by Scott Krisiloff, CIO, 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.
The macro story continues to be an industrial boom. There was also some focus on tax reform this week. I thought that the more interesting quotes were outside of the macro section though. Iād highlight a few areas of interest:
āPublic markets are shrinking and private markets are growing
āUsed car prices have stabilized
āLoyalty programs are an antidote to price transparency
āHigher deductiblesĀ have led to lower healthcare spending
The Macro Outlook:
The industrial economy has broad based momentum
āIf I look at all of my end markets, if I look at all the key markets I serve, for oil and gas to powered to chemical to pharmaceutical, the mining ā even mining is doing well for us right nowā¦ Weāre seeing a pretty good momentumā āEmerson (Industrial)
Are companies ready to invest in new capacity?
āwe are continuing to see good business environment for our products worldwideā¦Our inventories at Microchip as well as the distributors are towards the low end of our normal range. We are continuing to slowly add incremental capacity at various bottlenecks.ā āMicrochip (Semiconductors)
There have been false starts before
āIām cautiously optimistic. I mean Iāve been bitten over the last five quarters on certain things continuing to be shifted right on the schedule. But this does kind of give us some optimism that the trough is the trough and weāre starting to come out of it.ā āFluor (Engineering & Construction)
But there could also be a feeding frenzy
āIāve not seen the markets this low for this long in my career. And I do think that there is going to be a bit of a feeding frenzy with some of these projects that need to go forward if these companies are going to make the kind of numbers that theyāre suggesting.ā āFluor (Engineering & Construction)
New investment could propel the industrial cycle into 2019
āI fundamentally believe the recovery is going to spread out over two years. I think the recovery is going to be spread out over 2018 and 2019ā¦.I fundamentally donāt believe the bigger projects will start happeningā¦until late 2018 early 2019. ā āEmerson (Industrial)
Is the service economy booming in the same way?
āone of the questions we get often today, given the GDP numbers of the last two quarters, the optimism in the market, people ask, are you seeing more healthy demand today from your corporate customers than a year ago for example, and I think, generally, we would say no, itās about the same. It feels to us like the economy is growing at more or less the same pace it was beforeā āMarriott (Hotels)
A lot of optimism has been contingent on political changes
āI believe a good portion of the reason for why the economy has gotten better is regulatory relief and thereās going to be more to comeā āWilbur Ross (Commerce Secretary)
But not much has happened yet
āweāre a year in and the situation, interestingly enough, is probably a bit more cautious on the political front because I think there is a point of view that a lot of those policies, other than things that can be done by executive order, havenāt come to ā havenāt really made progress yet.ā āSothebyās (Art Broker)
Itās not clear if tax reform will happen at all
āweāre not going to be brave enough to forecast an estimated tax rate for next year, yet.ā āMoodyās (Credit Ratings)
Even if it does, will it boost earnings as much as expected?
āon tax reform, most of our income is domestic, so weāre not anticipating a whole lot of change, certainly in our book tax rate. Obviously, itās a little higher, so that would go down a little bit. But then weāve got to factor in what happens with state deductions or not. So weāre going to monitor this closely. We donāt think itās again going to be a huge driver one way or the other for our cash flow or our GAAP earningsā āCBS (Television)
Some will be negatively impacted
āThe thing that in the short term would likely have the greatest impact would be the repeal of 1031, the ability to do like-kind exchanges for art, which in the long term is a mild negative for the marketā¦there is material activity at the high end of the market using 1031.ā āSothebyās (Art Broker)
āthe interest deductibility cap first of all should have essentially no impact on the investment grade sector, and should not have a significant impact for the higher rated portion of the speculative grade sector. So, itās real, when you get more deeply into speculative grade that those was caps may make a difference.ā āMoodyās (Credit Ratings)
It probably doesnāt move the needle on investment decisions
āIf you wave a wand and say tax reform is done, and our tax ā cash taxes and book taxes decline by a certain amount, I donāt think that, by itself, is going to change our capital availability, if you will. I think, the longer-term question would be whether or not that has the impact of reducing our cost of capital, which could ā in some respects could go into a calculation about whether or not there are investments that make sense for us to do. But I think thatās a longer term, more theoretical questionā āMarriott (Hotels)
International:
Britain will have to adjust to Brexit
āIn the short term, without question, if we have materially less access (to the EUās single market) than we have now, this economy is going to need to reorient and during that period of time it will weigh on growth.ā āMark Carney (BOE)
Negative interest rates have not impacted bank profitability
āWe have also seen little evidence that negative interest rates are undermining bank profitabilityā¦In fact, net interest income has remained quite stable over the past two years, even as overnight rates have drifted lower.ā āMario Draghi (ECB)
Financials:
Public markets are shrinking
āif you go back and you look at the data, youāll see that there are a lot fewer listed companies in the U.S. today than they were in years past and the size of those companies continues to get largerā¦the middle market size business isā¦not looking to do an IPOā¦I think in the past one of the main drivers of why you would go IPO was because you could oftentimes get a better valuation in the public markets than you could get in the private. But I think as has been widely reported, valuations on the private sale transactions have crept up over the years and so today the discount between a private sale and a public exit are really not necessarily all that significant. And so thatās the broader trend that I think is going on in the middle market, is that these companies are simply moving more to private equity ownership and away from public ownershipā āGoldman Sachs BDC (BDC)
Private markets are growing
āweāre seeing new buyers coming in the market at lower price points, who are really interested in collecting, very interested in this both intellectual and somewhat financial exercise in their lives, and thereās no stemming the tide of people coming inā¦both in terms of the amount of collecting activity that weāre seeing and in terms of the number and range of artist that collectors are enthusiastically pursuing, we see an increase.ā āSothebyās (Art Broker)
āThereās a lot of money on the sidelines for transactions in the U.S., particularly in the areas of industrial and multifamilyā¦weāre having trouble keeping the buyers that we work with satisfied with the amount of product weāre deliveringā¦Itās still a healthy market out there, and weāve had nice growth in our investment sales business around the world.ā āCBRE (CRE Broker)
That is making those markets more efficient
āthe market is getting smarter and more efficient about finding its own level for different things. So thereās a sort of certain knowability or range of what particular work of art or markets are worth. And thatās helpful. Itās speeding up deals and probably increasing the flow of capital in the market because itās smarter and more efficient.ā āSothebyās (Art Broker)
Consumer:
Consumer debt is growing
āIn the broader environment, the economy remains healthy with growth in GDP and continued low unemployment. At the same time, consumer debt levels have continued to increase as credit supply has returned to the market and losses have risen from their post-recession lows.ā āLendingclub (P2P Lending)
Loyalty programs are an antidote to radical price transparency
āwe live in a world with radical transparency in pricing, where prices are available for essentially every hotel at an instant notice. We are doing everything we can. I mean, obviously, the core platform for us is the loyalty programā¦And thatās a powerful thing. Obviously, some of these other booking platforms are not conducive to loyalty members, because they will not earn points associated with them.ā āMarriott (Hotels)
Technology:
Appleās service business is the size of a Fortune 100 company
āIn fiscal 2017, we reached $30 billion, making our Services business already the size of a Fortune 100 company.ā āApple (Technology)
Healthcare:
Patients are making different choices because of high deductibles
āthereās no doubt we continue to see a very soft volume environmentā¦The fact is, consumers are making different choices with higher copays and deductiblesā āTenet (Hospitals)
Industrials:
Used car markets have stabilized
āthe used car market stabilized compared to the first half of the yearā¦residual values have really stabilized.ā āAvis (Rental Car)
Materials, Energy:
Oil markets appear to be rebalancing
āweāre, I think, certainly encouraged by the improving market conditions as we look forward. The market, obviously, is continuing to rebalance nicely. Inventories are moving towards the five-year average, and we are watching the market closely for opportunities.ā āEOG (Oil & Gas)
Oil service capacity is narrowing
āyou mentioned pinch point, and pinch point would probably be in just thinking about the various services that are available. Thereās been little equipment added over the last couple of years. And thatās one of the main reasons that weāve increased our activity here with the additional 25 wells; itās just to ensure that we have top-tier services availableā āEOG (Oil & Gas)
Production companies could start producing free cash flow again
āThe good news isā¦the price movement has gotten very constructive lately. And weā¦can see a price now where we could actually have some free cash flow next year pretty soonā āApache (Oil & Gas)
Full transcripts can be found at www.seekingalpha.com
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