Company Notes Digest 1.29.15

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

The Macro Outlook:

2015 may be shaping up to be a much tougher year than expected

“Now for the 2015 outlook, well it’s shaping up to be a much tougher year than we were expecting when we went through our preliminary view of 2015 with you all last October.” ($CAT)

Caterpillar is readjusting its sales forecast from flat to down 9%

“As I’m sure you picked up from our financial release this morning, we are more negative on prospects for 2015 than we were three month ago…Back in October, we expected sales and revenues with the flat to slightly up. Our current view is that sales and revenues will be about 50 million and that’s down over 9% from 2014.” ($CAT)

This will be the first time sales have declined for three straight years since the depression

“Based on our outlook for 2015 sales and revenues, 2015 is going to be our third consecutive year of sales decline. And to put that in some perspective, that’s happened only one other time in the history of our company and that was during the great depression in 1930, 1931 and 1932.” ($CAT)

The US is still positive, but not as positive. The rest of the world is challenged

“U.S. is still a positive but probably not quite as positive as we thought before. Almost everyplace else in the world to some degree negative. We are still not getting any decent economic growth in Europe. The developing countries Brazil, China are still let’s just say challenged.’ ($CAT)

In Caterpillar’s case, the headwind is primarily oil

“Without a doubt, the impact of substantially lower oil and gas prices is the most significant reason we’re expecting lower sales in 2015.” ($CAT)

For other multi-nationals, currency is the main problem

“This is the most significant fiscal year currency impact we have ever incurred…a 14 percentage-point drag on the quarter” ($PG)

“Obviously, what we’ve seen during Q1 has been unprecedented movements in currencies” ($AAPL)

“Like other multinational companies, we’re facing significant currency headwinds…currency is likely to hurt our bottom line by more than 15% in 2015.” ($KMB)

“the U.S. dollar…will be a substantial headwind for us in 2015” ($DD)

“we expect that FX will negatively impact revenue growth by approximately four points in [FY]Q3.” ($MSFT)

Multi-nationals will try to offset currency impacts by raising prices where possible

“the primary ways that we’ll offset currency headwinds will be by raising selling prices where we can, delivering cost savings, and controlling our overhead spending’ ($KMB)

It will be easier to take price in geographies where there have been sharper moves

“Where you’ve seen big currency moves, like Russia, Argentina, you’ll see a disproportionate amount of pricing in markets like that. If you see a market like Australia where you’ve had currency weakness, or the euro zone where you’ve seen currency weakness, it will be much tougher to get pricing in those markets” ($KMB)

For now, the affects of a strong dollar are mostly translational, but in theory a rising dollar will not be good for US manufacturing volumes either

“…Rising dollar and I will expect that 2015 would see more of that will not be good for U.S. manufacturing nor the U.S. economy.’ ($CAT)

So far order volumes have not been affected at GE though

“I would in the short run here we’ve seen very little that I am aware of, very little impact on our order performance as a result of currency.’ ($GE)

On the bright side, a stronger currency can be good for costs

“the stronger dollar was negative for our sales is positive for costs overall and that’s because of our non-US operations and our material purchases outside the U.S. and overall that’s expected to be a positive for profit.’ ($CAT)

On the other hand, companies have other cost headwinds to navigate

McDonald’s sees low inflation, higher minimum wage and healthcare costs impacting margins this year

“Having said that, we are in a relatively low inflation environment, so pricing as I noted in my commentary, pricing will still be probably below our average if you assume the low inflationary environment continues. At the same time, multiple states are increasing minimum wages. We’ve got National Healthcare impacting 2015 for the first time. That’s going to hit the McOpCo margin for about 20 basis points.” ($MCD)

Oil based costs have not fallen as quickly as the price of oil

“On the commodity front, the outlook has improved some in the past three months, but at this point we are not planning for a big commodity windfall. Oil-based costs have started to fall recently, but not nearly as much as the drop in oil prices.” ($KMB)

Don’t forget that agriculture is in for a tough year too

“In agriculture the fundamentals are challenging. Farmer net income has declined and we anticipate lower corn planted area as farmers favor soybeans over corn.” ($DD)

There were some positive comments in a mostly negative week:

The weather has been better this year. (SK Comment: Remember Q1 was pretty bad last year, so that could help comps)

“I think weather patterns have been better this year and last year, I mean, we didn’t gave a weather report last year, but I do think that weather impacted people’s ability to get out and buy else.” ($DHI)

Despite a gloomy sales forecast, Caterpillar does not see credit issues in their financing business

“at this moment, I would say that we don’t have any concerns relative to our portfolio performance and past dues coming off another year of improvement and I’d say we’d pretty stable heading into ’15.’ ($CAT)

McDonald’s saw negative trends in Germany starting to abate

“over to Germany; negative trends are beginning to moderate with the month of December marking the highest comparable sales performance in more than two years.” ($MCD)


Competition among banks is intense but rational

“the competitive environment in the card business, I would describe as – intense, but consistent and fairly rationale.” ($COF)

Digital banking is transforming the financial industry

“I haven’t seen anything remotely like this in terms of the ability to transform how a business works. The only parallel is the thing that led me to go out and build Capital One in the first place, was looking at how information and technology we’re going to transform starting with the card business and ultimately banking.” ($COF)

Spring selling season is on the horizon for the housing industry

Spring is not even really here yet. But we’re in line with our expectations and we would expect that we’re going to get every margin of dollar that every dollar of margin we can as we move to the spring and as our pace and absorptions stay on track.’ ($DHI)

DR Horton hasn’t seen a big impact to Texas from oil prices quite yet

“We saw our Texas operations perform in line with the company and our expectations for the first quarter and into the first few weeks of January so far. So, while we would expect that there could be some general slowdown in Texas at some point, specifically perhaps Houston and Midland, we haven’t exactly seen it yet, and we’re very encouraged seeing the results inline with the expectations right now.” ($DHI)


It’s hard to comprehend how good Apple’s iPhone sales were

“This volume is hard to comprehend. On average we sold over 34,000 iPhones every hour, 24 hours a day, everyday of the quarter’ ($AAPL)

The boost from the PC refresh cycle has ended

“As expected, the one-time benefit of Windows XP end-of-life PC refresh cycle has now tailed off.’ ($MSFT)

There is progress in the consumer segment though

“I actually think we agree with most of the benchmarks in terms of PC unit health across business, which has been stable since FY ’13 and across consumer where we see meaningful progress made in unit growth both last quarter and especially this one.’ ($MSFT)


The healthcare industry now has more visibility than it’s had for several years

“as I see hospital CEOs when I travel the circuit, you just get a lot more positive in terms of their ability to know what the next few years are going to be like to do their planning, to do their growth plans and things like that and that didn’t exist let’s say 24 months ago.” ($GE)

Materials, Industrials, Energy:

Most people still don’t think that oil prices are going to stay here long term

“Nobody that I can find expects that this is going to be a long term trend and certainly no one at this point in time has made any decisions to alter long term capital, facility expansions, or things like that. I think it’s just way too early to see if this is sustainable trend in energy prices.” ($UNP)

It’s worth remembering that natural gas prices already collapsed several years ago and things were ok

“it is also worth recalling that natural gas prices also fell significantly in the 2008-2009 period, and those prices have not rebounded fundamentally. Gas production was a very significant component of most exploration companies and impacted energy service companies’ revenues as well at that time.’ ($ZION)

Even if oil prices stay low, intermodal railroad traffic may still grow because of truck driver shortages

“I think the factors that we’ve been talking about are still there or even growing. The factors being driver shortages, I think that is still a factor that is going to drive conversions.” ($UNP)

Lower oil prices probably shouldn’t impact alt energy sources

“So we don’t see that, a short-term blip in oil is taking the PV industry office long-term kind of projection.” ($DD)

Farmers will likely plant less corn this year

“we’re expecting corn acres to be down…So it’s hard to size the shift, but we do expect the decline in corn acres and a slight increase in soybeans” ($DD)

Metallurgical coal markets may finally be coming into balance after four years of imbalance

“In 2015, we forecast that seaborne metallurgical coal demand growth will outpace supply increases for the first time since 2011.’ ($BTU)

Miscellaneous Nuggets of Wisdom:

Volatility in equity value is different from credit risk

“I think sometimes people think about that valuations — if a valuation — company goes from $100 million to $250 million or $300 million and it goes back from $300 million back to $100 million, that all of a sudden the credits — there’s a risk to the credit. And for the most part, that’s actually not true. So we look at credit, and as Marc has articulated, we feel very good about where we are from a credit perspective of keeping with our underwriting standards, et cetera.” ($SIVB)

When underwriting a deal, it’s sometimes best to assume that nothing changes

“As we look forward will underwrite a land purchase, we assume flat pricing on the homes as well as flat pricing on the cost develop if it’s a land parcel to be developed as well and stick and brick. It just too hard to start predicting, this is going to go up by this percent, these costs to go up by that percent. It’s much for us controllable underwriting process to look at pricing on a flat basis and then understand what that performance we expected to be to make the investment decision.’ ($DHI)

Spending money on innovation is more productive than discounting

“promotion is the last place we would like in most cases to spend a dollar, we would rather spend it on equity or innovation and if you just look at the drivers of our top line growth over time, I think that it bears that out.’ ($PG)

Full transcripts can be found at