Company Notes Digest 10.29.18

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.

Recent volatility has people concerned and some are starting to model in recessions. However the real economy is still strong and the outlook is positive. Securities markets are leading indicators though, especially when driven by Fed tightening. If the Fed doesn’t bow to political pressure, volatility is likely to persist. International markets have already been in bear markets for some time.

The Macro Outlook:

It’s a little too early to say if recent volatility is having an impact on the economy

“As you point out, it has been a more recent phenomena and here the volatility that we have seen over the last few weeks. I think it’s just too early to kind of make any generalizations about, the impact of the volatility on deal making.” Moelis & Company (MC) Co-President Navid Mahmoodzadegan

Generally, the economy is still strong

“Bank balance sheets are strong. Economic growth is strong.”- CME Group (CME) CFO Scan Tully

The underlying US economy is quite strong, particularly for small to midsize businesses”.- Robert Half International (RHI) CEO Max Messmer

And the US consumer is alive and well and the outlook is positive

“I also want to say that the U.S. consumer is alive and well… the wage rates are up and people are spending. Consumer confidence is off the charts, new records. So I think the – retail sales may have slowed slightly, but it’s not like, all of a sudden, we have a vacuum in the demand.”
Stanley Black & Decker (SWK) CEO James M. Loree

“favorable commodity prices, strong economic growth, and the global need for infrastructure will continue to drive strong end user demand across many of our end markets.” – Caterpillar (CAT) CEO Jim Umpleby

But people are getting concerned

“From a macro perspective, the ongoing tariff fight between the U.S. and China growing anxiety about rising interest rates, market volatility and potentially slowing global economies are all a concern.” –  SVB Financial Group (SIVB) CEO Greg Becker

Many are starting to model recessions

“look you are starting to hear about private equity firms and prognosticators start to model in recessions in their base cases on deals, et cetera, et cetera, et cetera. So I think there’s an acknowledgement that at some point the economy will slow down.” – Moelis & Company (MC) Co-President Navid Mahmoodzadegan

“we do believe in economic cycles and we do believe that there will be another economic cycle” – Barclays (BCS) CEO James Staley

It’s already been a bear market outside the US

“outside the U.S. we’ve already been in bear market territory. So the euro stock’s 50%, down about 13% in the last 12 months. China is down about 20%…to the question on exits or kind of the overall environment, we’ve actually been operating in an environment in Europe and Asia where we’ve already seen the stock market pullback probably over the last several quarters in a lot of those markets.” – KKR & Co. (KKR) co-COO Scott Nuttall

And the Fed is getting too tight for some people’s comfort

“He was supposed to be a low-interest-rate guy. It’s turned out that he’s not….My instinct is that he’s raising it too much…To me, the Fed is the biggest risk because I think that—I think interest rates are being raised too quickly”- US President Donald Trump

Lots of companies are talking about tariffs

“we’re monitoring the tariff situation very closely. There’s a lot of activity around that. I would say from what we see today, we don’t see anything material as it relates to the tariffs, whether it’s pull-ins or just the overall impact of tariffs. But we are doing quite a bit to adjust our supply chain, as I’m sure many others are.” – Advanced Micro Devices (AMD) CEO Lisa T. Su

“From a macro perspective, the ongoing tariff fight between the U.S. and China growing anxiety about rising interest rates, market volatility and potentially slowing global economies are all a concern.” –  SVB Financial Group (SIVB) CEO Greg Becker

Tariffs drive inflation

“as part of our ongoing initiatives to respond to external factors, including raw material tariff and currency headwinds, we have recently announced new cost base price increase” – Whirlpool (WHR) CEO Marc Robert Bitzer

“We will continue to put price into the market related to the tariffs that are coming in January for List 3. And we will also continue to monitor the elasticity of how the volume responds to those price increases” – Stanley Black & Decker (SWK) CFO Donald Allan, Jr.

But are tariffs just an excuse?

“We don’t even have tariffs. I’m using tariffs to negotiate. I mean, other than some tariffs on steel—which is actually small, what do we have?…I read that today: We’re worried about the tariffs. You know what happens? A business that’s doing badly always likes to blame Trump and the tariffs because it’s a good excuse for some incompetent guy that’s making $25 million a year.” – US President Donald Trump


Inflation in the EU expected to pick up soon

“While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Looking ahead, underlying inflation is expected to pick up towards the end of the year and to increase further over the medium term” – ECB President Mario Draghi

On Brexit, things will be sorted out

“It’s very hard to imagine that Brexit won’t be sorted out in some reasonable manner that will enable life to go on economically. Both the UK and the EU need each other” – Group 1 Automotive (GPI) CEO Earl Julius Hesterberg

No stress in the UK consumer

“we are not seeing yet any concerning signs of stress among our U.K. consumers or business customers” – Barclays (BCS) CEO James Staley


There’s still plenty of liquidity out there

“The abundant liquidity in markets is another challenge… Venture capital and private equity investments are to near record levels, fund raising remains strong with a lot of dry powder on the sidelines and the ex-environment is relatively healthy. – SVB Financial Group (SIVB) CEO Greg Becker

Fear in the public markets negatively impacts exits in private markets

“if fear in the public market starts to effect – exit the private funding in a meaningful way or our late stage clients would likely be the first to feel the negative impacts of that” – SVB Financial Group (SIVB) CEO Greg Becker

Housing markets are slowing but demand fundamentals are still very strong

“we are now seeing a scenario where slowdown of home price appreciation and a slight increase in inventory will meet strong demand fundamentals, including favorable demographics, a homeownership rate at a 52 year low and a strong need for rental homes and apartments.” – Whirlpool (WHR) CEO Marc Robert Bitzer


Auto inventories are fairly balanced

“we’re seeing an aggressive market. Inventories are fairly balanced car to truck for the – that’s the second quarter in a row”  – Group 1 Automotive (GPI) President, U.S. Operations Daryl Kenningham


PCs are alive and kicking

“As it relates to the current supply environment, we did see some pockets of constraints in the supply chain around PCs. We saw that towards the end of the third quarter. We are increasing our production such that we can satisfy some of that demand. And I think that’s a short-term statement.” – Advanced Micro Devices (AMD) CEO lisa T. Su

“Supply is tightest at the entry level of the PC market and in our IoTG business. Within our CPU product lines, we’re prioritizing the production of our Xeon and Core processors so that we and our customers can serve the high-performance segments of the market. Our biggest challenge in Q4 will be meeting any additional PC and IoTG demand beyond our guidance, and we do expect fourth quarter upside from here will be limited.” – Intel (INTC) CEO Robert Holmes Swan

GPU channels are working through over-supply

“the weakness in the GPU channel or primarily in the sell-in, is, let’s call it, for – we might see that for the next quarter or two. But as you look through the overall business, I think gamers are still buying GPUs, and so this is really a matter of just absorbing some of the first half let’s call it oversupply as it relates to GPUs. And that’s translating into a bit weaker sell-in. But we are still tracking the sell-out and the sell-through through the – to the end customers.” – Advanced Micro Devices (AMD) CEO Lisa T. Su

Google is increasingly investing in data centers

“we’re very focused on ensuring that we have the needed compute capacity to support growth. And that’s what you’re really seeing with the uptick in investment.To give you a bit of a breakdown, the largest component continues to be machines. But relative to last year, it’s important to note that datacenter construction is an increasing percentage of our CapEx investment.” –  Alphabet (GOOG) CEO Sundar Pichai


China still needs a lot more airplanes

“In China, from a macro standpoint one of the fastest growing commercial aviation markets in the world. Over the next 20 years we said a world that needs 43,000 new airplanes; about 7,700 of those are in China. Traffic growth patterns are very strong in China and the rising middle-class population is a tremendous driver there, well beyond normal, I’ll say GDP metrics, so about 150 million new passengers every year in Asia are fueling that growth. So China is very interested in a healthy growing aerospace industry” – Boeing (BA) CEO Dennis Muilenburg

Metal prices are not increasing

“there’s certainly not a strong growth in metal prices in the cards right now.”- Alfa-Laval AB (ALFVF) CEO Tom Erixon

Materials, Energy:

The energy industry remains in a survival mode

“Industry remains stuck in a sub-survival mode with minimal industry reinvestment, which is now leading to reduction in available equipment. We’re seeing signs of customers of being recognized how difficult this is as some are now accepting rate increases and accrue labor premiums to help us manage through these issues.”-  Precision Drilling Corporation (PDS) CEO Kevin Neveu

There’s high demand for efficient rigs

“Now turning to the United States, as our customers prepare for 2019 drilling programs, the drive to the most efficient rig seems to be accelerating even as the market volatility is tampering our customers’ risk appetite. We are experiencing a surge in demand for the most efficient rigs…he industry drive and customer preference for the most efficient rig is not going to slow down anytime soon. I don’t see – obviously, day rate aren’t going to keep on going up. There’ll be a plateau at some point. I think that’s real. But we see just very strong demand kind of across the basins and across the customer base right now for no question for pad walking rigs that can deliver consistent and predictable results.”- Precision Drilling Corporation (PDS) CEO Kevin Neveu

Saudi Arabia’s political decisions could impact energy prices

“I think that political decisions related to Saudi Arabia needs to be very much thought through. The implications are that they destabilize the Middle East with sanctions against the two major oil exporters of Iran and Saudi Arabia in parallel is raising the stakes in the game significantly…to the degree the world decides to go on the sanction basis against Saudi Arabia, we will see a major impact on the energy prices, and we will see a major investment boom in other geographies” – Alfa-Laval AB (ALFVF) CEO Tom Erixon

Full transcripts can be found at

Company Notes Digest 10.22.18

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.

It’s earnings season again and the overall outlook of the US and global economy is positive though laced with a layer uncertainty because of concern over tariffs.  Strong positive growth is expected to continue into 2019 despite the prevailing uncertainty. 

The Macro Outlook:

The economy is in great shape 

“the US economy remains in great shape by nearly any measure. Growth is strong, confidence is high and there aren’t any signs of the excess we saw ahead of the last down cycle” – The Blackstone Group (BX) CEO Steve Schwarzman

“The continued strength of the U.S. economy is the primary catalyst for our earnings growth. Tax and regulatory reform, along with a robust domestic energy sector, are driving this economy.” – Nucor Corp (NUE) CEO John Ferriola

“The economy is really strong, consumers are in great financial shape and companies are optimistic and growing.” – The PNC Financial Services Group (PNC) CEO Bill Demchak

“The economy is strong still, two days in the market notwithstanding” – First Republic Bank (FRC) CEO Jim Herbert

Credit quality has never been better

“overall what we are seeing is that because of the economic growth here in the U.S., in particular, but around the world, the credit quality for our customers in the commercial, corporate world has never been better. Their balance sheets are strong. They have extended their maturities. Their interest coverage is higher than it’s ever been, because their debt service is lower”. – Wells Fargo (WFC) CEO Tim Sloan

Above-trend growth is expected to continue

“The economy could be strong for a while…wage is going up, participation is going up, credit has been written as pristine. Housing is in short supply. Confidence, both small business, consumer is extraordinarily high. And that could drive a lot of growth for a we look at the economy, we don’t see it slowing down. It seems to be continuing to grow pretty solidl.” – JPMorgan Chase (JPM) CEO Jamie Dimon

“Participants noted a number of favorable economic factors that were supporting above-trend GDP growth; these included strong labor market conditions, stimulative federal tax and spending policies, accommodative financial conditions, solid household balance sheets, and continued high levels of household and business confidence.” – The Fed

“that’s a snapshot of our markets, healthy and growing. And if you ask our customers they’ll tell you that things look good and our branches feel the same way. We’re confident about the fourth quarter and believe the cycle has plenty of gas left in the tank..” – United Rentals (URI) President Matt Flannery

But uncertainty remains

“considerable uncertainty remains in our markets, driven by supply disruptions and policy and trade actions taken by governments in the United States, China and elsewhere. These dynamic conditions could have impact in the last quarter of 2018 and into 2019.” – Alcoa Corporation (AA) CEO Roy Harvey

“The market backdrop has become more turbulent recently as everyone knows, with risk assets around the world impacted by growing concerns around macro issues. These include rising interest rates in the United States, trade tensions, emerging markets weakness and geopolitical risks in Europe. Taken together, these issues add up to more uncertainty and volatility in an already complex investment environment.” – The Blackstone Group (BX) CEO Steve Schwarzman

“there’s a great deal of uncertainty around the tariffs and around the Brexits of the world which we are seeing some impacts of that” – Textron (TXT) CEO Scott Donnelly

“a number of contacts cited factors that were causing them to forego production or investment opportunities in some cases, including labor shortages and uncertainty regarding trade policy” – The Fed

Tariffs are are impacting prices

“the tariffs are having their intended impact by curbing unfairly traded imports…The tariffs are providing leverage to get other countries to the table to negotiate fairer trade agreements for the U.S.” – Nucor Corp (NUE) CEO John Ferriola

“several participants reported that firms in their Districts that were facing higher input prices because of tariffs perceived that they had an increased ability to raise the prices of their products. – The Fed

The labour market is tight

“Contacts in many Districts reported tight labor markets, with difficulty finding qualified workers…recent data suggested some acceleration in labor costs, but that wage growth remained moderate by historical standards, which was due in part to tepid productivity growth.”- The Fed

“I think labor is tight in any business in the US today. And we were certainly no exception of that with unemployment now under 4% for a while… labor pressures are certainly on the minds of our franchisees.On the flip side of that, the one of the things that yes, or the thing that drives sales of pizza as much as anything is having people gainfully employed and earning good wages out in the marketplace. So as the number one player in the pizza business, we also get a nice top size benefit from a strong labor market.” – Domino Pizza (DPZ) CEO Ritch Allison

Rising interest rates are impacting valuations

“cap rates are beginning to adjust a little bit for the rising rates. And that is slowing down, the velocity of turnover. And that’s really what I was getting at. Commercial real estate, per se, from the cash flow point of view is still quite strong” – First Republic Bank (FRC) CEO Jim Herbert


Loan growth is a little slower than expected

” While we did see modest growth in the quarter consistent with industry data, our corporate loan growth came in below our own expectations. We attribute the shortfall to a combination of several factors, including elevated competition, meaningfully higher payoffs this quarter and paydowns and overall lower line utilization.” – The PNC Financial Services Group,(PNC) CEO Bill Demchak

“So, I think the fact that we have got very buoyant capital markets, very liquid capital markets and we have high credit quality for our customers means that loan growth is a little bit slower than we would have all imagined in an economic growth level that we are seeing right now”. – Wells Fargo (WFC) CEO Tim Sloan

Companies are finding alternative funding sources

“Alternative funding sources such as the capital markets and companies own cash balances are limiting the clients’ need to access the loan markets, but to a lesser extent, than during the last several quarters. we expect commercial loan growth to continue to improve.” – U.S. Bancorp (USB) CFO Terrance Dolan

Corporates are flush thanks to tax reform and so they’re not borrowing as much

“corporates are flush. The lower tax rate has basically increased cash flow in companies. And all else equal, they’re not spending the incremental difference in totality on CapEx. And so they’re dropping their line utilization” – The PNC Financial Services Group (PNC) CEO Bill Demchak

As the Fed shrinks its balance sheet, that’s going to come out of deposits 

“I’ll just make a macro point too. As the Fed reduces balance sheet – just say by $1 trillion over the next 18 months or whatever, which they indicated they’re going to do, that’s $1 trillion out of deposits. That will have an effect kind of macro competition and stuff like that.” – JPMorgan Chase (JPM) CEO Jamie Dimon

Now that some banks are not subject to CCAR, they can return more capital to shareholders

“Now that we are no longer subject to CCAR, our board is able to more efficiently and effectively take capital actions with a focus on reducing our robust capital ratios to a level that is reflective of our business strategy.” – Comerica Inc. (CMA) CEO Ralph Babb


Caution in global auto OEMs, soft OEM market

“there is just caution right now in the global auto OEMs. And that’s coupled with I think just an overall softening a bit of the global auto OEM manufacturing. And I say Q3 is always the most susceptible because most of the guys do shutdowns during the summer months anyway and so one of the ways they – easy for them to regulate output is to extend some of these shutdowns and again that’s something that generally manifest itself in Q3 and we certainly saw that at Caltech. So it’s not a huge reduction in volume but there had been some modest declines” – Textron (TXT) CEO Scott Donnelly

Steel demand to continue to grow

“Based on strong underlying domestic steel demand fundamentals and customer optimisms throughout all market sectors we believe steel consumption will continue to be seasonally strong and grow into 2019” – Steel Dynamics (STLD) CFO Theresa Wagler

we still see strong demand. There is strength in the marketplace…so the 24 end markets that we serve, 23 of them are either stable or on the uptick”.- Nucor Corp (NUE) CEO John Ferriola

Materials, Energy:

Aluminium supply is likely to reduce

“you’re at a point where half of smelters outside of China are now cash negative and under water. And that simply means that there is very little incentive to continue to operate many of those plants and certainly no incentive to invest… there really isn’t a lot of room unless aluminum prices to go up for raw materials to continue to increase without starting to see a significant supply reduction. Because plants can’t continue to operate at these types of cash losses.” – Alcoa Corporation (AA) CEO Roy Harvey

and the high prices may not persist

“the current dynamics, which have pushed world ex-China alumina prices above Chinese alumina prices may not persist..” – Alcoa Corporation (AA) CEO Roy Harvey

Delta expects to be able to pass higher fuel costs along

“I can tell you that the economy is healthy, demand is very healthy for the Delta product and to the extent oil prices were to continue to rise, we expect to be able to pass along the cost of that.” – Delta Air Lines (DAL) President Glen Hauenstei

Miscellaneous Nuggets of Wisdom:

Better to have a failed idea than none

“the great tragedy for an entrepreneur is NOT a failed idea. You will have other ideas! No, the great tragedy for an entrepreneur is a zombie idea, a business that has no chance of growth and vibrancy, but is kept alive through some witch’s brew of too much friendly capital and too much misplaced hope”  –  Second Foundation Partners CEO Ben Hunt

Spotting great opportunities 

“the focus is on where is there a large scale opportunity. And when you look in the life science area, what we’re seeing is there is a very large pipeline of drugs that it costs an awful lot of money and resources to bring them to market, particularly as they get towards the phase 3 trials later on in their process. So, we said, gosh, wouldn’t it be terrific, if we had more operating capability. So, we identified the opportunity, we talked to a lot of people in the space, we found a world class organization in Clarus that has terrific people, expertise and a great track record.” – The Blackstone Group (BX) CEO Steve Schwarzman

Full transcripts can be found at