What CEOs Said Last Week: A Weak Economy
by Scott Krisiloff, Avondale Asset Management
Each week we read dozens of transcripts from earnings calls and presentations as part of our 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 weekâs post: A Weak Economy
The US economy continues to be sluggish and there are signs that industry isnât seeing the bounce that it had hoped for. One week does not necessarily make a pattern, but until we get inflation, it will be tough for businesses to show the type of top-line growth that investors are used to.
Also in this weekâs post: Oil companies are now optimistic, Elon Musk sleeps at the office, and our Director of Research, Jeremy Saltzberg, was in Omaha last weekend, so there are a number of words of wisdom from Buffett.
The Macro Outlook:
The US may not be rebounding as much as hoped
âThe one surprise we had is in the last couple months weâve seen the U.S. spending rate come back down again, which bothers usâŠI feel a little bit more worried about sales because of the U.S. marketplace in particularâŠthis slow to start turning that nose up really bothers me.â âEmerson Electric CEO David Farr (Industrial Components)
GDP growth has obviously weakened
âU.S. GDP has obviously weakenedâŠconsumer spending continued to be the primary economic driver in the U.S. On the other hand, industrial production has been disappointingâ âUPS CEO David Abney (Logistics)
Restaurant data has shown recent weakness
âAccording to the National Restaurant Association, restaurant sales have been uneven during the first three months of 2016 after steadily rising throughout 2015. Both NPD and KNAPP-TRACK have also shown recent traffic and sales declinesâŠwe may be seeing a little bit of a softening out there right nowâ âSysco CEO Bill Delaney (Restaurant Distributor)
Flextronics continues to see a very slow, very weak, but stable environment
âweâve been mentioning that the macroâs been softâŠfor at least three quarters. We continue to see the same kind of softnessâŠwe donât see the market getting stronger, but we see it somewhat stable. We donât see a significant downside. We just see it very slow and very weak.â âFlextronics CEO Mike McNamara (Electronics Manufacturing)
Avis saw an âunusually weakâ spring break, but does think that things are turning up
âOur soft Presidentâs weekâŠwas the start of what turned out to be an unusually weak spring break. Coupled with the soft commercial demand, weak inbound volume and a mild winterâŠour view is that this unusually soft pricing eventâŠis an anomaly, not a trendâŠMarch was better than February, April was better than March, and May bookings are indicating a continuation of the favorable pricing trendâ âAvis CEO Larry De Shon (Rental Cars)
Expeditorsâ customers are more cautious about their spending
âOur peopleâŠadapted toâŠslowing global trade and excess carrier capacity. Many of our customers are being cautious about how to spend their logistics dollar, taking advantage of abundant capacity in search of lower rates where possibleâ âExpeditors International CEO Jeff Musser (Freight Forwarding)
Trophy real estate assets are showing some potential price vulnerability
âparticularly with regard to trophy office, weâre not seeing as many bidders in some casesâŠIf we were going to circle some assets and say these are the ones that might be vulnerable, it clearly would be the trophy office assets.â âCBRE Group CEO Bob Sulentic (Commercial Real Estate Broker)
Markets have rallied back, but has it just been a technical bounce?
âWe are happy to see the fear in the marketâŠsubsiding a bitâŠWith that being said we believe this recovery is largely technical and without a meaningful change in fundamentals, our attitude and our approach is generally unchanged.â âAres Capital CEO Kipp deVeer (Business Development Company)
Oaktree thinks that we are about to see more distressed debt
âthe credit marketsâ panic attackâŠreminds us that market psychology is fragile, liquidity can suddenly become scarce, and capital markets can quickly shut. Moreover, we believe that signals that an upswing in defaults has finally started, and that we are a big step closer to the next expanded distressed debt opportunity.â âOaktree CIO Bruce Karsh (Asset Management)
A large percentage of US profit growth has historically come from inflation
âThere are a lot of headwind coming at us as you know that is putting downward pressure on sales, because historically in the U.S. market the growth did not come from volume. If you look back for the last number of years, it came from inflation and that inflation was based on commodities inflation. Now, we are living in an environment where there is no inflation in commodities, so it is harder to be able to say, to have a bullish approach to grow.â âKraft Heinz CEO Bernardo Hees (Packaged Food)
And no one really knows when inflation will come back
âI wish I could tell you when we were going to cross over between deflation and inflationâŠI think we said that we expect it to last at least another quarter, it could be longer than that based on what weâre seeing. And so Iâm not really sure when to make that call.â âSysco CEO Will Delaney (Restaurant Distributor)
Beware market illiquidity
âOne of the hallmarks of the capital markets today is that there just isnât a lot of liquidity. And when the sellers emerge, prices drop, in many cases, well below fundamental valueâŠIn some cases, we were stymied, because there wasnât as much supply as we would have liked of the companies that we found attractiveâŠwhen the recovery came, again, some of these securities traded up 20 points or 30 points, again because of the lack of liquidityâ âOaktree CIO Bruce Karsh (Asset Management)
It would not be abnormal to go into a recession after seven years of expansion
âif we go into a recession after six-seven years of economic growth, it wonât be unusualâ âFairfax Financial CEO Prem Watsa (Insurance)â
International:
Europe has improved
âI just came back from Europe. Europe, our Western European business has continued to improve. I finally see some good momentum there. No, the economy is not going to be robust there, but they clearly are making investments.â âEmerson Electric CEO David Farr (Industrial Components)
Sentiment in China is not all doom and gloom
âI have to say, having just returned from Latin America and India and China, the consumer that you see on the ground, the behavior that you see on the ground, is really quite vibrant in India; and in China, is not doom and gloom, some concerns, but not the headlines that we read every day.â âColgate Palmolive CEO Ian Cook (Packaged Goods)
Financials:
Tom Gayner is struggling to comprehend negative interest rates
âI remember that it was hard learning about negative numbers in fifth grade, Iâm finding it even harder to understand them as a grown up as they pertain to interest rates. Fortunately, I figured out negative numbers and made it to the sixth grade eventually, and we will all do so as well with negative interest rates.â âMarkel CEO Tom Gayner (Insurance)
Warren Buffett has a good way of explaining them
âWe had a rule for 2600 years from AesopâŠthat a bird in the hand is worth two in the bush. But a bird in the hand now is worth about nine-tenths of a bird in the bush in EuropeâŠThese are very unusual times.â âBerkshire Hathaway CEO Warren Buffett (Textiles)
Extremely low rates have a real effect on business valuations
âIf you ask me whether I paid a little more for Precision Castparts because interest rates were zero, than if they had been six percent. The answer is yes. I try not to pay too much more but it has an effect. If interest rates continue at this rate for a long time, if people ever really start thinking this is normal that will have an enormous effect on asset values. It already has had some effect.â âBerkshire Hathaway CEO Warren Buffett (Conglomerate)
The hedge fund space is overcrowded
âweâve been reducing our hedge fund investments over the past year or year-and-a-halfâŠthe space has become very crowded and returns have been competed away. When 20-years-ago, there were one or two or 10 traders, market neutral hedge funds could earn very, very attractive returns. Now that there are hundreds of them, the rate of return that those hedge funds can earn has come down rather dramatically.â âLoews CEO James Tisch (Investment Company)
Reinsurance markets may be starting to improve
âthere are some signs that reinsurance terms, especially ceding commissions maybe bottoming out.â âArch Capital CEO Dinos Iordanou (Insurance)
Antitrust enforcement has gotten more intense recently
âobtaining the U.S. anti-trust approval of large complex business combinations, regardless of the industry, has become increasingly time intensive and difficultâ âHalliburton CEO Dave Lesar (Oil Service)
Consumer:
Used car prices are falling because more people are leasing cars
âyou can see that we have seen a decline in both 24 months and 36 months auction values versus a year agoâŠWe have, across the industry, more units coming back from the increasing rates of lease over the last number of years.â âFord CFO Robert Shanks (Automobiles)
Electric cars have momentum in China
âAsâŠwas reinforced in Beijing last week, customer interest in electrification is gaining momentum. Our customers increasingly see the need for electrification of the power train to close the regulatory gaps on CO2 emissions and fuel economy.â âDelphi CEO Kevin Clark (Auto Supplier)
Television is enjoying a resurgence in interest from brand advertisers
âweâre seeing some of our inventory sell for upwards of 30% to 50% higher than last yearâs upfront levelsâŠwe think all signs point to, frankly, the best upfront we will have seen in yearsâŠtelevision is experiencing resurgence in the minds of brand advertisersâ âTime Warner CEO of TBS John Martin (Media)
Whole foods is trying to stay ahead of its competition with prepared foods
âour commitment around culinary is really what separates us compared to the competitionâŠwe really feel like [it is] a big, big differentiator for us as a company. Our stores are very different than our competitors, and weâre not standing still.â âWhole Foods CEO Walter Robb (Grocery)
Technology:
Tinderâs user growth is strong overall but has slowed in North America
âIn terms of Tinder MAU, it continues to grow well. Again, as Iâve said, itâs slower growth in North America than in the rest of the world, which is natural just given the rollout.â âMatch Group CEO Greg Blatt (Online Dating)
Apparently there is a Chinese âAlphabetâ after all. Baidu appears to be a mirror image of Google.
âWe have invested in AI for many, many years. We believe we are leading in this sector not only in China, but around the world. This enables us to do disruptive things like autonomous driving. And itâs kind of early for us to talk about this model because right now our focus is to solve those technical problems; the first to make that autonomous driving fully autonomousâ âBaidu CEO Robin Li (Chinese Google)
Healthcare:
CVSâ front of store is primarily a tool to drive Pharmacy sales
âultimately we see the role of the front store as essentially a door into the pharmacy. This is where consumers get connected to CVS, and ultimately over time, they start using us for prescriptionâ âCVS Pharmacy EVP Helena Foulkes (Pharmacy)
Emergency rooms and Urgent Care are filling a gap caused by a shortage of primary care physicians
âyou see urgent care, freestanding emergency rooms, and even hospital-based emergency rooms, providing the solution that patients are looking for when they canât get into a physician clinic because of physician shortages, or because of payer dynamics.â âHCA COO Samuel Hazen (Hospital)
Industrials:
Manufacturers may be nearing the end of their inventory liquidation
âWe completed the inventory correction back in December quarterâ âMicrochip CEO Steve Sanghi (Semiconductors)
A shift to a 48 volt electrical system could create opportunities for auto suppliers
âthings like 48-volt, where you can get a significant benefit at a fraction of the cost, itâs a great value proposition. Itâs a terrific value proposition.â âDelphi CEO Kevin Clark (Auto Supplier)
Materials, Energy:
The oil industry is feeling better than it did 90 days ago
âI think it almost goes without saying that things feel better today than they did 90 days agoâŠThe very fragile energy capital marketsâŠappear to be stabilizing, the outlook for commodity prices are improving and I think for industry our operating environment is definitely strengthening.â âAnadarko CEO R. A. Walker (Oil E&P)
Companies are starting to talk about expanding their capital budgets again
âif the current oil price environment prevails, itâs more likely that we will maintain or even increase drilling and completion activity from current levels, which would result in increased capital spendingâŠAt this point, the environmentâs getting much better. I mean, we like the direction on the cost, we like the direction on the oil price, so I think weâre at a point where things are starting to look pretty darn attractive.â âApache CFO Stephen Riney (Oil E&P)
People are expecting oil companies to move cautiously
âI do think commodity prices have to go up and they have to stay there a while before you really see activity and purchasing follow, as customers repair balance sheets and basically get comfortable that commodity prices are going to stay highâ âNational Oilwell Varco CEO Clay Williams (Oil Equipment)
But producers have maintained their ability to increase production quickly
âApache has maintained the organizational capacity and personnel to operate a significantly higher number of rigs and we are well prepared to ramp-up activity when appropriate.â âApache CEO John Christmann (Oil E&P)
And they have cut costs significantly
âin key areas of North America where Apache was actively drilling, our average drilled and completed well costs were down approximately 45% in the first quarter compared to average 2014 levels. Notably in the Delaware Basin, our most recent well costs are now down approximately 60%.â âApache CEO John Christmann (Oil E&P)
High levels of storage could be an overhang on the market for some time too
âWhile production in the U.S. peaked several months ago, oil storage is proving quite stubborn and is rivaling levels from over 80 years ago. Until production declines translate into meaningful oil inventory storage reductions in the U.S., I believe we will continue to operate in a challenging upstream environment.â âDistribution Now CEO Robert Workman (Oil Service)
Recovery may not come until 2017
âWe continue to believe that the upturn is really a 2017, not a 2016 story, i.e. the oil and gas market upturn.â âEcolab CEO Douglas Baker (Services)
In the meantime, oil companies are confident that theyâll have access to capital if they need it
âI think what weâve seen is theyâll be able to get the money to do that either through commodity prices, or through going back into the equity markets or the debt markets. So, yeah, they are feeling better and I think theyâre trying to survive to 2017 and then get on with things.â âHalliburton CEO Dave Lesar (Oil Service)
Cliffâs Natural Resourcesâ CEO is one of a kindâŠ
âAnalyst: Yes, hi, Lourenco. My question was answered already.
Lourenco Goncalves: But mine was not, whatâs the current price expectation of the desk of JPMorgan for iron ore, Mike?
Analyst: Well, let me just say theyâre below your expectations. I realize that our commodity teamâŠ
Lourenco Goncalves: When are you guys going to fire these guys at the desk; they are making your company look ugly.â âCliffâs Natural Resources CEO Lourenco Goncalves (Iron Ore)
Miscellaneous Nuggets of Wisdom:
Crystal balls tend to break
âOne of my favorite sayings is he who lives by the crystal ball must learn to eat ground glass.â âLoews CEO James Tisch (Investment Company)
Dedication means being willing to sleep at the office, even if youâre a billionaire
âIâm personally spending an enormous amount of time on the production lineâŠI have a sleeping bag in a conference room adjacent to the production line, which I use quite frequently.â âTesla CEO Elon Musk (Automobiles)
Move your desk from time to time
âI move my desk around to wherever the most important place is for the company. And then I sort of maintain a desk there over time to sort of come and check in on things.â âTesla CEO Elon Musk (Automobiles)
Management works on the system, employees work in the system
âWe always say that management works on the system and employees work in the system.â âMicrochip CEO Steve Sanghi (Semiconductors)
Know what youâre good at and stick to it
âI think one of the smartest things weâve done for 10 years is have a very small to-do list and a big donât-do listâŠwe stayed to our knittingâŠWe stayed core to our business and thatâs why 10 years later we are the best in the world at what we do.â âLivenation CEO Michael Rapino (Ticketmaster)
Never hire people you donât need
âTom Murphy had the best approach. He never hired a person they didnât need, and therefore they never had layoffs. The idea that you give up your staffâŠbecause business has slowed down, if you donât need them now then you didnât need them in the first place.â âBerkshire Hathaway CEO Warren Buffett (Textiles)
Government always has been and always will be a big factor in business and business has always found a way to adapt
âGovernment is a very big factor in our business and in all businesses. Thereâs the very broad policies that affect practically everybody and sometimes there can be some pretty, specific policiesâŠWeâve operated under price controls. Weâve had 52% federal taxes applied to our earnings for many years. I mean they were higher at other times but weâve had regulations come along and in the end business in this country has done extraordinarily well for a couple of hundred years, and it has adapted to the society and the society has adapted to businessâ âBerkshire Hathaway CEO Warren Buffett (Textiles)
Full transcripts can be found at www.seekingalpha.com
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