by Scott Krisiloff, Avondale Asset Management
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:
Fixed Income markets are getting more volatile
“As we have all witnessed, fixed income markets have exhibited significant interest rate and spread volatility over the recent past given the debate over the timing of Fed lift-off amidst continued global central bank stimulus and its impact on U.S. markets.” –Annaly (Mortgage REIT)
Debt issuance has spiked ahead of potential interest rate increases
“First-quarter issuance in the US was quite strong across all sectors. Investment grade increased 24%…a continued thirst for yield has enabled corporate issuers across the rating spectrum to tap the capital market, extending maturities at beneficial pricing and terms. High yield increased 39%, public finance was up 61%” –McGraw Hill (Financial Data and Statistics)
Have policy makers created asset bubbles?
“policymakers have failed to foster the conditions for a credible sustained recovery. They have, however, been very successful in creating both debt and equity market bubbles, however reliant they may be on zero interest rates.” –Annaly (Mortgage REIT)
Markets are priced to perfection
“I think that after all these years of low interest rates and quantitative easing, what we have is markets both fixed income and equity markets that are priced for perfection. So, my guess is that for the time being businesses look like they’re priced too high for us.” –Loews (Diversified Holding Co)
There are a lot of companies priced at ridiculous multiples
“as you know there’s a lot of very highly priced things out there…there’s an awful lot of companies that are priced at ridiculous multiplies these days.” –TIME (Publisher)
Loews says it’s better to be patient than to overpay
“I’d rather be patient and get a good business at an attractive price rather than lose patience and buy a business at too high a price.” –Loews (Diversified Holding Co)
The world is cyclical, opportunities will eventually present themselves
“Now one of the things that I always remember is that the world is cyclical. And it’s easy to lose sight of that because we’re now in – firmly in year six of an upcycle for equity prices. But at some point in time something will happen, people will lose all the confidence that they have and my guess is that opportunities will present itself.” –Loews (Diversified Holding Co)
Greenlight has taken net exposure down to just 16%
“The investment portfolio’s net exposure was 16% at quarter end which is near an all-time low and reflects our concern about stretched valuations and challenges we see for corporate earnings in 2015. These challenges include the strong dollar, lower oil prices and difficult year-over-year comparisons in the next three quarters…These issues lead us to believe that earnings have peaked and may even shrink this year.” –Greenlight Capital Re (Hedge Fund/Reinsurance)
If the environment starts to sour, it will pay to make sure that liquidity is truly liquid
“we’re mindful of trying to make sure the composition of the portfolio is as liquid as it can be. And one of my sayings is make sure your liquidity is liquid.” –Annaly (Mortgage REIT)
Cash wont burn a hole in your pocket
“As we have said before, money doesn’t burn a hole in our pockets. While we acknowledge that cash can be a drag on Loews short term returns, we feel that having the flexibility to be opportunistic and not rely on financing markets has served our shareholders very well over the long term.” –Loews (Diversified Holding Co)
Chasing a little extra yield can end badly
“I’m sure that if we were really smart and clever we could find some alternative investment approach that would increase the yield on our short term portfolio from essentially nothing to something more than that. We’re not that clever or smart, so we won’t try to perform that sort of alchemy. We’ve seen enough of those experiments end badly to dissuade us from going down that path.” –Markel (Insurance)
Meanwhile in the real economy…
This month will be the first one that we get clear comps that weren’t affected by weather
“if you recall last year, there was a little bit of a cabin fever…So we had good volume in March and April relative to the rest of the year last year and I think we’re seeing softer volume this year. What I’m trying to say to you is I think weather is impacting that. I just don’t know to what degree and I think I can make a better call on that after we see May and June here because we’ll be back to apples-to-apples.” –Sysco (Food Distributor)
International:
Volatile currency markets are keeping companies on their toes
“While the U.S. dollar strengthened further in the quarter, it has weakened significantly in the last couple of weeks. And we are updating our outlook to reflect that volatility using a range that roughly aligns with our initial 2015 guidance rate on the high side and more current prevailing rates on the low side.” –Fossil(Apparel/Accessories)
Currency moves balance out in the long run
“if you look at currency movements, over the short-term they do impact multinationals but over long term things balance out.” –Flowserve (Industrial Equipment)
Even though emerging markets are out of favor, the fundamentals are still the same as they were in the BRIC years
“I like to remind people that despite the bad mood or some poor macro indicators, the fundamentals in Brazil remain the same. So demographics, the fact that LDA is growing at a healthy pace, it’ll be a plus. The weather, the beer culture, the regional differences, middle class, all those things are there.” –Anheuser Busch (Beer)
For instance, India has a lot of potential beer consumers
“we see India as an attractive, long-term market. It’s currently at market size of 23 million to 24 million hectoliters. It’s been growing double digits steadily. And yet, per capita consumption of beer is only 2 liters per person per year, which means, in the long-term, we expect this market to continue to grow.” –Molson Coors (Beer)
Financials:
Solar City is seeing capital markets more receptive to financing solar installations
“Every six months I only see our credit spread shrinking as we continue to perform as the paper continues to perform. So I am very happy where things are going from that perspective and then obviously on a cost spend of it. It is really is the cost of capital and the cost that’s really driving our success and where I think we will continue to outdistance and be cost efficient.” –Solar City (Solar Panel Installation)
Consumer:
Kate Spade says that the retail environment has stayed very promotional
“I think it’s fair to say that we are still seeing a promotional environment generally driven by the department stores. I think what we have continued to see is various department store groups, matching other sales from other retailers. There’s been an extension of key events. So this is certainly seeming to be an ongoing issue” –Kate Spade (Apparel/Accessories)
Fossil’s partners have been impacted by new entrants to the watch space (i.e. Apple)
“in our wholesale partners in the United States, we actually are seeing, as mentioned, their declining business there…there’s a lot of disruption. Obviously, there’s a new entrant in the market. We’re not sure if there’s some impact on the consumers’ side to see what that new entrant’s products look like, et cetera, but they have yet to be seen.” –Fossil (Apparel/Accessories)
Department stores believe that the convergence of fashion and technology could present a huge growth opportunity
“We think we’re in a situation where consumers are very, very interested in this convergence of fashion and technology…department stores are very interested in this because…the watch business is about $65 billion globally, relatively a small industry, whereas, the tech industry…The spending in there is huge.” –Fossil(Apparel/Accessories)
Anheuser Busch is dealing with brand fragmentation from its craft beer portfolio
“brand fragmentation is a reality. It has to be managed, though…you have to be smarter about how you split your market money and sales money in support of those brands. So we’re developing better models to check return on investment on both traditional and social media. So we are sharper on how to allocate resources behind brands” –Anheuser Busch (Beer)
Anheuser is spending more and more on social media
“Social media continues to grow within our mix of media spend between social and traditional. We are learning every day by connecting more with consumers and making our contents relevant. Of course, it’s a very fast paced type interaction with consumers, and we don’t intend to get everything right all the time.” –Anheuser Busch (Beer)
Disney is developing ways to take content directly to consumers
“we do have an ability as a company to take product, specifically filmed entertainment, television, movies, directly to consumers. And we’ve got some development underway to do just that.” –Disney (Magic Kingdom)
Distributors add real value though
“That said, the distributors, whether it’s cable or satellite or even some of the new platforms, create real value for us, too. They already are in the customer acquisition business. They’ve already spent significant amount of money in capital to create their platforms. And they manage the relationship with the consumer, whether it’s billing or technology or whatever fairly effectively.” –Disney (Magic Kingdom)
Technology opens many doors for high quality media
“I think we’re entering into a pretty interesting world, where technology is for the most part the friend of high quality media. Because it’s going to give us many more opportunities to reach customers, either directly or through third-parties. So we’re viewing this as kind of a new world order in many ways, because of I think the impact of technology on media, but one that’s going to be very beneficial to this company.” –Disney (Magic Kingdom)
Technology:
Sprint is sounding a lot like T-Mobile
“In Sprint’s customer-centric culture, we’re passionate about listening and understanding customers’ pain points and making changes to enhance their experience. One of the main complaints from customers who travel to top destinations in Latin America and Europe and Japan, is how shocked they are when they return home.” –Sprint(Telecom)
One can gather a lot of valuable business data from Linkedin
“actually, anyone can like figure this out by just going on LinkedIn. LinkedIn can produce statistics on what the relative flow of people is from one company to another. And I think it’s like – something like – if you look at like the trailing 12 months, Tesla has recruited five times as many people from Apple as Apple’s recruited from Tesla.” –Tesla (Electric Vehicles)
Elon Musk says that demand for Tesla’s power pack has been, like, crazy
“The response has been overwhelming, okay, like crazy…there’s, like, no way that we could possibly satisfy this demand this year and we’re basically like sold out through the middle of next year in the first week…it’s like crazy off the hook.” –Tesla (Electric Vehicles)
It will still be more expensive to use power packs than to draw electricity from the grid, but people will buy them anyways
“If somebody wants to do a daily cycling, basically go off grid. It’s going to be more expensive than being on grid. This doesn’t mean that people won’t buy it because there are people who want to go off grid on principle, or they just want to be independent.’ –Tesla (Electric Vehicles)
Battery chemistry still has not meaningfully improved
“we’d love it if somebody could come up with a better internal chemistry for the cell. But it’s worth noting that nobody has sent us anything…we’d love it if somebody would do that, they just haven’t…it’s just a real hard problem.” –Tesla (Electric Vehicles)
Healthcare:
Investors focused on public markets don’t get to see a huge part of the healthcare industry
“you got to remember that the industry is five times as big as the companies that everybody pays so much attention to.” –Tenet (Hospital Operator)
Tenet says that exchanges have been a good source of business for them
“were an early adopter of the exchanges…it’s growing very rapidly. But it’s a great story for us with a new market that’s substantial, it’s profitable, and we’re providing good service to people who are utilizing our hospitals within those.” –Tenet (Hospital Operator)
Healthcare providers don’t necessarily want value based reimbursement because it introduces more risk into the business model
“as a company, we’re not looking to move and to take risk. We don’t see that right now in the intermediate term as something that we need to do.” –HCA (Hospital Operator)
Materials, Industrials, Energy:
Oil companies are doing a great job of finding ways to improve productivity
“the slowdown in activity is giving us more time to focus on efficiency improvements. While much has been made of service cost reductions, we expect, we will gain the most long-term benefits from efficiency gains.” –EOG (Oil Exploration and Production)
They have even surprised themselves at how much efficiency they have been able to generate
“We’re testing some additional processes that make our drilling faster and more efficient…I’ve always thought we’re pushing toward the later innings [of productivity gains], but these guys have continued to prove me wrong. So I’m excited about how things are going.” –Anadarko (Oil Exploration and Production)
Higher prices could bring production back on the market
“I think we still have some concerns that, as we achieve higher prices, we could see activity increase and prices, unfortunately, could suffer as a result of higher production than people are anticipating” –Anadarko (Oil Exploration and Production)
Some companies will try to call the bottom
“There probably will be some that decide to take a bet and thinks that prices are going to run up, and they’re going to get ahead of it with their operations. We won’t be one of those.” –Anadarko (Oil Exploration and Production)
Anadarko says to be cautious until service costs sync up with oil prices
“We’re fairly cautious because we don’t quite yet see service cost synced up to the environment that we’re in from a hydrocarbon price perspective. Until we start to see more of that synchronization, we’re going to be pretty cautious.” –Anadarko (Oil Exploration and Production)
EOG is ready to ramp production back up in 4Q though
“as we talked about, the production shape is going to be U-shaped this year and the second and third quarters will be the low point, but the fourth quarter, with the current plan, is to ramp up production growth and the heading into 2016 on a very strong note.” –EOG (Oil Exploration and Production)
Companies should be able to ramp quickly because servicers have kept capacity in place in anticipation of a rebound
“If we were ramping up here in the next month or two, I think you can ramp up pretty rapidly. And that’s why many of those operators are trying to keep as many services in place even if reduced work levels just to maintain that support that service companies.” –EOG (Oil Exploration and Production)
There is a lot of capital eager to rush into the energy sector
“We have an awful lot of capital sitting on the sidelines waiting to go into our industry. Whether it’s private equity, the public capital markets, or other forms of capital that – sound like the mushroom is starting to get over $100 billion waiting to go into our industry, broadly defined.” –Anadarko (Oil Exploration and Production)
Conditions haven’t been bad enough for long enough though
“I think right now the conditions are bad enough for rig valuations to go down. The problem is they haven’t been bad enough for long enough.” –Loews (Diversified Holding Company)
Sellers still want more than buyers are willing to pay
“There’s still a pretty good spread between the bid and ask on the acquisition front. I think we’ll be very selective. ‘ –EOG (Oil Exploration and Production)
Miscellaneous Nuggets of Wisdom:
Understand how you add value
“with respect to value, and we talk a lot in our organization about healthcare and the value that we need to bring to our markets. And we see right now, our value as being turned by including, number one, patient safety, patient quality, patient experience, access points, so that it makes our system accessible, easy to get into, easy to access from a patient standpoint, from a physician standpoint” –HCA (Hospital Operator)
Success breeds competition
“we’ve been so, so successful that we’d actually brought a lot more competition and everybody jump in kind on the national organic food band wagon and that’s really, frankly due to our success.” –Whole Foods (Grocery Chain)
A company’s most valuable assets are its people
“at the end of the day, I certainly believe that – and I think Randall does as well – that the most valuable assets AT&T is buying is truly our people.” –DirecTV (Satellite Television)
Full transcripts can be found at www.seekingalpha.com
