Company Notes Digest 5.1.15

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:

Mastercard’s data shows that consumers aren’t spending their savings from lower gas prices

“I think what is happening is that consumers are only using a small portion of their savings from gas to buy new goods and services. Rather, what they are doing is using those savings from gas to increase their personal savings rate ” –Mastercard

Ajay Banga, Mastercard’s CEO, thinks consumption will rebound though

“I don’t see this as a long-term issue, actually, not even a medium-term issue…I think we’re going to look at a somewhat different pattern of consumer spending over the next three to six months just because underlying consumer sentiment is positive.” –Mastercard

Steve Wynn would appear to disagree

“If you were to ask me…what will the second quarter look like in Las Vegas? Weak. Do you hear me? Weak. So I’m trying to lower expectations here. This notion of a big recovery is a complete dream. I don’t think Las Vegas is experiencing a great recovery. I think it’s still very patchy and I think that that’s probably our non-casino revenue in the first quarter was flat. I’d be thrilled if it was flat in the second quarter.” –Wynn (Casinos)

Wynn’s CFO said that summer trends are not picking up like they did last year

“We’re starting to see summer trends not pick up the same way they did in previous year. So we’re paying very close attention to the market. And what we’re getting as indicators as far as the summer business but it does not seem as strong at this point as it was last year.” –Wynn

Consumers may be cautious, but businesses seem to be hitting their strides

Companies are focused on expanding again

“We see notable shift in the composition of demand as corporates focus now on expanding activities rather than right-sizing their portfolios.” –Jones Lang LaSalle (Commercial Real Estate Broker)

UPS saw B2B growth stronger than B2C for the first time in a long time

“For the first time in a very, very long time, our B2B growth was actually a bit stronger than our B2C” –UPS

The construction market is strong in the US

“The construction market in the U.S. is continuing to strengthen and we are riding that wave.” –Graco (industrial equipment manufacturer)

However, there are also increasing signs of over-extension

Capital One sees auto loans starting to deteriorate

“In our auto business…Credit performance is gradually worsening in the industry and we see slightly higher losses on newer originations…we observed increasingly aggressive underwriting practices by some competitors, particularly in subprime. We are losing some contracts to competitors who are making more aggressive underwriting choices” –Capital One (Bank)

BB&T (NYSE:BBT) said that multifamily lending has become overheated

“we are being careful in multifamily. We think it is kind of peaking, and so we are being careful in underwriting and certainly in some markets we have really curtailed lending, because we think it is overheated.” –BB&T (Regional Bank)

Jones Lang LaSalle said that real estate investors are extending into tier 2 cities to try to squeeze extra return

“we’re seeing a lot of capital both domestic and particularly international trying to get into assets. And as we mentioned, the result is that investors are moving out along the risk curve somewhat into big cities, tier 2 cities, tier 2 properties, to find deals as well as a little extra return.” –Jones Lang LaSalle (CRE Broker)

The shadow banking system is popping up again to finance deals that regulated banks wont

“The big banks are feeling regulatory pressure on leverage transactions…that is why one of the reasons you’re seeing some of the big private equity firms put together credit, shadow banking credit opportunities” –Moelis and Co (Investment Bank)

Companies are scrambling to lock in office space before it becomes a tight market

“there’s a level of enhanced activity amongst the corporates to get space now while pricing is relatively attractive, space is available, and they’re not in a cycle where the landlords have control of the markets.” —Jones Lang LaSalle

Sellers have high expectations of price, but buyers are not willing or able to pay those values

“M&A activity is being driven by the seller, stock prices increased and sellers become confident that they can receive value for their company and M&A begins to pick up…Today, the seller’s expectations continue to be high, but we’re seeing a bit of mismatching terms of what buyers especially credit sensitive buyers are able and willing to pay.” –Moelis and Co (Investment Bank)

If this isn’t a sign of consumer exuberance, then I don’t know what is:

“we’re having this call today on the eve of the upcoming Pacquiao fight and Mayweather fight. And this, in my 40-odd years in this town, this is a one-off. I have never seen madness and demand of this sort. This fight is probably going to break all records for pay-per-view. It certainly is breaking all records in what they’re getting for tickets. We have never charged more than $1,500 for a ringside seat in a fight and they’re going for $10,000, and then $7,500 for the medium range, and then $5,000 for the ones in the upper tier, an outrageous amount of money. Mayweather and Pacquiao are going to not only have to have a fight, but they’re probably going to have to do a chorus line or something to justify the cost of this.” –Wynn (Casinos)

International:

QE has helped business confidence in Europe

“European economic outlook has improved mildly overall since before QE, generally speaking I would say our sense is that confidence is improving at the decision maker level in Europe CEOs” –Lazard (Investment Bank)

European companies are seeing the accounting benefits of a weak Euro

“Group revenues increased by 16% and adjusted for foreign exchange effects by 9%. Group EBIT from ongoing business grew at much higher rate of over 40% to €2.9 billion’ –Daimler (Automobiles)

US Steel is getting crushed by cheaper imports

“Excluding the energy sector, steel consumption in North America is generally good, but extremely high level of imports, many of which we believe are unfairly traded continue to negatively impact order rates for domestic steel producers.” –US Steel

The Chinese economy is still trying to get a sense of what direction Xi Jinping wants to take things

“The tentativeness of the government is a reflection of their own uncertainty, I believe, in many respects, as far as predicting where to go tomorrow or in the near future. There’s a new boss in China, Xi Jinping, and his agenda is something that everybody is adjusting to. He’s a very dynamic man. He enjoys enormous popularity among the people of China. And in China, the people matter. And so, everybody’s waiting and watching.” –Wynn (Casinos)

Mexico is an increasingly attractive place to build manufacturing capacity

“Geographically, Mexico continues to be a very, very strong place to manufacturers. Demand in the U.S. has been relatively stable. Mexico as a manufacturing location continues to be more attractive.” –Flextronics (Consumer Electronics Manufacturer)

India is also picking up from a manufacturing standpoint

“one thing I would add is India. India as a manufacturing location and as a demand environment is probably picking up as much as anything, so that’s probably where we see the biggest place of growth.” –Flextronics

Financials:

The Fed may raise rates just to get the ball rolling

“I think the Fed is going to raise short-term rates in the June to September time frame in spite of all their rhetoric about the recent changes and so forth. The reason is because I think they believe they need to get started on moving off the zero-based level.” –BB&T (Regional Bank)

The world of banking is moving to a real-time system

“the really dramatic transformation that’s going to happen to banking is it’s going to become real-time, far beyond kind of real-time payments. And I think that – I think banks are so, in a way, ill-suited to drive to that destination, yet the world will drive us banks there…we’re going to need to think more like technology companies and maybe a little less like banks.” –Capital One (Bank)

Consumer:

Simon Property Group (NYSE:SPG) listed some hot retailers that you may not be following

“we are doing with a lot of international retailers that people haven’t — DAVIDsTEA has come down, we are growing UNIQLO, we are growing H&M, we are growing Sephora, and we are growing Altar’d State, which is a great retailer that has got a significant growth platform.” –Simon Property Group (Mall owner)

There is overcapacity in the auto industry

“I think everyone is familiar with this industry is aware that there is a fair amount of overcapacity among the OEs. Right, that is the reality. I think that’s something that the OEs need to ferret out, and figure out how they deal with it.” –Delphi (Auto Parts Supplier)

Local Chinese OEMs are moving up the quality curve, adding more content to their vehicles

“You’re absolutely right, the local OEs are starting to increase the quality and increase the content in their vehicle.” –Delphi (Auto Parts Supplier)

Amazon (NASDAQ:AMZN) spent $1 B on video content just to get people into the store

“we spent approximately $1.3 billion on content…this video content that we’re spending is helping us customers who buy consumable from us, they will buy clothing from us, they will buy shoes from us, they will buy electronics, they will buy media items.” –Amazon

Technology:

Brand advertisers are getting more and more comfortable with YouTube

“over the last quarter, over the last couple of quarters, we’ve seen the real takeoff. The number [of advertisers] grew 45% in 2014. And all of the top 100 global brands have run TrueView ads over the past year.” –Google (NASDAQ:GOOGL)

Microsoft (NASDAQ:MSFT) said that its cloud growth isn’t just a shift of existing customers

“There’s significant traction we have in terms of moving beyond just one-for-one shift of a workload that traditionally ran on our server to our Azure Cloud. In fact if anything the majority of what we are seeing is new. Even in Office 365 it’s not just one-for-one shift.” –Microsoft

The iPhone is still attracting new customers

“we continue to see a higher rate of switchers than we have seen in previous cycles, and so we’re extremely excited about that. We also continue to see a reasonable percentage of first time buyers, particularly in some of the emerging markets…Our current estimate is that about 20% of the active installed base has upgraded to a 6 or 6 plus.” –Apple (NASDAQ:AAPL) (Consumer Electronics)

The iPad is being cannibalized by iPhone and Mac

“have we had cannibalization? The answer is yes. We’re clearly seeing cannibalization from iPhone and on the other side, from the Mac. And of course, as I’ve said before, we’ve never worried about that. It is what it is.” –Apple

John Legere vowed that T-Mobile will eventually have coverage that matches Verizon

“I can’t tell you the date but there will be a time when T-Mobile coverage will be superior or equal to Verizon then what. We’re faster. We’re bigger. We’re more focused on customers. So that day is coming. I can’t put it on the calendar but it’s coming. And that is why when you see this question on the auction they don’t want any part of that.” –T-Mobile

Twitter (NYSE:TWTR) was proud to report that they have a demand issue, not a supply issue

“In terms of your broader question about, are we running into a supply issue? What I would say is this, the shortfall we had in revenue in the quarter was related to demand. We don’t have a supply issue today…we are not inventory constrained” –Twitter

Healthcare:

Healthcare utilization and medical cost trends have been more moderate than expected

“Medical cost trends remain moderate…as you know we anticipated that we would see a trend increase this year, utilization increase. We really did not see that, trend was very moderate in the first quarter” –Aetna (NYSE:AET) (Health Insurance)

People buying healthcare on public exchanges tend to be younger and receive a federal subsidy

“The demographic profile of Aetna’s public exchange membership remains generally consistent with last year. While the average age of our membership has declined modestly, the vast majority remains in silver and bronze plans and nearly 90% of our members receive a subsidy from the federal government, consistent with national averages.” –Aetna (Health Insurance)

Materials, Industrials, Energy:

Energy firms continue to be amazed by the speed with which the industry has reacted to lower prices

“The rate of decline of active rigs, most acute across North America is breathtaking and unequaled in prior downturns.” –National Oilwell Varco (NYSE:NOV) (Oil Drilling Equipment Manufacturer)

Eventually supply and demand will balance out

“Eventually supply and demand curves will cross, and we will see oil prices signaling producers to get back to production growth. We just don’t know when.” –National Oilwell Varco

The oversupply situation isn’t extreme and shale wells can be taken off line very quickly

“individual shale wells decline exceedingly quickly, 8 to 10 times the rate of conventional resources. We know that the sharp and rapid decline in the addition of fresh and new producing wells of all kinds will result in diminished global oil production over time. We also know that the excess productive capacity around the world, the oversupply, is, thankfully, just a few percent, far less than my first downturn in the 1980’s.” –National Oilwell Varco

This isn’t the first cycle that most operators have been through

“Most of us in oil and gas industry have been through downturns many times before and have honed our skills at rapidly adjusting spending through the cycles.” –National Oilwell Varco

There still isn’t much sign of credit deterioration among energy companies

“We maintained close, regular communications with our energy-related customers. We told you in January, we had visited with more than 90% of our customers. Well, we visited them again in March and early April, and there were no surprises or material issues.” –Cullen Frost (Regional Bank)

Hedges may be hiding the need for restructuring

“I don’t think [restructuring] has even begun. Look it happened rapidly, the decline was rapid, there are many, many firms who hedge at least six months to a year out…if oil would have settle in and call it $50 a barrel for long period of time, I think you see substantially more restructuring than we have seen.” –Moelis and Co (Investment Bank)

We’ll have a better sense of credit quality in the coming quarters

“the hedges are still are an important factor. And I think you’re going to see the real — you’re going to see a lot more this summer, but certainly in the fall you will continue to see how you go through this adjustment period. That’s when we’ll know at the end.” –Cullen Frost (Regional Bank)

Cliffs’ CEO says that the big three iron ore producers are colluding to force down prices simply by threatening to increase supply

“Rio Tinto (LONDON:RIO) and BHP more Rio Tinto than BHP, they are playing the game of scaring everybody else, and some people are getting really scared, some others are not…I believe that what they are doing is on purpose and I believe that what they are doing is not right…it is a tactics that plays well for the future markets they are base on the IODEX and that is manipulation of an index. If it were the LIBOR, people would go to jail, but because it is IODEX, people do not go to jail…How long it will take for everyone to perceive the game, I do not know.” –Cliffs Natural Resources (Iron Ore)

He says that in reality the big three do not have enough money to carry out these expansions

“Another point to consider is that there is not enough CapEx for these guys to do what they are doing other than current cash flow generation. I really would like to see analysis on that, where is the money coming from for the massive deployment that’s necessary for BHP, Rio Tinto and Vale…The do not have that money, period, full stop…Long story short these big projects are not coming” –Cliffs Natural Resources

Projected copper surpluses have not materialized

“When you step back and look at where we are right now in 2015, the surpluses that had been projected for a number of past years are not developing as they were estimated. Projects have been delayed, production has been interrupted and the market has not moved into a large surplus position.” –Freeport McMoran (Copper Miner)

Miscellaneous Nuggets of Wisdom:

Jeff Bezos lists the keys to Amazon’s success:

“We’ll approach the job with our usual tools: customer obsession rather than competitor focus, heartfelt passion for invention, commitment to operational excellence, and a willingness to think long-term.” –Amazon

It’s not easy to build a business

“the number of people who had said they are going to go out and create new investment banks or boutiques and I do think there is a lot of great bankers but I think the ability to create a long-term cohesive culture around a system that can create clients, new clients around the globe…is a very different thing than being a great banker.” –Moelis and Co (Investment Bank)

Try to invest along side CEOs with significant skin in the game

“I have 28 years of my life and a significant percentage of my net worth invested in this company and I want to assure my fellow shareholders a smooth and successful transition of leadership for Cash America is a top priority for me and our Board.” –Cash America (Pawn Shops)

“Now I’m speaking on this call as the largest single recipient of such distributions…When there’s a dividend check in this company, the largest one goes to me. And so I say again, unapologetically as a shareholder and as a Chairman of the Board, we believe that you distribute the money that is free and clear cash flow after you’ve met all other obligations” –Wynn (Casinos)

Original post

Written By: Scott Krisiloff