on our business and — because we’re doing fine.” ($MAN)

Abbott’s earnings call was a gold mine for valuable insights on business:

In my opinion this answer receives an A+ on how to be successful in M&A and investing (remember that Abbott was the company that said that valuations look stretched right now):

“One of the things that I think has been a hallmark of our success, at least on the M&A side, it has been that we have done a lot of study, we followed businesses, we follow the market, and follow various things that we are interested in the target for a long time, done a lot of due diligence and so forth and by the time the opportunity drifts into the radar screen in the right way, with the right stars aligned and circumstances, we generally are pretty ready with a fairly well-developed point of view on valuation and so on and will act on the opportunity. The problem is, you can’t always predict when that’s going to be.” ($ABT)

Be brutally honest with yourself, especially when you’re underperforming:

“We think we are underperforming and by any measure whether we look at competitor performance, our performance, market performance, share, et cetera, we are underperforming. It pains me to say it but we are.” ($ABT)

Something is always wrong somewhere. It’s your choice whether or not to obsess over it.

“I think, if you are over obsessed about China, you would over obsess about China. If you are over obsessed about Brazil or India, or Russia or somewhere else, you get over obsessed about any one of them. Is there a headache every day? Yes. Somewhere.” ($ABT)

Improving profitability starts with Gross Margin:

“the longer-term sustainable improvement in profits, frankly, tend to be above that gross margin line and the real cost or pricing, the mix of your products, how you manufacture, all those sorts of things.” ($ABT)

Plan long term, manage volatility daily. Reality will never coincide with plan, but adjust to the bumps in the road and you’ll thrive:

“in the backroom here we are managing volatility every day…we got to be always kind of preparing plan B and what are you going to do and contingencies and so forth and that is a fundamental part of our whole planning and budgeting process all the time. And, if you look this year, six months, seven months end of the year, has the year gone like you would expected? The answer is no. Have we delivered the earnings we committed? Yes. We’ve exceeded them. So, I think you got to kind of plan that way every year.” ($ABT)


Spend less time focusing on accounting and more time focused on what really drives value. Accounting is NOT Business:

“This is what the issue is with all this. You spend all this time talking about accounting as opposed to business. The business is deposits, serving clients, doing things, and now we’re talking all of a sudden about AOCI. And we have a lot of asynchronous accounting. And pro-cyclical accounting and stuff like that. We try to explain, but we try to look through all of that and build a business. More clients, more bankers, more branches, happier clients, and so all of our business, that’s how we look at it. We’ll work through the asynchronous accounting.” (JP Morgan)

An example of how financial statements can be influenced by arbitrary factors (But a bizarre explanation for why receivables grew in a quarter):

“Our AR grew a little faster than it should…I don’t know if this is a post office, logistics thing or what’s driving this, but we’re slowly seeing more and more of our cash come in, in the first 2 and 3 days of the week than what’s historically the norm….most of our cash still comes in via the U.S. mail…[2Q ended on a weekend] So if we held our books open until Tuesday instead of closing on the weekend, our AR would look a lot better.” (Fastenal)

People are the most valuable assets a business has. Limit turnover or prepare for headaches:

“We believe that there is a relationship between shrink, inventory levels and store manager turnover” (Family Dollar)

Family Dollar looks for executives who are experts in their industry and so should you:

“It’s about understanding small-box retail. It’s about understanding, having an in-depth understanding of our consumer and how they’re evolving; our competition, how they’re evolving; our mix, how it’s evolving; our marketing collaboration between marketing and supply chain. And to me, it’s all about leadership, and I don’t know if it’s necessarily rocket science. But I think it’s those types of qualities that we are looking for. Someone’s got a deeper understanding of our business.” (Family Dollar)

When Buffett says he wants executives who tap dance to work, this is what he means. John Stumpf dreams of checking accounts:

“When I wake up in the morning I get here, the first thing I look at is the checking account report from the day before. I love checking accounts, I dream about them…because it’s the formational account for a consumer. And the second probably most important is mortgage, and that’s why we’re almost — we’re obsessive about that, about serving customers.” (Wells Fargo)


It takes consumers two to three years to forget a PR nightmare (probably a good proxy for memory of market panics too):

“our consultants have basically used an analogy of two other non-industry events…In terms of consumer perception, we’re tracking the same way…that the recovery will be gradual, and it will take 2 to 3 years for the Carnival brand to fully recover…[from] the incidents back in March.” (Carnival Cruises)

Relationships are built on consistent, high quality service. A strong relationship opens the door to opportunity:

“the quality and efficiency that we’re able to deliver to this customer allowed us to have a different conversation about we could become more of a business partner for them. So over the course of the greater-than-20-year relationship that we’ve had with this customer…we continue to innovate with them to again help them solve their business problems, and the key being here is we want to be a valuable business partner to our customers. Not just a distributor, but a valuable business partner.” (McKesson)

Take your destiny into your own hands:

“when we get the message right, when we get the innovation right, these brands respond…we’re not victims here. If we get the innovation right, we’ll do just fine. It’s on us” (General Mills)

Be aggressive, B-E Aggressive:

“we are on the offense, always” (Nike)

Charlie Denson, president of the Nike brand is retiring. Let’s all hope someday such nice things can be said about us by our colleagues:

“what I know about Charlie is that he is a brilliant and affable man, easy to respect and easy to like…Charlie is more than a colleague, He’s a friend, a mentor…he leaves some huge shoes to fill but luckily that’s the business we are in, filling shoes” (Nike)


It can take 20 years for even a well financed global brand to reach critical mass in a new market:

“We have actually been in China since the late 90’s, but we reached something of a tipping point I would say, three or four years ago…I think that was about reaching an awareness in that marketplace” (Starbucks)

Sometimes you have to make investments in growth when the cycle looks weak, so that you can reap the benefits when the cycle turns:

“Historically when these economies turn you do not have enough time to rehire your distribution capability to take advantage of the change in the economy. If that pipe is not sitting there when markets get better you lose out on that expansion. So this is actually, it’s counterintuitive, I know, this is the right time to be in a position with a broader distribution capability.” (Oracle)


You can’t predict the future but you can prepare for it:

“we’re just trying to grow our businesses and some of these things are like the weather. We have to manage through it. We’re not going to guess the bad weather time.” (JP Morgan)

Investing in Real Estate has its advantages:

“It’s much easier to invest in real estate than it is in the company. Companies are very complex, very dynamic and what you find about real estate that’s very comforting is first of all, buildings don’t talk, right?” (Blackstone)

It’s not easy to start a business:

“I remember, when we just started the firm and almost everybody turned us down for everything. Our first fund, our 17 closest relationships turned us down.” (Blackstone)

But you know you’re successful when…

“As an entrepreneurial business, you know when you’re successful because it’s when people really want to join you who have enormous records of success.” (Blackstone)

The most important thing in business? People, People, People:

“go into other businesses that would be great on their own but would make the existing mix stronger, and you had to do it with people who were 10s on a scale of 10.” (Blackstone)


Be fair and honest with your customers when times are good, because you’ll be glad you were when times are bad:

“[we’ve been able to hold our margins because] We’ve been consistent, open, transparent with [our customers] on pricing when we need to price. And we haven’t tried to overprice in the up cycle and they’ve — I think they’ve developed a confidence that we’re fair and balanced with them. And therefore, we’re able to execute pricing when we need to in the down cycle.” (Joy Global)

Business isn’t about financial statements, it’s about serving customers well:

“We don’t manage the Company to the margin. We manage it around providing services and products that our customers need and help them succeed financially.” (Wells Fargo)

It’s not about being the biggest either:

“Incidentally, we don’t set out to be number one in anything. If we get there because we’re doing a good job, great, but I don’t have league tables on anything that – because the size has never been the arbiter for us.” (Wells Fargo)

It’s tough to compete with state owned enterprises:

“We’ve gotten out of me too businesses that subsidized companies can go win at…I can do a lot of things, I can’t get subsidies like…state owned companies” (Dow Chemical)


Every company is unique and has its own business practices.  Even two seemingly similar companies may be very different:

“It’s hard to compare company margins. I mean, clearly these competitors do a great job of managing their businesses and we’re trying to do the same, but it’s a bit hard to compare us to anybody, its been hard to compare them to us as well. So, I think what I’ve looked at is what can we do to improve ourselves, not necessarily relative to a competitor” (Waste Management)

When I talk about looking for management teams driven by curiosity, this is the type of comment I’m looking for. Genuine amusement at facts others might find boring, because the world is an interesting place:

“It’s really interesting statistics. If you look at the first quarter 22% of the sales based online were actually picked up in the store…isn’t that interesting?” (Home Depot)

The big dog can afford to sit back and let others take risks, then swoop in once new technology becomes proven:

“So our eyes wide open. We want to be where the customer is going. We don’t necessarily want to lead the way.” (Home Depot)

There is a difference between price and value. Focus on giving your customers good value, not just the cheapest price:

“You can be the cheapest and you may get a quick win here, but if your network can’t support that, it’s not a good product, people are just going to turn back off.” (Verizon)


Stars are made, not born:

“you can just take…20 athletic people of X descent, put them in that country and people are going to say it’s WWE. You got to be on TV. You got to be made a star and people then want to see the stars.” (World Wrestling Entertainment)


It can take up to 10 years for a retail location to truly mature, but when you spend 30 years building a strong brand/relationship with your customer new locations aren’t so new:

“As these stores get a little bit older, they are still comping very strongly and ROICs are going up…As their sales continue to climb, increasing leverage less spoilage they just become more and more efficient, so it’s going to be very interesting to watch the larger stores as they reach their maturation phase and we starting to move 10-plus years old…Our new stores are performing extremely well relative to any historical time period in over 30-years…there used to be a lot of holes in the boat. [Before] [new] stores would be losing money and have negative EBITDA…And we are seeing very few stores in that category, so overall we are very pleased with our new store performance.” (Whole Foods)

Getting someone else to spend money on proof of concept is a great business strategy:

“the advantage of having perpetual mineral positions is, you can let others prove up the play” (Anadarko Petroleum)

Seems simple enough:

“The price of chicken is going to be driven by the balance of supply and demand for chicken, and not necessarily the price of corn.” (Pilgrim’s Pride)

Good businesses focus on finding problems and solving them:

“We’re a science company focused on addressing some the world’s toughest challenges including feeding the world, decreasing the dependence on fossil fuel and protecting people and the environment.” (Dupont Analyst Day)


Depreciation is real, especially in some industries:

“the issue that you have with [recycling] glass is that it more than any other commodity it hurts your equipment, right? As you process the glass it puts a lot of wear and tear on the equipment.” (Waste Management)

The metric system could probably make financial analysts lives easier too:

“the stocking in France, we said in the annual call that it was around 250,000 hectoliters.” (Heineken)

TD Ameritrade 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Average client trades per day were 382,000, an activity rate of 6.4%. Net new client assets of $10 billion, an 8% annualized growth rate. Record total client assets of $556 billion were up 18% year-over-year. The record interest sensitive assets of $96 billion were up 16% year-over-year”

“we returned 107% of our earnings to our shareholders via cash dividends and debt repayments.”

“Yes. I think more recently, the wire houses have made some moves, which have made it a little bit more difficult in the breakaway brokers. But what we always find is, in the market, it could be an independent broker/dealer is 1 year on their wire house. The next year, it could be 1 wire house to 1 independent broker/dealer. There always seems to be someone who’s making some changes that upset their advisors. And that always means there’s opportunity and people looking. And I do think in this market, with the — where the markets are at and how well the markets have gotten, this is a good market if you want to move to the independent channel and move to a fee-based model off of the commission-based model. This has actually been a pretty good environment to do that. We’ve seen that in spades in our results.”

“we don’t normally — don’t comment too much on M&A. But I think it’s suffice it to say, we’ve always kept an eye open for entering the mix in strategic and financial sense. And I think, as evidenced by our returning capital as aggressively as we can, we really don’t see anything on the near-term horizon that would make financial sense.”