Company Notes Digest 6.26.15

Each week I read dozens of transcripts from earnings calls and presentations as part of my 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.

The Macro Outlook:

The spring selling season has confirmed further improvement in housing markets

“This year’s spring selling season confirms that the market is continuing to improve at a very consistent pace.” —Lennar (Home Builder)

There’s strength across the board

“there is no question that our demand has broadened out…we’re seeing strength across the markets…there is none that I can think of where I’d say that’s a tough market today.” —KB Home (Homebuilder)

The first time homebuyer is coming back

“We are starting to see the first time homebuyer come back to the market place, but from basically a very flat level of virtually non-existent first time homebuyer to some beginnings of improvement.” —Lennar (Home Builder)

Household formation has rebounded

“Recent census reports put household formation at an annualized rate of almost 2 million, well above normalized historical levels and significantly higher than the 500,000 households we have averaged per year over the last eight years. This data point suggests that we may be at a turning point in this housing recovery, as household formation has been the missing link.” —KB Home (Homebuilder)

People have moved on with their lives

“over a 40-year period, the nation averaged 1.2 million household formations…With the job growth that’s occurring and the aging of the millennials, they’re getting to a point in their life where they’re getting a job and moving on with their life.” —KB Home (Homebuilder)

Consumers are feeling more flush

“I do think the consumer is looking for less discounting activity today than they were a year ago, or two years ago…we haven’t seen lower gas prices stimulate traffic, but we have seen it change the consumer behavior once they’re in our building, and they’re not seeking the deals the way they were years ago…We’re seeing some more –- the consumers buy more add-ons. They’re buying wine, dessert, apps.” —Darden (Restaurant Chains)

Small companies are growing more aggressively than larger ones

“our own order patterns suggest demand for midmarket customers may have grown faster than from the larger customers…what you see is that the companies that are in the $25 million to $50 million of revenue size are the ones that are leading the growth” —Steelcase (Office Furniture)

Wage pressure is rising

“There’s continued pressure, we see it more on the labor side, perhaps than the material side in today’s world” —Lennar (Homebuilder)

“I would say the wage rate is probably in the upper-half of [the inflation] range” —Darden (Restaurant Chains)

Given this environment, wouldn’t you expect higher inflation expectations?

“We anticipate fiscal 2016 to be a more normalized inflation environment, resulting in overall inflation of 1.5% to 2%, with commodity inflation of 0.50% to 1%, and we expect the price at the low end of the overall inflation range.” —Darden (Restaurant Chains)

International:

Carnival doesn’t see much pickup in Europe

“As we had said before in the notes, there is a lot of macroeconomic difficulties in Europe. The economy seems to be bouncing along at the bottom” —Carnival (Cruises)

Steelcase is seeing some strength in Western Europe though

“Our business in Eastern Europe has been affected by the political turmoil…However, we are also seeing signs of strength in export markets in Western Europe” —Steelcase (Office Furniture)

Accenture expects foreign exchange to lower revenue by 10%

“This assumes the impact that foreign exchange will be a negative 10% compared to the fourth quarter of fiscal ‘14. For the full fiscal ‘15, based upon how rates have been trending over the last few weeks, we now assume the impact of FX on our results in U.S. dollars will be negative 7.5%” —Accenture (Consulting)

Financials:

CarMax says that subprime auto lenders are staying well behaved

“We’ve seen pretty stable performance from our Tier 3 lenders. If you look at what they’re approving and the quality of their offers, it’s been pretty consistent for the last several quarters…if you look at credit quality of applications this quarter, it’s up about two points year over year.” —CarMax (Used Car Dealer)

New regulations could disrupt mortgage markets in October

“this is a rough and tumble mortgage market that is defined by a regulatory environment that has a lot of laws of unintended consequences coming through. And the new legislation, the new regulations that will come in to affect in October will have some ripple effect…we recognize that there is potential for disruption and we are trying to stay ahead of the curve.” —Lennar (Homebuilder)

It’s cheaper to buy land directly than acquire a homebuilder

“And when you are buying companies today, you are buying land assets, and we had found that we are able to buy those assets through negotiations with sellers at a cheaper price than acquiring the company and paying the goodwill associated with the company. We have continued to look at smaller acquisitions and you can and we’ll continue to do so. But with regards to the larger public companies don’t seem to pencil out for us today.” —Lennar (Homebuilder)

There is a cost to stock based compensation

“we’re also planning to reduce dilution from shares granted in our stock based compensation program. We’ve made good progress in reducing our stock based compensation expense over the last year and half. We remain committed to continuing this effort and will work to reduce our 2017 annual share purchase by approximately half of our current year level.” —IHS (Energy Data)

Consumer:

It will be easy to buy used cars in a few years because a lot of people are leasing vehicles right now

“Lease percentage right now, I think, in the new car industry is somewhere around 30%. And when you see that supply coming back is really two years and three years later after you see a high lease percentage. So I’m not sure that we’ve seen much of it yet, but it’s never been a problem for us to source cars. And when cars are at a high lease percentage, when you look out two years and three years later, generally, they’re more organized at the auction, so it’s a little easier for us actually to buy those cars when we see them come back to the marketplace.” —CarMax (Used Car Dealer)

Physical retailers have to create an “experiential shopping environment”

“physical stores remain integral to our success…we want to give our customers more reason to spend time in our stores. We want to encourage product discovery, create an experiential shopping environment and enhance the services we offer” —Bed Bath and Beyond (Retail)

Technology:

Blackberry is trying to pivot from a hardware company to a software company

“On the handset front, we are taking steps to get the business to profitability. A few key actions were taken in the quarter. Number one, we have reduced our spending in hardware through some level of reorganization. Number two, we moved some hardware resources to our software and our Internet of Things efforts…BlackBerry focuses to expand our leadership in mobile security connectivity and communications.” —Blackberry (Researching in Motion)

Accenture is one of the largest developers of mobile apps in the world

“With Accenture Mobility, it is now one of the world’s leading developers of mobile apps, leveraging the capabilities of our global delivery center. We have now developed over 1000 apps across nearly all industries.” —Accenture (Consulting)

Monsanto wants to transform agriculture with big data

“we will be able to unlock a new data driven approach to provide farmers even more valuable real time insights about their crops with our Climate platform. The information will provide actionable crop protection recommendations to farmers to maximize productivity, while ensuring inputs are applied in a precise manner to meet society’s broad goal to preserve and protect our environment.” —Monsanto (Seeds)

Materials, Industrials, Energy:

Nike supports the Trans Pacific Partnership trade bill

“the passing of the TPA was obviously an important step toward what we hope is a final approval of TPP and as we’ve said before as you know, this will help us to accelerate the work that we’re doing with advanced manufacturing, will help us expand our business overall, I think certainly give us an opportunity to build local manufacturing here in the United States” —Nike (Apparel)

The global supply chain may be shifting closer to home thanks to innovation

“I think you’re going to see the overall supply chain geographically shift a bit here and there with the advancements of new manufacturing innovation. That is a major priority for NIKE. It will give us the flexibility to create more localized manufacturing overtime, and that will put us closer to market and again allow us to advance products, particularly in the customization area and to meet more local demand as well.” —Nike (Apparel)

Steelcase mentioned that they are able to insource more processes that they outsourced 10 years ago

“In the Americas, we went through a shift towards outsourcing for a while. This is going back maybe 10 years now. While we were in a transition from the very vertically integrated model to the model we have today. Now, interestingly, and now that we have reached higher level of efficiency in our Americas footprint, we have been able to in-source some of the things that we had previously outsourced.” —Steelcase (Office Furniture)

The Energy sector is finishing up current construction projects, but halting future ones

“Orders from the energy sector grew modestly in the first quarter following a significant decline in the previous quarter. We expect this sector to be challenged for the foreseeable future while oil prices remain depressed. Most energy sector construction projects that were well underway are being completed, but many future projects have been postponed” —Steelcase (Office Furniture)

Miscellaneous Nuggets of Wisdom:

It’s tough to do business with people who wont talk to you

“call me traditional, but I always think that business gets done when people meet, when they sit down across the table and try and work out a solution and we’ve been singularly unsuccessful in getting Syngenta to sit down and talk. We’ve seen the videos where they talk to themselves, but I’d love to be able to engage in a conversation.” —Monsanto (Seeds)

Regulation benefits large players who can afford to make adjustments

“there are a lot of unintended consequences embedded in some of this legislation or regulation I should say. I think in many of the instances the consequences are that larger players are benefitted and the larger player’s ability to adjust, to adapt and to spend the dollars to be ahead of some of the regulatory changes works to the benefit.” —Lennar (Homebuilder)

You win and lose deals on products and relationships. Price is just an excuse

“you win, because you have got the right products, you have got the right relationships. When you lose, you might be told you lost because of price, but really you lost because you did not have the right relationships and the right products, so that is our philosophy on this.” —Steelcase (Office Furniture)

Mutual benefit is the key to a successful partnership

“To consistently achieve our success we follow a proven strategy. Our goal is to gain alignment and support from our trade partners by promoting and demonstrating mutual business success.” —Altria (Cigarettes)

Be a customer centric business

“The success in our business is a natural outcome of putting the consumer at the center of everything we do” —Nike (Apparel)

Full transcripts can be found at www.seekingalpha.com