Company Notes Digest 10.20.17

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 began to pick back up this week led by banks. The economic story remains the same as it has been: growth and optimism.

The story line that caught my eye in the banking sector is that there is increasing focus on “deposit beta,” which is the rate at which deposits move given increases in interest rates. It looks like large customers are starting to optimize for higher yield on deposits.

This is important because it’s the first time in ~10 years that anyone has noticed what their deposits are paying them. It could mark the first rumblings of the end of a ZIRP mentality. If investors begin to believe that there is time value to money again, it would mark a seismic shift for capital markets.

The Macro Outlook:

Consumers are spending

“Consumers are spending, whether it is checks written, cash taken out of the ATM’s, P2P payments, and all the debit and credit cards, 5% more through the first nine months of 2017 than they did in the first nine months of 2016. That’s a faster growth rate than it has been in prior years.” –Bank of America CEO Brian Moynihan (Bank)

Companies are optimistic

“Our commercial clients continue to perform well. They continue to remain optimistic. They continue to look forward to continue implementation of a pro-growth agenda, particularly focused on meaningful tax reform.” –Bank of America CEO Brian Moynihan (Bank)

It’s a solid atmosphere with no signs of change

“Housing starts home prices continue to remain on positive trends. Employment is strong and employers continue to search for skilled workers. So that leads to a solid atmosphere and we see no near-term indications of any change to it.” –Bank of America CEO Brian Moynihan (Bank)

Investors are fully invested

“we saw more cash go into the markets, particularly the equity markets as those markets rose around the world. And we’ve seen cash in our clients’ accounts at its lowest level.” –Morgan Stanley CEO James Gorman (Broker)

Inventories are tight

“when we look at shipments versus retail sales next year, there is an opportunity to ship in at a little bit higher rate just because of the way we’re taking the inventory out this year…..overall inventory levels will remain tight through the fourth quarter and into 2018.” –Harley Davidson CFO John Olin (Motorcycles)

M&A pipelines are strong

“The pipeline…is strong also in our conversations with clients on the advisory side. There’s no sense of slowdown. We’re seeing a pickup in client dialogue, particularly I would note in technology, media, telecom, as well as industrials and natural resources. And so, it’s strong for all of the reasons that you would expect that CEOs are confident, equity market support valuations and acquisition currencies, the financing markets are open, the overall levels of financing costs are relatively low by historical standards.” –Goldman Sachs CFO Marty Chavez (Broker)

Companies are excited about lower taxes

“To level the playing field with other industrialized countries, tax reforms should include three fundamental elements, a lower corporate income tax rate in line with other industrialized countries, the adoption of a modern, globally competitive International tax system allowing U.S. companies to manage their cash without tax penalty and of course greater incentives for innovation in the U.S” –Johnson and Johnson CFO Dominic Caruso (Healthcare)

But they aren’t waiting on tax reform to move forward

“That’s all constructive on tax reform which you also mentioned, that is certainly a part of our engagement with clients. And I will also note however that clients, it seems to us, have moved towards saying, well, tax reform would be a good thing but it’s not stopping us from considering strategic acquisitions and sales right now.” –Goldman Sachs CFO Marty Chavez (Broker)

How would the stock market react if tax reform fell through?

“There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done…To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done, you’re going to see a reversal of a significant amount of these gains” –Treasury Secretary Steve Mnuchin (Government)

This environment wont last forever

“I don’t think it’s structural. I think it’s cyclical at this point. At some point, there will be catalysts to change the direction of the trading environment, and whether that’s tax policy, whether that’s better inflation data. But there will be something. And so this has been a sort of a subdued environment. I don’t think it persists forever. But when and how that catalyst appears is clearly a question mark.” –Morgan Stanley CEO James Gorman (Broker)

There is inflation in out there

“Now, we are starting to see inflationary pressures a little bit more than we’ve seen in the last few years of course. But so far, we have that is not shown up in our COGS line” –Grainger CEO D. G. Macpherson (Industrial Distributor)

Margin pressure is building

“Margins were softer than usual this quarter primarily due to a significant impact from copper prices. In the third quarter of last year, copper averaged $2.16 per pound but increased 35% over the past year to average $2.91 per pound during the third quarter” –Badger Meter CEO Rich Meeusen (Water Meters)

“Absent any unanticipated moves by the Fed, we expect some of the margin pressures we are seeing to be more apparent in the coming quarter.” –M&T Bank CFO Darren King (Bank)

And the Fed is unwinding QE

“there’s a positive backdrop, so the U.S. economy is performing…And at the same time, all of this unwinding quantitative easing is unprecedented territory, never happened before. So, you could see volatility and spikes showing up in this process, simply because it’s never happened before. We don’t see duly unwind risk priced into the markets. ” –Goldman Sachs CFO Marty Chavez (Broker)


FX headwinds are starting to turn into a tailwind

“I’d like to thank you for pointing out that we have had a pretty dramatic [FX] headwind. In fact, I think from the time I’ve been in this job now, this is my 15th call. I think I’ve only had one other call where it was a small tailwind. And this was a small tailwind as well in the quarter, and hopefully, we’ve wrapped on some of the big, more profound effect” –IBM CFO Martin Schroeter (Enterprise Tech)

China’s economy has done better than most people expected

“I’d say we’ve seen a stabilizing of China, it hasn’t been as choppy as it was in the last two years…We were more conservative on market growth than recent data we’ve seen. The market growth is better than we indicated or better than we believed or better than we thought ” –Abbott Labs CEO Miles White (Med Device)


Bank deposits are starting to be more fluid

“I think we are starting to see a little more fluidity with deposits” –Comerica CFO David Duprey (Bank)

Larger customers are more price sensitive

“our larger commercial customers, they tend to be the most price sensitive and we are working with each of those customers on an individual basis, to work through deposit pricing. And the other place where we see a little bit more activity and sensitivity, is with the larger balanced consumer customers, which are typically affluent or private banking types of customers, where because again, the size of the balances are a little bit bigger, they are a little more sensitive to rate. When we look through the rest of the portfolio, in general, on the consumer side and the rest of the smaller and the commercial, including small business; there still seems to be somewhat less of a focus on rate in those customers…Customers in the consumer and small business area are tending to stay short-dated” –M&T Bank CEO Darren King (Bank)

Rising rates are troublesome for real estate markets

“Rising rates to the real estate market are troublesome. They impact cap rates, they — if — as rates go up in the front end, since most of the borrowings on the projects are floating rate, you expose coverage ratios in those loans…at the margin, I would expect higher rates are going to cause greater delinquencies in real estate, and it’s one of the reasons we have at the margin, dialed back our growth.” –PNC CEO Bill Demchack (Bank)

Insurance companies have been hit by catastrophes, but that doesn’t mean a hard market is on its way

“In summary, there continues to be a lot of capital across the insurance market place. However the recent storms, fires and earthquakes may have implications on pricing in 2018. At the present time, we don’t have a clear view on the potential impact for next year. But there are a lot of discussions about rate increases for coastal properties. If there are proposed increases which we think there will be, the question really is will they stick. Certain markets are testing that philosophy right now…Right now I hear and what everybody else is hearing out there about the market place and what people are speculating on…I am guardedly optimistic…But if anybody is telling you they are getting ramped up for a hard market, I believe that’s a little premature” –Brown and Brown CEO Powell Brown (Insurance Broker)


We’ve heard this before from other retailers:

“I think grocery shopping remains for many a sensory experience, with the vibrant colors, sounds, and aromas of prepared foods and helpful human interaction enhance the shopping trip and help solve the issue of what’s to eat for me and my loved ones now, tonight, and later this week. I believe that retailers that do this well will continue to succeed.” –Supervalu CEO Mark Gross (Grocery)


VCs seem to be investing more money in fewer deals

“what we’re seeing is that the venture capital firms have become a little bit more selective. They’re investing more money in fewer deals…a lot of competition is chasing a lot of the same transactions” –Comerica President Curtis Farmer (Bank)

Cyber security is top of mind for most executives

“This new mainframe addresses what is probably top of mind in every board discussion. It is top of mind for every CEO and it’s top of mind for the whole C-suite, which is the problem of cybersecurity.” –IBM CFO Martin Schroeter (Enterprise Tech)

Central bankers have an eye on crypto currencies

“With anything that’s new, people have great expectations and also great uncertainty. Right now we think that especially as far as bitcoins and cryptocurrencies are concerned, we don’t think the technology is mature for our consideration… One of the lessons of the great financial crisis is that financial innovation, in this case it’s financial and technology innovation… should be embraced with lots of attention to its potential risks” –ECB President Mario Draghi (Central Bank)


There may have been a softening in utility spending

“Although utility metering sales were relatively flat, we have seen an overall softening in the utility market over the past six months” –Badger Meter CEO Rich Meeusen (Water Meters)

Full transcripts can be found at