What CEOs Said Last Week: The $500B tech companies all depend on connectivity

by Scott Krisiloff, CIO, Avondale Asset Management

Earnings season began to slow back down this week. Most of the important companies have now reported, so this week’s post draws heavily from a handful of calls. The economic picture remains unchanged. There’s still a lot of optimism, but fundamentally GDP growth has been anemic and policymakers haven’t come through on promises.

Among the quotes are two interesting blocks. One is from Charlie Ergen of Dish. He implies that internet companies are seeing more than their fair share of profits from connectivity and that telecom companies (the distributors that make the internet possible) will fight back. Ergen has an ulterior motive in saying this. He owns a large chunk of wireless spectrum and may be trying to get one of those internet companies (Amazon?) to think about buying him.

The other interesting block is from David Seaton of Fluor. He points out that construction markets have never really gotten back to prior peaks. He is optimistic about infrastructure spending though. Even without a large stimulus bill, American infrastructure is probably overdue for some heavy investment.

The Macro Outlook:

Most people are feeling pretty good

“I feel pretty good about the global economy right now. We’ve already experienced, as you’ve seen in our orders the last couple of quarters, this is pretty good activity right now and we look for it to continue.” –Parker Hannifin CEO Tom Williams (Industrial Components)

The original reasons for optimism haven’t materialized but it’s better to be lucky than right

“I guess this is a case of better lucky than right. We expected the market to go up but for different reasons. We thought it would be based on generally positive growth oriented policies enacted by the administration, lower taxes, infrastructure spending, healthcare, reform et cetera, none of these things transpired. But what has transpired has been kind of global synchronized economic growth and a very accommodative global monetary structure. So, I’m happy with the outcome the reason for it was different from what we anticipated, but we’ll take it.” –Third Point CEO Dan Loeb (Hedge Fund)

Profits have rebounded but GDP growth has been anemic

“I think GDP probably is still a better reference point for assessing demand than corporate profits are. Obviously, they’re both averages of lots of economic activity and lots of participants in the economy. But GDP is a broader measure. Obviously, GDP has been quite anemic.” –Marriott CEO Arne Sorenson (Hotels)

Washington is gridlocked

“So one of the frustrations I see, and this is kind of a political commentary…there’s 2,200…candidates have to go through Senate approval. I think the last count was 55. And you’ve got people like Elaine Chao in transportation. You’ve got Rick Perry in energy, Rex in State. These people that we know and know well are sitting there twiddling their thumbs, so to speak, because we haven’t been able – the government hasn’t been able to give their team. So I think that is why you saw things screech to a halt. And I don’t see a whole lot of improvement until that phenomenon is behind us and the efforts that the administration are putting forth in terms of the regulatory reform actually see light of day. A lot of good intent, a lot of good thought and strategies to people that I’ve talked to, including the folks I just mentioned, but until we get those things, done you’re not going to see these permits that are absolutely necessary to go forward actually awarded.” –Fluor CEO David Seaton (Engineering)

But don’t under-estimate the optimism

“Don’t under-appreciate the optimism, which still seems to exist in the market and in corporate America these days. And compare it to the point of view last August, September, and October, you’re talking about a pre-election time. I think there was not a sort of robust optimism. Economy seemed to be producing, again, fairly anemic GDP growth. And I think in some respects, while that fairly anemic GDP growth has continued into 2017, there is still some optimism. You can see it reflected in certainly the equities markets and other places.” –Marriott CEO Arne Sorenson (Hotels)

Inventories are still low

“we are continuing to see a very strong business environment for our products worldwide…Our bookings rate in the June quarter was extremely strong. Our inventories at Microchip as well as at the distributors are towards the low end of the normal range.” –Microchip CEO Steve Sanghi (Semiconductors)

There’s some modest restocking taking place

“On the distribution level, I would say there is some modest restock taking place. There’s been a surge in activity and I have North America mostly in mind when I make that comment.” –Parker Hannifin COO Lee Banks (Industrial Components)

Radical price transparency makes it harder to have inflation

” we’re nearly 80% [occupied] for the full quarter, which is a pretty impressive kind of number. And so, you would expect a little bit more pricing movement. But…you’ve got to remember that we have thousands of franchisees who are pricing their own hotels on a day-to-day basis. And it is a market with radical transparency in pricing. And that may have some impact on our ability to move rates in this cycle compared to prior cycles.” –Marriott CEO Arne Sorenson (Hotels)

Consumer:

Disney is ready to go head to head with Netflix

“It’s been clear to us for a while with the future of this industry will be forged by direct relationships between content creators and consumers…we’re accelerating our strategy to be at the forefront of this transformation…With this strategic shift, we’ll end our distribution agreement with Netflix for subscription streaming of new releases beginning with the 2019 calendar-year theatrical slate.” –Disney CEO Bob Iger (Media)

No other studio gets Netflix’s multiple

“we have Netflix envy, and we try to present our results in a way to give you the ability to value us on an equivalent metric. So we’ll leave the valuation to you guys. We’ll post the results and you tell us what it’s worth.” –CBS CFO Joseph Ianniello (Media)

Food companies are struggling

“clearly not everything went our way in the first half. Canada, India and commodity cost in United States are just a few examples” –Kraft Heinz CEO Bernardo Hees (Packaged Food)

“we’re experiencing a decline in our base volume greater than our previous expectations…Volume softness continues to weigh on the broader food industry.” –Dean Foods CEO Ralph Scozzafava (Dairy)

Technology:

Charlie Ergen made a good point about the relative strength of telecom and internet companies

The $500B tech companies all depend on connectivity

“I think Amazon is one of those $500 billion companies that probably have to think about connectivity in their future…their cloud business doesn’t work unless it’s connected.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

That connectivity may not always be as cheap as it is today

“I think everybody in – the really big companies have always assumed there’s going to be a connectivity network out there that they can piggyback off of. And I think that if net neutrality rules get more define…you’re not going to be quite as confident of that in the future.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

The telecom companies aren’t going to let the internet companies make all the money

“You can’t have all the profits going to three or four companies and have the guys that are – the companies that are providing them the raw material to make that money, not get wake up one day and get a little smarter…at some point, all the money going one direction, a lot of people are enabling that.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

The balance of power always shifts between content and distribution

“They’re going to wake up and say maybe they should get – I’ve been through this business long enough to know that the money ebbs and flows between distribution and content. It’s probably going to continue to do that today. And a lot of the content companies, probably the distribution guys, probably are going to be in position to get a more of it. Then it may go the other direction.” –Dish CEO Charlie Ergen (Wireless Spectrum Owner)

Industrials:

Construction markets have never fully rebounded

“the current market environment is perhaps the worst I’ve seen in my 30-plus years. The market has contracted since 2014. The good news is that we’re starting to see prospects come back in some of our end markets including mining” –Fluor CEO David Seaton (Engineering)

Infrastructure spending is one brightening spot

“I feel pretty good about infrastructure and what’s going to happen. I would caution though…there is no such thing as a shovel-ready project. But what I’m very eager to see is that at least the dialogue is around…toll roads, bridges, ports, airports…But I believe that our infrastructure group will continue to be a bright spot” –Fluor CEO David Seaton (Engineering)

Infrastructure projects definitely suffer from the regulatory environment

“I think the capital is there. I agree with you 100%. I think the problem is, you got to look at the Purple Line in Baltimore. Project passed all the hurdles environmentally, financially, everything else and then the regulatory environment slowed it down and actually stopped it for a while. So even though the capital is ready, some of the projects, I think, are at least to a point where you get to that next stage. I think the regulatory reform that the government is talking about has to come through before the timing of those things actually improve. And I’d put pipelines in that category.” –Fluor CEO David Seaton (Engineering)

Full transcripts can be found at www.seekingalpha.com

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