What CEOs Said Last Week: Earnings Avalanche
by Scott Krisiloff, Avondale Asset Management
Each week we read dozens of transcripts from earnings calls and presentations as part of ourĀ 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.
This Weekās Post: Earnings Avalanche
Earnings season is in high gear this week and next. We read more than 50 earnings calls this week, but there are always more to get to. The calls that we read generally had a similar view of the economy: things are sluggish, people are still cautious, but thereās no reason to believe that a downturn is imminent.
Other takeaways: The Chinese economy is doing better than many people think according to several CEOs. The oil industry will still be under significant pressure even if oil prices rise. And Jeff Gundlach had some ominous words about the macro environment.
Thereās a lot that got left on the cutting room floor this week. Itās worth clicking through on the Gundlach interview and Silicon Valley Bank.
The Macro Outlook:
The market threw a tantrum in Q1
āThe market tantrum in the first part of the year resulted in lots of dislocation, some of which has normalized, some of which has notā¦Segments of the debt market still remain under considerable pressure. Investment sentiment is fragile and characterized by significant caution around choppy economic data, negative rates, political rhetoric and other factors.ā āBlackstone CEO Steve Schwarzman (Private Equity)
But the industrial economy appears to be stabilizing
Parker Hannifin saw a moderation of declines
āorders during the quarter sequentially got better as we saw January going through Marchā¦we saw a number of markets move from accelerating declined to decelerating decline.ā āParker Hannifin CEO Tom Williams (Industrial Components)
AIT also saw improvements throughout the quarter
āwe had improvements really each month throughout the quarter, with a couple of days remaining April is consistent with Marchā¦weāre seeing a stabilization perhaps as we goā¦perhaps on through calendar 2016.ā āApplied Industrial Technologies CEO Neil Schrimsher (Industrial Distributor)
Chicago Bridge and Iron is seeing better bookings
āNow year-to-date, weāve already seen improvement in new work bookings early in the second quarterā āChicago Bridge and Iron CEO Philip Asherman (Engineering and Construction)
Most people are expecting results to improve as the year progresses
āI was just with a lot of our international teams recently at our brand week, and I would say everybody is expecting their results to improve as the year progressesā āKimberly Clark CEO Tom Falk (Consumer Packaged Goods)
Capital markets still arenāt fully healed though
āI think the stock market has rebounded 95%, 99% of the way back to where it was. And the credit markets are a little slower the spreads are still wide, there is still caution in the market, deals are still being more diligent on covenants and structure. So itās a little different in the middle market, itās a little slower on the comeback.ā āMoelis and Co CEO Ken Moelis (Investment Bank)
Capital continues to be tighter for venture backed companies
āThe tech markets seem to have calmed somewhat following a volatile first quarter, sparked by a long buildup of fears over a possible unicorn bubble. While those fears may have been overstated, valuations have pulled back and capital is tightening, especially for early-stage companies.ā āSilicon Valley Bank CEO Greg Becker (Bank)
Auto sales are also showing signs of plateauing and inventories are rising (note: in luxury)
āWe continue to see declines in our premium luxury businesā¦our premium luxury profits declined 13% year-over-yearā¦Industry inventories were elevated with retail day supply outstanding at approximately 80 days. As we indicated earlier this year, the new vehicle market is plateauingā āAutonation COO Bill Berman (Auto Dealership)
āThe U.S. new vehicle inventories stood at 31,400 units which equates to an 85 day supply compared to a 69 day supply for the first quarter of 2015. Luxury brand inventories drove much of the year-over-year increase.ā āGroup 1 Automotive CEO Earl Hesterberg (Auto Dealership)
There are a number of retailers who may or may not go bankrupt
āWe are consumer oriented company, and I mean we are the basically the worldwide economy is flattening. There is a lot of stuff out there. And we are just being a lit bit of cautious. And obviously I mean, we all know there is a few tenants out there that may or may not go bankrupt may or may not close the bunch of stores.ā āSimon Property Group CEO David Simon (Mall REIT)
There is also mounting evidence that negative interest rates do the opposite of what central bankers expected them to do
āSo there is mounting evidence that negative interest rates do the opposite of what the central bankers were hoping for. Negative interest rates are designed to fight deflation. But they are the very definition of deflation: Your money is disappearing. As an investor, you are going to have less money in the future than you have today with negative interest rates. Thatās deflation! So negative interest rates are deflationary and they are tremendously negative for monetary velocity.ā āDoubleline CEO Jeff Gundlach (Asset Management)
If youāre looking for sentiment to guide you, we havenāt seen extremes in either direction
Things havenāt gotten white hot yet
āin prior cycles, late stage has been indicated by this white hot hyper demand where permanent placement grows at very high double-digit rates. That hasnāt happenedā¦we still donāt see that type of hyper demand that we would typically see late cycle, but instead we continue to slug it out in this relatively sluggish macro environment.ā āRobert Half CEO Max Messmer (Temp Staffing)
Nor did anyone really panic in February
āInterestingly, client cash balances remained relatively consistent, they grew pretty much in proportion to organic overall client growth that indicating, I think, the clients really didnāt panic even during that first half of the last quarter.ā āSchwab CEO Walter Bettinger (Retail Brokerage)
Tread carefully
āItās all about capital preservation. If you can get a few percent return in a deflationary environment youāre doing fineā¦The US stock market seems egregiously overvalued versus other stock marketsā¦also fundamentally, itās very hard to believe in US stocks. Earnings and profit margins are droppingā¦ the high yield market has enjoyed the easy rally. I think itās basically overā¦[high yield bond] are facing enormous fundamental problemsā¦The leverageā¦is enormous and youāre about to have a substantial increase in defaults. I wouldnāt be surprised if the cumulative default rate in the next five years were going to be the highest in the history of the high yield bond market.ā āDoubleline CEO Jeff Gundlach (Asset Management)
International:
Tim Cook said that China is not as weak asĀ people think
āI think China is not weak as has been talked about. I see China as may not have the wind at our backs that we once did, but itās a lot more stable than what I think is the common view of it. And so we remain really optimistic on China.ā āApple CEO Tim Cook (Consumer Electronics)
Jeff Immelt also saw improvements in China
āI was in China last week and saw improvements in our business. Most of the portfolios are strong and weāre delivering. Thereās plenty of business out there to achieve our goals.ā āGE CEO Jeff Immelt (Conglomerate)
Caterpillar is seeing an uptick in China for the first time in three years
āThis is the first post-Chinese New Year in probably three that we have seen a continued industry uplift for the industries that we serve around construction. Itās not a hockey stick. Itās not a boom. Itās not a 2010. But it is the first time weāve seen that happen, and we have lifted our schedules as a result of that this year.ā āCaterpillar CEO Doug Oberhelman (Construction Equipment)
Caterpillarās CEO has his doubts about whether the uptick can be trusted though
āI would share the caution in Chinaā¦Our folks over there were pretty emphatic that thatās going to hold and that this is beyond pre-buy. But I am very cautious about how far that goesā¦Weāre going to have to watch this month by month and see where it goesā¦Iām not going to declare a bottom in China, I donāt know.ā āCaterpillar CEO Doug Oberhelman (Construction Equipment)
Europeās strength surprised Honeywellās CEO
āIf there was any region that surprised me in this past quarter, it was Europe did a lot better than I expected. I donāt know if this is just a one-time bounce or something thatās going to stay consistent, but I was quite encouraged by seeing that. It was a nice surprise.ā āHoneywell CEO David Cote (Diversified Industrial)
Brazil is in the worst recession in its history
āIn Latin America, Brazil is still in the worst recession in the countryās history, and of course, economic conditions in Venezuela are deteriorating further.ā āMastercard CEO Ajay Banga (Payments)
Financials:
Companies are relying on M&A to generate āgrowthā in a low growth environment
āgenerally speaking the catalyst behind this cycle is pretty powerful, which is this deflationary trend. And M&A becomes a important tool for boards and companies to have in their toolbox to address difficulties or challenges around organic growth and challenges around driving earnings through additional efficiencies in the businessā āLazard CEO Ken Jacobs (Investment Bank)
āI think corporates are back and looking and how they can improve their business. Itās a very low growth environment out there, they still have to look at M&A as a way to either take out cost or increase growth.ā āMoelis and Co CEO Ken Moelis (Investment Bank)
Jones Lang LaSalle continues to be positive on commercial real estate markets
āSo thereās nothing really out there, which at this point says that even though we are in the fourth quarter here, there is anything imminent that suggests that this cycle is about to turn.ā āJones Lang LaSalle CEO Colin Dyer (CRE Broker)
Bank loan growth has been very strong
āAnother item that appears to be an emerging trend in the last six months is stronger loan growth. In the first quarter, loans increased at an annualized rate of 7.6%ā¦It was one of the best first quarter growth rates Zions has posted in the last decade.ā āZions CEO Harris Simmons (Bank)
But loan growth is risky at this stage of the cycle
āthe massive amount of growth that we see in the credit market place is not lost on usā¦we know that in the end the growthā¦can affect credit with the selection quality of new origination and can impact existing customers who take on more debt from other players.ā āCapital One CEO Richard Fairbank (Bank)
Online ārobo-advisingā ultimately isnāt that differentiated. Everyone will have the offering
āWith respect to the digital or online adviceā¦I just think that everybody is going to haveā¦these types of products these types of solutionsā¦I would be surprised if you see major market share move as a result of it because itās just not that differentiated in many cases from one firm to the otherā āSchwab CEO Walter Bettinger (Retail Brokerage)
The hedge fund industry may be on the verge of collapse
āThe result of all of this was one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fundā¦There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies.ā āThird Point CEO Dan Loeb (Hedge Fund)
Consumer:
US diaper buyers have been trading up from private label
āWe saw private label shares flat to down in nearly every category that weāre in, which is again another sign of health of the consumer for us, and are probably maybe more bullish on the outlook in North America at this point in time than maybe we would have been even at the beginning of the year.ā āKimberly Clark CEO Tom Falk (Consumer Packaged Goods)
Retailers have invested a lot of money in e-commerce and the returns arenāt showing up
āThe Internet is not the panacea. A lot of CapEx have been spent there. Itās not showing the returns for retailers, so I think they are going to ā their biggest and best opportunity continues to be bricks and mortar and you know weāll keep plugging along.ā āSimon Property Group CEO David Simon (Mall REIT)
Chipotle said it started to see sales recover in the first quarter
āWe begin to see sales recover in the second half of the first quarter as our transaction trends reversed course from the lows we saw in January. Since the beginning of February, we have seen an 18-point improvement in comp transactions compared to the full month of January.ā āChipotle CEO Steve Ells (Burritos)
Advertisers are coming to the conclusion that TV is still an important part of a successful advertising campaign
āI think the emotion of the market has swung pretty dramatically over the last year. I think people have come to the realization that broad television reach is really important in a campaign that digital has a place but television has a big place.ā āComcast CEO Brian Roberts (Media)
The LA Times quoted some hooligan about Comcastās Dreamworks acquisition
āComcast is trying to [emulate Disneyās strategy], but they are not getting [the same A+] content,ā Krisiloff said. āStudios have always had animation studios, and for whatever reason nobody has ever really been able to copy Disneyās success.ā āAvondale Asset Management CEO Scott Krisiloff (Author of the piece youāre reading)
Technology:
Tim Cook said that macroeconomic weakness was primarily responsible for slowing smartphone growth
ā In terms of do I think the smartphone market is mature, I think that the market, as you know, is currently not growing. However, my view of that is thatās an overhang of the macroeconomic environment in many different places in the world. And weāre very optimistic that this too shall pass and that the market and particularly us will grow again.ā āApple CEO Tim Cook (Consumer Electronics)
Mark Zuckerbergās interests appear to be straying from Facebook
āWhile helping to connect the world will always be the most important thing that I do, there are more global challenges that I also feel a responsibility to help solve to create a better world for my daughter and all future generations, things like: helping to cure all disease by the end of the century; upgrading our education system so itās personalized for each student; and protecting our environment from climate change.ā āFacebook CEO Mark Zuckerberg (Social Media)
Acquisitions have been critical to creating value in the internet sector
āacquisitions have been critical in creating value for the Internet sector, consumer Internet sector over the last two decades. Many of our competitive peers have bought assets at very early stages that have resulted in billions of dollars of valueā āTwitter CEO Jack Dorsey (Social Media)
T-Mobileās CTO vowed to overtake Verizonās network within the next two to three years
āif Iām Verizon, oneā¦Iām looking over my shoulder because T-Mobile may match my breadth if not exceed it with the largest network in the U.S. before too longā¦the next two to three years, you will see us push and be the fastest growing, the fastest network and the most advanced network with what weāre doing on LTEā āT-Mobile CTO Neville Ray (Telecom)
Some examples of the way that companies are using the cloud:
āMicrosoft announced Azure contracts with BMW and Toyota, to assist in making their cars smarter and more connected. This is in addition to contracts Microsoft has with Volvo and Nissan. BMW is using Azure to power its open mobility cloud for their new BMW connected app. Toyota will use Azure to run Toyota Connected to support in-car services, telematics, Internet of Things, home connectivity and smart city integration.ā āDupont Fabros CEO Christopher Eldredge (Data Centers)
Healthcare:
Express Scripts is using big data to better understand its patient population
āAnd so we use great amounts of that data to not only in our own book run fraud, waste and abuse, but increasingly for our health plan clients to help power their programs, power their provider networks, power their payment mechanisms by virtue of being able to have a very complete look at prescribing patterns, at patient outcomes and so forth.ā āExpress Scripts President Tim Wentworth (Prescription Benefits Manager)
Industrials:
Aircraft demand continues to be supported by growing passenger miles
āIāve said many times the biggest Aerospace driver we have is flight hours. And itās not tied to OEM schedules or airline profitability or any of that generally. The long-term trend is going to be driven by flight hours. If theyāre flying, everything ends up working out.ā āHoneywell CEO David Cote (Diversified Industrial)
āpassenger traffic is off to its strongest start in eight years, with traffic growing 8% in early 2016. Over the past three years, we have seen passenger traffic growth consistently outpace global GDP and airline capacity growthā āBoeing CEO Dennis Muilenburg (Aerospace)
Industrial companies are putting sensors in everything
āThis whole focus on total system innovation going forward, combining hardware with sensors, instrumentation, and software controls, this is the way of the future for the industry.ā āSchlumberger CEO Paal Kibsgaard (Oil Service)
āToday, weāve got 400,000 connected assets and growing. By this summer, every one of our machines will come off the line being able to be connected and provide some kind of feedback in operational productivity to the owner, to the dealer and to us.ā āCaterpillar CEO Doug Oberhelman (Construction Equipment)
Materials, Energy:
The oil industry is facing a āfull scale cash crisisā
āActivity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levelsā¦our industry is now in the deepest financial crisis on recordā¦This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turnsā āSchlumberger CEO Paal Kibsgaard (Oil Service)
Even if prices improve, the industry will still be under considerable stress
āthe longer this goes, which itās going to go, you know, even if prices improveā¦oilfield service will be under considerable stress for the remainder of this year and a fair amount of next year.ā āZions COO Scott Mclean (Regional Bank)
No one would be excited about oil prices in the 40s if they hadnāt dipped into the 30s
āif we didnāt take a short trip down into low 30s you would think this was a very distress level of oilā¦So yes there has been a recovery, but itās still at a price thatās going to cause many companies to have to focus on restructuring their balance sheetā āMoelis and Co CEO Ken Moelis (Investment Bank)
At least one positive is that companies are finally capitulating to the oil price, not expecting it to go higher
āWeāve seen $40 before. We saw it coming down. And so now weāre seeing it going up. But we could be back at $30 again. So we just prefer to err on a more conservative sideā āZions COO Scott Mclean (Regional Bank)
āThe story around oil and gas, I guess major OEMs really continue to indicate no significant improvement until the end of calendar 2016 early 2017ā¦It looks like everybody is trying to restructure and look to be profitable around $40 per barrel.ā āParker Hannifin COO Lee Banks (Industrial Components)
Oil companies still have a long way to go though
āin Houstonā¦I attend a lot of meetings and Iām on various Boards with these oil company executives and they still have quite a way to go in restructuring their balance sheet and thatās what happening now.ā āGroup 1 Automotive CEO Earl Hesterberg (Auto Dealership)
A lot of corn is expected to be planted this year, which could keep corn prices low along with farm incomes
āif the weather is perfect and we get 94 million acresā¦weāll continue to see commodity prices at that low end ofā¦that 320 to 420 kind of operating range. And that will continue to put stress on that farm incomeā āDupont EVP James Collins (Chemicals)
Miscellaneous Nuggets of Wisdom:
Recessions donāt drive financial markets, itās the other way around
āWe will be on watch for [a recession] in the coming months. But it doesnāt really matter. Recessions donāt drive financial markets. Itās the other way around.ā āDoubleline CEO Jeff Gundlach (Asset Management)
Full transcripts can be found at www.seekingalpha.com
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