Company Notes Digest 9.26.14

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

3M doesn’t see any warning signs that the US is slowing

“We thought we’d have economic growth and that it would be a tailwind in helping us grow and throughout 2014 we’ve been seeing that and we really don’t see any warning signs of the U.S. slowing down right now.” ($MMM)

A hot question is whether or not volatile currency markets will impact earnings

Caterpillar doesn’t expect much impact because it has diversified manufacturing

“I can’t give you — I guess the best rule of thumb that I could give you is it is probably not going to have too much impact. We are not an entirely U.S. based company, not even close. More than half our employment is outside the U.S. We have significant manufacturing operations spread around the world. So it always depends upon which currencies move in which directions and where we have factories, but by and large, I think over the last 10 years, you have heard us talk less and less and less about currency impact as we become more — I don’t know what the right word is, more diverse in our manufacturing operations around the world. So I doubt that you would hear us talk much about it.” ($CAT)

3M hedges its exposure to currencies through derivatives contracts

“it’s 3M’s strategy to hedge approximately 50% of our economic exposure to those currencies” ($MMM)

Where there are effects, they wont necessarily show up right away

“Most of the yen-based spending is in COGS, actually, so the impact is delayed about a quarter based on their inventory flow through. So, you need to keep that in mind.” ($MU)

There would have to be a prolonged move in currencies to get companies to change their operations

“It’s not in our nature to shift from one month to another our source of supply, but when we see a sustained trend after a number of quarters, we do have the capability of moving manufacturing to a more advantageous location.” ($MMM)

Two areas of the economy that still have room for improvement: labor and construction

The low end consumer continues to struggle

“This quarter’s sales results can be summed up in one word: Inconsistent…We attribute much of this volatility to both unique weather and the belief that the low-end consumer continues to struggle.” ($AZO)

The low end will probably continue to struggle as long as labor costs don’t rise

“what we’re seeing in the labor market and to be honest, we’re really not seeing that significant of a change in our labor cost trends around the world.” ($MMM)

“if you’re trying to understand is there anything unusual that we anticipate in ’15 with respect to wage increases, the answer to that is no.” ($ACN)

Construction is still dampened too

“Construction is a mixed bag. Generally speaking, I can’t think of anywhere in the world where construction is actually good. U.S. is below the prior peak. Yes it’s better than where it was last year, but that doesn’t mean that its good.” ($CAT)

But there are real buyers out looking at homes

“The feedback I am getting from the field is that the quality of the traffic is improving. These are real buyers that are out there that are just taking their time right now and making sure they are comfortable with the home buying decision.” ($KBH)

Homebuilders are starting to move to more greenfield projects

“if you think about our industry is moving past buying finished lots and building homes on those and completing those communities to more deals that are self developed” ($KBH)

And there are labor shortages

“As we have been sharing, you hear it across the industry, there is pockets of labor shortages that, depending on the city, are really tough or not so bad and that’s fairly typical in our industry when things are recovering.’ ($KBH)

Meanwhile in the world of financial engineering…

Companies continue to issue debt to buy back stock

“Turning to the balance sheet, during the second-quarter we received $1.5 billion from the notes offering of which $1.1 billion was subsequently used to fund our accelerated share repurchase program, which commenced during the second-quarter, and is expected to be completed before the end of the calendar year. ($BBBY)

M&A (i.e. share prices) are expensive right now

“The market is one where there is a lot of interest. It’s also a market I characterize as feeling somewhat expensive right now…We’re seeing both strategic and financial buyers as our primary — it’s a pretty even balanced time.’ ($MMM)

Remember, easy winter comps are approaching (for Autozone weather effects are inverted)

“many investors have asked us about our expectations for 2015 relative to the more difficult comparisons our industry will have in the upcoming winter months. For us, our second quarter and third quarter results are more difficult comparisons. However, we’re optimistic we can grow in all our upcoming quarters” ($AZO)

China’s economy isn’t growing as fast as it used to, but there are still pockets of growth

“China, we don’t see the economy as a strong propellant for growth for 3M in China. Certainly not as strong as it has been several years ago…That said, we do have some pockets within 3M that are growing nicely in China. Industries such as healthcare where 3M competes or products or industries where we’re involved in personal safety or the air people breathe, the water that people drink, those are areas where we are seeing growth in China.’ ($MMM)

The Chinese are clearly moving to a more consumer oriented economy. Promotion of the cruise industry is one example

“the government has it as a priority now.The Chinese government has a plan for development of a cruise industry in China and that means, you are getting tremendous support and opportunity to participate led by the various governments whether it’s the Central Government or the provincial or the municipal governments like in Shanghai and Tianjin. And so all of that bodes well, we are beginning to gain momentum.” ($CCL)


Subprime auto-lenders have tightened their standards

“We’re clearly seeing them continue to provide, I’ll say less attractive offers than they were a year ago, less compelling offers for the customer so therefore we’re seeing less conversion in that space…we saw it happening at the very end of [FY]Q3. There was a notable shift in behavior.” ($KMX)

Mortgage underwriters are still tight at certain FICO thresholds

“We have seen a slight improvement in underwriting and I would still say that it is not as difficult as it was, but it still is a headwind as you look at FICO scores, they have come down somewhat, but they have not come down to the degree where you could say that the mortgage companies are underwriting to the broad, HUD approved underwriting criteria.You get under a 670 or 680 FICO, you still have to put a lot more money down and as a first-time buyer, you don’t have that.” ($KBH)

The back end of the payments industry is behind digital wallets, now it’s about getting buy in from merchants and consumers

“I would say most of the heavy lifting has been done. It’s now working with the next third parties, the big merchants, the wallet providers, the issuers in the markets to launch these services.’ ($V)

Digital wallets could completely change the customer experience at retail

“a lot of these solutions that are out there that are transforming the point of sale. Most of aren’t just changing the point of sales or mobile point of sale or changing this big register to the small digital configurable register. They are just saying actually we don’t need a physical checkout. We just need to know you are in the store. You can pay in an app and walk out, right. And so we think in app payments is going to be a huge development.” ($V)

There will be innovative applications for loyalty programs too

“I think we are going to see as Apple pay evolves or as this HCE or NFC wallets evolve, more and more links to value-added offers, loyalty coupons targeted offers because of what we can do with the network…So it won’t just be payment. We are going to have a lot of loyalty based programs as well, supported in these wallets.” ($V)


Consumers continue to shift towards e-commerce

“We’re very bullish on our ecommerce opportunity. We’ve invested quite heavily in improving our operational capabilities or supply chain. We’re seeing, again, the category offense really resonate through dotcom. Obviously, the preferred channel, where a lot of consumers are shifting and moving.” ($NKE)

Autozone thinks e-commerce isn’t as large of an opportunity in auto parts as in other industries

“I think on the e-commerce side, when we look at the industry broad-based, we think that there’s some opportunity for our online sales, although it isn’t a significant penetration like it is in other industries. We recognize that a lot of people are coming for information relative it to be a content of the product or repair information, et cetera. So we think that it’s an integrated approach overall and that’s how we’re approaching it” ($AZO)

Locations are a strategic asset in omni-channel fashion retail

“we are not looking to reduce our stores or reduce the number of stores, because apparel — fashion apparel is still about that touch and feel, and as we had omni-channel capabilities, they become fulfillment center, they become a pick-up center and we think that across all of our brands that there is going to be an ongoing need for the store base that we have in all of our brands” ($ASNA)

Many retailers have made investments in e-commerce that still need to be leveraged. Gross margins are squeezed by some initiatives

“This decrease in the gross profit margin as a percentage of net sales in order of magnitude was primarily attributed to first, an increase in coupon expense resulting from an increase in redemptions and a slight increase in the average coupon amount, and second, an increase in net direct-to-customer shipping expense which was impacted by change in’s free shipping threshold.’ ($BBBY)

Many retailers are taking a stand against across the board promotions, favoring more targeted strategies

“From a marketing perspective, we’ve begun to see customer response shifting away from traditional promotional strategies like storewide percent off and regular bounce back programs. We’re testing more targeted marketing to specific customer segments aimed at growing share walks in cross category engagements. Examples of this include focused programs in our best ad denim and bra categories.We’ll also focus on broadening our marketing investments to better reach both prospective and inactive customers, including more direct mail that goes to these groups and a significant digital marketing initiative and expanded the office. ($ASNA)

Nike sees consumers trending towards premium products. If this is accurate, then the promotional environment should start to lighten up

“we’ve seen it really in every market around the world where the consumer is definitely trending towards premium products. Well made with great innovation is certainly resonating with the consumers.” ($NKE)


Micron sees strong demand for DRAM from its PC customers

“On the client side, we continued to receive strong demand signals from our PC customer base…Given the strength of the PC market, we’ve optimized around the PC market… PC strength clearly today is helping lift mobile pricing and server pricing” ($MU)

All industries continue to adopt more and more technology

“So we’re starting to see good traction of course with more the B2C kind of industries if you will, I’m thinking about retail, I’m thinking about consumer good, financial services, telecom, good appetite for that but certainly we see the second wave of digital impacting now more the B2C businesses, I could have mentioned Healthcare.’ ($ACN)

Moving into interesting new applications in the internet of things

“then you move in to more the manufacturing kind of organization with what we know we call it the famous IOT, the Internet of things…we’re starting to put digital in what we are calling digital plant and digital operations and things we’re doing with some of our partners and we’ve recently created joint ventures as you might have seen with General Electric around aircraft maintenance as well as intelligent pipeline” ($ACN)

Caterpillar is seeing interest in internet of things applications in mining, sees autonomous mining in the future

“I think not just autonomy, but sensors on machines, telematics, remote controlled machines, fully autonomous machines, all of that is very topical, and probably certainly away for the — some of it near term, some of it longer term future. So it’s a big technology focus for us, and a lot of the customers are interested in it. I mean, it can be everything from as simple as predictive maintenance on a machine, tracking a machine, shutting a machine off, knowing where a machine is, all the way up through control of the guidance and ultimately automation. So it is a big deal.” ($CAT)

Materials, Industrials, Energy

Perhaps one reason that oil demand is lagging is that many entities have made it a point to reduce energy consumption over the last 7 years

“we have a series of technology initiatives in progress related to energy efficiency in areas like propulsion, lighting and air conditioning to name a few that we will continue to roll out during the resulting accelerated dry dock schedule. These initiatives have a quick payback period as we continue to steadily reduce few consumption in the years to come.It is gratifying to say we have reduced our fuel consumption by another 5% this year and 25% since 2007, meeting our stated goal of delivering a 20% reduction in carbon emissions ahead of schedule while saving more than 1 billion gallons of fuel and $2.5 billion of fuel cost during that period.’ ($CCL)

Energy production requires more horsepower than in the past

“Oil and gas is one of those kind of businesses that I think over time has just become more horsepower intensive. So 20 years ago, whoever heard of horizontal drilling, or injecting gas into a well, to increase oil flow or fracking, it has just become a more horsepower intensive business to get the same amount of output and that has been good for us, and that will probably continue to be good” ($CAT)

The railroad industry is investing in more horsepower too

“I think the railroads find themselves in a position, where a combination of much better business environment for them, and a bit of congestion here and there on some of their systems. I think they find themselves in a need for a bit more power, and so I think they may end up buying more or at least want more than we thought they were going to need.” ($CAT)

Miscellaneous Nuggets of Wisdom

When things get bad enough in an industry, it’s tough for them to go anywhere but up

“let’s take mining for example; it is so beat up right now, it is so — I mean, our production in sales of equipment is well below the replacement level. So barring a nasty recession or a recession, its hard to imagine that kind of an economic environment that we are in right now, there is a lot of scope for it to go much lower. So I feel actually pretty good about that. When it’s bad enough, kind of the only way up, the only direction is up. So I wouldn’t get predictive of that. I mean, we really haven’t seen much yet that would indicate, that that’s going to turn around any time soon. But I would say, if you are looking over the next few years, the bias, definitely would have to be up.” ($CAT)

Full transcripts can be found at