Company Notes Digest 6.5.15

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:

John Stumpf says that the weak first quarter felt like an anomaly

“if you look at what’s happened so far this year, surely, the first quarter was an anomaly, at least the reported number of two tenths of a percent growth, it sure felt and it feels stronger to us the math.” —Wells Fargo (NYSE:WFC) (Bank)

If Stumpf is right, we’ll get a rebound in growth in the next few quarters

“The way business feels to us and the way our internal team looks at, it would not surprise us if we had second, third, and fourth quarter have numbers that would make the year equal to 2:2, 2:3, 2:4 in that range.” —Wells Fargo (Bank)

The head of JP Morgan’s consumer bank division agreed that the economy continues slow but steady improvement

“would say net-net that we’re seeing a slow continuous improvement in the economy that we’ve been observing now over the last three or four years as the employment rate continues to improve, we are really seeing a broadening of the improvements…middle and lower middle income segments…those are coming back actually quite nicely right now” —JP Morgan (Bank)

Consumers are spending on travel and entertainment

“if we look at credit and debit you see kind of an interesting story that particularly kind of travel and entertainment. So restaurants particularly look very strong” —JP Morgan (Bank)

Commercial credit is increasingly being extended for commercial, not financial engineering, purposes

“One thing I’d share with the audience is that, a lot of the usage of commercial credit in the past three or four years has been for whatever it called financial engineering reasons. I don’t mean that in a negative sense. But it was to buy out a partner, to leverage something, to buy back stock or whatever. I’m starting to see more of the discussion and some more of the dollar today used for what I would call commercial purposes, buy a piece of equipment, add a lien on to this, maybe a different product, and so forth.” —Wells Fargo (Bank)

Navistar sees good demand for trucks

“U.S. economic outlook remains optimistic so is the outlook for the transportation industry. Improving freight rates, lower engine costs, favorable business conditions, aging fleets and better new truck fuel economy and safety all translate into good demand for trucks” —Navistar (Truck Manufacturer)

There are cranes up all over the country

“if you look around the country there are cranes up everywhere. I was with one of the U.S. senator from New York who said, I think, the straight 2.5 million people are going to moving to New York in the next 10 years. It’s some unbelievably big number and I like to build housing for these people. So you are seeing that around the country the urban core being developed largely for rentals, you’re seen office buildings drop, industrial building drop, so you’re have seen that happen.” —Wells Fargo (Bank)

But beware, all the good news makes this the most dangerous part of the credit cycle

“We will regularly tell our team that this is the most dangerous point in the credit cycle for all of the industry, why because credit performance is being good for so long and people become very comfortable in a good credit cycle and actually people come into the business and they don’t remember and doesn’t seem long ago for those of us who went through the pain of the downturn that people come in and they think, credit all you do is see improvements in role rates.” —JP Morgan (Bank)

Consumers and businesses remain very cautious though

Consumers are still reluctant to re-lever

“I think the deleveraging cycle of the consumer has worked its way, fairly substantially through but what we’re not seeing is re-leveraging by the consumer in any meaningful way.” —JP Morgan (Bank)

Businesses have been pretty careful with their inventories

“I think in United States, what we saw first quarter, one thing we saw was our sales into the channel was less than that sellout. So, we had a better sellout than we had sell in. That’s indicating that they were very careful with inventories.” —Minnesota Mining and Manufacturing (Conglomerate)

International:

The US slightly improved over the first quarter, but Europe has not accelerated as much as expected

” see some slight changes in the different areas of the world. I see a slight improvement in United States versus the first quarter. And I see — I do not see as much acceleration in West Europe that I thought would count.” —Minnesota Mining and Manufacturing (Conglomerate)

Global steel production is down 2% so far this year

“Global steel production contracting nearly 2% year-to-date has reduced met coal demand, at the same time, the forecast for steel consumption had been reduced to just 0.5% for 2015.” —Joy Global (NYSE:JOY) (Mining Equipment)

Financials:

It takes a long time to develop a housing project, and that pipeline stopped in the recession. This has contributed to a lack of housing inventory.

“this idea about lack in inventory is becoming a bigger issue in more places…The life cycle of building a home is not the cost or time you use, put the sticks up or you build. You have to get convince a farmer, if it’s a raw land, the sell the land and him to get it plotted and then you have to get it improved with sewer, and streets and so forth then you have to find build it once or build on it or and then you build it so. It’s a fairly long life cycle and a lot of that didn’t happen, lot of that stopped, as a result of lot of foreclosures on the market. So getting the inventory flow working again takes some time.” —Wells Fargo (Bank)

Mortgage markets have benefitted from clarification of rep & warranty policies by GSEs

“We’ve had some policy changes at the GSEs where we know now more about when risk transfers, so the credit boxes opened up a bit for that reason” —Wells Fargo (Bank)

Consumer:

Retailers will see tougher comps as the year progresses

“we’re fairly confident that we will have expansion for the year but as we continue to move throughout the year, the compares get a little tougher to last year” —Dollar General (Retail)

Retailers may be getting less promotional and more rational

“The macro environment out there in retail, it’s always very competitive but I think the best way to still characterize it is it’s been rational across all channels of trade, mass grocery and drug.” —Dollar General (Retail)

Technology:

Smartphone launches are looking more and more like movie launches

” these new phone launches are almost like movie launches. They have a very, very concentrated marketing period. They sell a lot of devices in a short period of time and they launch worldwide on the same day or roughly the same day.” —Qualcomm (NASDAQ:QCOM) (Semiconductors)

The industrial economy is preparing to enter the digital age

“instead of just the physical world, you selling machines, you are going to have to be good as an industrial company at physical and analytical. We are going to see that a product is going to be sold with much more software…Companies are going to have to put more sensors, more capability in their machines. Machines are going to become much more intelligent. We are going to see that companies have got to be really good at managing large volumes of data…we look at the future, this idea of the industrial internet is – industrial companies being able to do this beyond just the mechanical engineering of making great products, great machines for big industries.” —General Electric (NYSE:GE) (Conglomerate)

3D systems says that it’s not even the first inning for using 3D printers in manufacturing

“there are a couple of dozen aerospace parts that are slated for 3D printed to go on the aircraft out of 25,000 that are in each aircraft engine and GE has already said that they are going to be 3D printing thousands of parts. So within aerospace and by extension the other ones, it’s just like not even the first inning. It’s just the warm up phase of using these tools to do redesigns to print parts that are lighter and just as strong to go into aircraft engines. ” —3D Systems (3D printing)

Detroit is well aware that it may have some new competition from Silicon Valley

“we’re very attuned to is the fact that the marketplace is changing, consumer preference are changing and you’ve got new disruptors that we wouldn’t have thought of talking about for – just need to pickup any automotive press and those names associated with the future of autonomous vehicles we would have historically not associated with automotive at all; Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL), et cetera. So it’s clear that we need to be equipped to be very nimble, which is why we put the focus of our employees that it’s innovation at all levels.” —Ford (Automotive)

Materials, Industrials, Energy:

Just when you thought it couldn’t get any worse for the mining industry, commodity prices took another step down

“we certainly have seen our end markets take another step down. Compared to the first quarter, we’ve seen met coal prices drop 21%, iron ore fall 11%, thermal coal fall 8%, and natural gas drop 20%.” —Joy Global (Mining Equipment)

It’s tough to see a bottom anywhere

” it’s tough for me to say seeing the bottom. We see where it’s bottoming, as I shared in the last quarter, we thought the U.S. was bottoming, and boy, it took another step down” —Joy Global (Mining Equipment)

But maybe this is just the capitulation phase

No one is optimistic

“our customers are definitely into distressed state…I don’t see the optimism there.” —Joy Global (Mining Equipment)

Miners are now projecting reduced Capex through 2017

“The extended downturn in commodities has put pressure on our customers under increasing pressure. Reduced cash flows and increasing debt levels are forcing our customers to shift to austerity measures, delay service work, and withdraw our original equipment expansion plant. Overall, our mining customers are now projecting double digit declines in Capex through 2017.” —Joy Global (Mining Equipment)

Underinvestment in commodities will eventually lead to under-supply

“The market conditions over the last few years have been such that no significant new projects are being developed. So it’s going to create a gap in copper supply as we go forward. We think that’s going to be constructive for the market” —Freeport McMoran (Copper Miner)

It’s not so easy to increase the supply of some resources, like copper

“Its very, very difficult to increase copper production as we saw, we’ve had incentive pricing for several years, back 2010, ’11, ’12 you had prices above $3 averaging between almost $4 in some years, and there is a lot of capital available to our industry. Lot of big companies in our industry interested in copper and even though there was a lot of desire to expand copper production. It really has not been a meaningful increase in production because mines are aging and production declines at the same time. So, again we just reiterate our view that this is, this is one of the most positive commodities from a fundamental standpoint that you could be in” —Freeport McMoran (Copper Miner)

Miscellaneous Nuggets of Wisdom:

Cost cutting and growth are each driven differently by head and heart

“I think that cost cutting is intellectually easy but emotionally hard, growth is emotionally easy but intellectually very hard if you want to find profitable growth.” —AIG (Insurance)

John Stumpf talks about some of the things that he’s learned from his largest shareholder, Warren Buffett

“he is very long-term in his thinking and he knows us as well or better than we know ourselves. He reads everything that we produce, I called him one day…he said ‘you know I was reading your 10-Q this weekend…on Page 37 and I know that you are doing something…a variable investment.’ I said wow, don’t you watch football on Saturdays?

So here you have this guy who is incredibly detailed and understands the issues, but yet when you talk with him, he is talking about the morale of the team and what you are seeing in this industry, how do you think about this five and ten and 20 years forward. It’s just one of the great privileges I’ve had.” —Wells Fargo (Bank).

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Written By: Scott Krisiloff