Quotes from this week's earnings calls
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:
Commercial Real Estate broker Jones Lang LaSalle presents two important bull arguments:
1) Asset prices are full but not excessive, especially compared to interest rates
“So it feels more like 2005 than later in that prior cycle…If you look at pricing in the markets, we sense that there is no form of excessive pricing at this point. Yes, pricing is full…But when you compare the level of cap rate or yields, which are again in the 4′s and 5′s in those best markets, and you compare that with the bond rates…negative deposit rates in Switzerland and zero in Germany, the returns on real estate still seem to be rational and not excessive” ($JLL)
2) The slow recovery turned this into a longer cycle
“we’re 5 years in, into what might be an 8, perhaps a bit longer cycle this time, given how hesitant the recovery was…it feels like this cycle still has some way to run yet.” ($JLL)
These arguments may have merit, but there are real negatives too
In some industries, you are seeing big sales decline projections for the first time in a long time
“Our 2015 forecast assumes softer industry demand across all regions and a sales decline ranging from 15% to 17%.” ($AGCO)
“If one wanted to use the 2008 to 2009 timeframe is a proxy for 2014 to 2015, one could predict revenues to fall between 20% and 25% would seek 50% to 60% decremental margins.” ($NOV)
BEA retail sales data was weak in December, and Ralph Lauren’s commentary seems to confirm that it was accurate:
RL says that the holidays got off to a strong start but then softened
“as we enter the holiday season, we got off to a pretty strong start over the Thanksgiving period, the week before Thanksgiving through Cyber Monday, and then we saw a little bit of a drop in sort of the consumer purchase behavior and that period between the Thanksgiving – the end of the Thanksgiving shopping period and the first couple of weeks of December.” ($RL)
In reaction to soft traffic, retailers started to get extra promotional
“And as a result of that what we saw was that a lot of the competitors ratcheted up the promotional intensity in terms of trying to deal with the inventory that they had on the floor and so reacted to that not to ensure that we stayed competitive during the period and I think that’s what we were alluding to in our commentary.” ($RL)
It was a US phenomenon
“And again, that was really a U.S. phenomenon, not so much international.’ ($RL)
Whirlpool dealt with particularly aggressive promotions on imports (a function of a strong dollar perhaps?)
“while higher fourth quarter, our volumes were negatively impacted by very aggressive and value destroying promotions on import products.” ($WHR)
Mastercard hasn’t seen lower gas prices lead to higher spending yet
“Even though 4% growth is nothing to sneeze at, we haven’t yet seen the extra savings from lower gas prices translate into additional discretionary consumer spending.’ ($MA)
On a positive note, the weather has been much better this year
“I think trends so far in January — certainly things look better than they did a year ago at this time because of the incredible disruption of all the snowstorms.’ ($UPS)
Financials:
There’s plenty of capital flowing into real estate, the harder part is deploying it
“investors are also increasing their appetite for risk, embracing value-added and opportunistic investment strategies in a search for higher returns. The main challenge is going to be deploying capital’ ($JLL)
Consumer:
Despite great effort, UPS had a hard time managing the holiday season peaks
“To illustrate the enormity of peak season, consider that during this peak we averaged over 30 million deliveries per day. Looking back just two short years ago, that’s about 6 million more per day than we handled in 2012. In those two years, we saw peak volumes go from 55% above our average day to 75%.” ($UPS)
UPS would argue that they overbuilt in order to protect their brand
“our main priority going into peak was protecting the brand. After 2013, we just felt that was something we absolutely had to do…So we certainly erred on the side of caution. We did overbuild to some extent” ($UPS)
Underarmour wants to power your health “dashboard”
“again the vision there is to become the daily dashboard that people check, the same way you check your bank balances, same way you check the whether, is the same way that you get an update on the most important asset in your life, your own personal health.” ($UA)
Fox says that the shift to digital media consumption happened faster than expected
“he digital transition continues to be a glass half full story for us. The moment of advertising dollars and shift of our consumer viewing is clearly going to continue as I think it’s fair to say that its trend recently has been in a bit faster than many expected.’ ($FOXA)
Netflix isn’t the only game in town for streaming video anymore
“In reality, our recent SVOD have been actually with the Amazon and Google Plus, so I think that’s a positive that you got more competitive marketplace than you’ve had.’ ($FOXA)
Healthcare:
Medicaid expansions have been effective at giving health insurance to the uninsured
“Our trends in Medicaid expansion states continued into the fourth quarter. In the fourth quarter, Medicaid admissions were up 51% and uninsured admissions were down 65% in expansion states.” ($HCA)
However, newly insureds still struggle to have access to care (because doctors don’t want to see medicaid patients)
“We haven’t really seen a significant change in Medicaid activity and behavior. So the emergency room heavily, they struggle to get access to physicians in some markets. So that dynamic still exists.” ($HCA)
People who have gotten commercial insurance policies have better access
“when they do get commercial insurance, there is different ability to access care through physician office or possibly through urgent care centers and the like and not through the emergency room.” ($HCA)
About 40% of patients on exchanges are newly insured
“what we do is look back at exchange patients level we’ve seen this year, look back how we’ve previously seen them and what was their status when we saw them. And that’s what we’re coming up with our estimate of about 42% on a yearly basis of the patients we saw in exchanges who are newly insured.” ($HCA)
Materials, Industrials, Energy:
The supply demand imbalance in global energy markets is not excessive by historical standards
“we do not believe the global excess production capacity is excessive by historical standards. We do not face the kind of structural global overhang the industry faced in 1986″ ($NOV)
If oil prices stay below $80, supply wont grow quickly enough
“We don’t believe the world can sustainably grow its oil supply with prices below $80 – $75 of barrel and with prices below $60 oil production will begin to contract” ($NOV)
Shale oil production falls steeply, so production cuts could come faster
“The production type curve from these basins exhibit extraordinarily steep decline rates, which is well documented across thousands of wells in multiple share basins.” ($NOV)
Oil production companies are expecting steep price cuts from servicers
“Yeah, I’ll say that our customers are being very aggressive and seems to have the same form letter that they are sending to everyone within the people receive a letter and demanding very high discounts, double digit percentage discounts.” ($NOV)
If oil companies can get price concessions from service companies then $70 could become the new $90
“$70 could be the new $90 or $90 could be the new $70, however you want to look at it.So we think that $70 gives you the same economics that $90 with the 20% reduction in service costs. I think that’s sort of the way our industry is going to have to look at things.’ ($APC)
Anadarko is expecting a U shaped recovery in oil prices
“I think today we would concur with those that are in the camp that think we have a U shape. We’re not anticipating it being V shaped.” ($APC)
For utilities, switching to natural gas is not a panacea
“If you dial back to 2014, remember we have switched a lot away from coal to natural gas. And one of the things that we always warn people was that gas was more volatile and there were certain risks around it. It was not a panacea.’ ($SO)
Somewhat counterintuitively, great growing conditions are bad for farmers
“Nearly ideal growing conditions produced record crop production across the global ag markets in 2014. The record harvest contributed to an increase in year-end grain inventories.The resulting reduction in commodity prices has negatively impacted the economy for row crop farmers but favorably reduced the input cost for dairy and livestock producers.’ ($AGCO)
Dairy prices may finally be coming down
“We expect dairy price to come down during Q1 from record highs for our cheese and sour cream from late 2014 and remain at normalized levels throughout the remainder of 2015.” ($CMG)
Miscellaneous Nuggets of Wisdom:
There’s no reason to grow for growth’s sake
“I mean we don’t really see the need to grow in an environment where we don’t have well head economics, purely for the simple purpose of having production growth as an objective…We won’t chase growth just for growth’s sake.” ($APC)
Chart your own path
“we have chartered our own path for how a restaurant company should be run in every single way. We have shown that you can own and operate all of your restaurants rather than franchise and still grow at a rapid rate, that you can spend more on ingredients not less, still serve high quality food at reasonable prices and have industry leading margins and returns, that you can build teams of top performers and power them to deliver high standards while still maintaining an efficient labor model” ($CMG)
“We built a $3 billion business by making great product and telling great stories, but there is nothing that says we must follow our competitors’ playbook” ($UA)
Don’t run your business thinking about how decisions will affect your stock price
“none of our discussions about…what we should charge and ingredients to source…none of that ever involves a discussion of the stock price.’ ($CMG)
Never be satisfied with where you are
“we are never satisfied with where we are’ ($DLPH)
Build an innovation machine
“what we tried to build over the last decade is this new product introduction machine where we can launch new products that come out at quality levels that are better as good or better than the ones that they are replacing” ($CMI)
In finance, there are tricks, but no magic
“So you guys have heard the old saying that — I believe in the long run view of finance, there’s lots of tricks, but there is no magic.” ($SO)
Full transcripts can be found at www.seekingalpha.com