Practical analysis for investment professionals
22 February 2016

The C-Suite Speaks: Objects in Mirror . . .

The C-Suite Speaks: Objects in Mirror . . .

Each week our team at Avondale Asset Management reads 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 as well as other forums.

The Federal Open Market Committee (FOMC) of the US Federal Reserve seems to believe that financial markets are not accurately reflecting the strength of the economy. But it looks like the FOMC prefers to err on the side of caution. Even though many CEOs appear to agree with the Fed’s assessment, financial market conditions have tightened enough to generate caution. The question remains whether that caution will be enough to cause a broader slowdown.

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The Macro Outlook

According to many at the FOMC, the performance of US financial markets is not reflecting the data coming in from the larger US economy.

“A number of participants noted that the large magnitude of changes in domestic financial market conditions was difficult to reconcile with incoming information on US economic developments.” — FOMC Minutes (Central Bank)

Industries that would typically be first to feel recession are holding up. Advertising markets remain strong.

“Advertising is as robust as we’ve seen in a long time . . . Back in ’08, we saw it coming. We saw it coming. It was there in bright, shining lights. We’re not seeing anything remotely resembling that now.” — CBS chairman, president, and CEO Les Moonves (Broadcast TV)

Disaster is not imminent for Marriott.

“What we see is, again, reasonably encouraging. The sky is not falling when we look at our data.” — Marriott president and CEO Arne Sorenson (Hotels)

Business is strong in Las Vegas.

“With regard to Las Vegas, January was terrific and Super Bowl and February are off to a roaring start. . . . As of now business is pretty good in the United States.” — Wynn Resorts chairman and CEO Steve Wynn (Casinos)

Wages are rising for many low-income workers.

“On February 20, we’ll raise the starting wage to at least $10 per hour for hourly associates hired before January 1, 2016.” — Walmart US president and CEO Greg Foran (Big Box Retail)

“We are expecting inflationary headwinds in 2016, primarily as it relates to our labor costs.” — Potbelly SVP and CFO Michael Coyne (Restuarants)

There are even signs of strength in China.

“What is interesting is to say that January in Macau . . . was our best month in a long time. Happy to say so. And Chinese New Year is in progress, but early in the week, a little too soon to say, the mass component clearly looks a little stronger than in the past.” — Wynn Resorts chairman and CEO Steve Wynn (Casinos)

“Obviously, we’ve been bombarded with news about the Chinese economy over the last couple of quarters. Most of it not very positive in what we read in the papers here. . . . I think we see in our industry and certainly at Marriott, stronger performance in China than you might expect from reading that newspaper. . . . What we see so far in 2016 continues to make us quite positive about China.” — Marriott president and CEO Arne Sorenson (Hotels)

If the economy is strong, then what is going on with financial markets? FOMC participants said it may be a function of valuation.

“A couple of participants pointed out that the recent decline in equity prices could be viewed as bringing equity valuations more in line with historical norms. Additionally, a few participants cautioned that valuations in CRE markets should be closely monitored.” — FOMC Minutes (Central Bank)

Will the volatility impact the real economy? Vornado’s CEO thinks so.

“Asset prices are high, well past the 2007 peak. . . . With many sectors of the economy decelerating, we have experienced a period of high volatility in both the credit markets and the equity markets. This will, of course, have some effect on the real-estate markets.” — Vornado Realty Trust chairman and CEO Steven Roth (REIT)

Financial market stress is impacting companies’ ability to access credit markets.

“The decision to delay the spin, as we have previously stated, is the sudden disruption in the debt markets. This is a market-driven decision. We understand that the debt markets have not been like this since 2008. We expect to complete the spin once market conditions are favorable.” — Community Health Systems chairman and CEO Wayne T. Smith (Hospitals)

“The market liquidity has tightened up a fair amount in the last six months and certainly we were pretty conservative.” — Dish co-founder, chairman, and CEO Charlie Ergen (Telecom)

“The unsecured and CMBS debt markets are getting a little jumpy.” — Vornado Realty Trust chairman and CEO Steven Roth (REIT)

Companies are planning more conservatively.

“I think we’re all living in very uncertain times. And so, while we’re not seeing any specific macroeconomic indicators yet, we all realize that if the current uncertainty gets elongated and lasts for an extended period of time, we will see potentially impact on customers buying psyche and sales cycles, etc., budget sensitivity. So with an abundance of caution, we’ve baked in a bit of the challenging economic cycle into our estimate as well.” — Rackspace president and CEO Taylor Rhodes (Cloud Support)

“What’s changed between then and now? I think, we look at a world in which there’s obviously more anxiety in the marketplace . . . and as a consequence, we’ve been a bit more conservative in the forecast that we provided.” — Marriott president and CEO Arne Sorenson (Hotels)

If conditions remain on their current course, a recession is likely.

“If there is a recession in America, and it is hard to see why there won’t be if we keep going the way we are, then Las Vegas will ultimately reflect whatever is going on in the rest of the United States. It always has. . . . So I don’t want you to construe my remarks about a healthy January and a promising February to mean that we’re running counter to anything else you’re seeing. We’re just lucky, that’s all. Just luck. We’re holding high. I don’t want to make too much of it.” — Wynn Resorts chairman and CEO Steve Wynn (Casinos)

You really can’t tell anything about the economy until March though.

“January, February is always a little bit soft in the first quarter and March really is kind of indicative of what we were going to see basically in the second quarter. So I think we will always be a little bit conservative on our guidance in the first quarter. . . . The telling point [is] really in the month of March.” — Reliance Steel & Aluminum Co. president and CEO Gregg Mollins (Steel Distributor)

And if things do get dicey, everyone expects the Fed to ride to the rescue.

“I believe and most commentators believe [that volatility] will cause an extension of the low interest rate, easy money environment that we have found ourselves in for years and years now. . . . The interest rate environment and the wall of liquidity which still exists, is an anchor on keeping pricing firm.” — Vornado Realty Trust president of the Washington, DC Division Mitchell Schear (REIT)

Case in point:

“They agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook. . . . Several participants noted that monetary policy was less well positioned to respond effectively to shocks that reduce inflation or real activity than to upside shocks, and that waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent.” — FOMC Minutes (Central Bank)


Currency moves will affect EPS. Hedging just puts it off for a bit.

“Hedging only delays the EPS impact . . . Even if and when currencies stabilize completely, there will always be the following year EPS challenge of anniversarying non-operating hedge gains.” — Fossil Group EVP, CFO and treasurer Dennis Secor (Apparel)

Often hedging currency is so expensive that it makes more sense to assume the risk.

“To be quite honest, in many cases the costs of those hedges are so prohibitive that it’s really better off to stick with the risk.” — Marriott EVP and CFO Kathleen Oberg (Hotels)

Zika virus is not affecting Copa Airlines passenger traffic.

“So far, we have not seen an impact . . . Most of our passengers originate in Latin America so the Zika scare is not such a big deal. We’re already living in Latin America.” — Copa Holdings, S.A. CEO Pedro Heilbron (Airline)


T-Mobile and Cabela’s each mentioned signs of weakening credit quality.

“During the quarter, we saw a shift in the trends in delinquencies. Greater than 30-day delinquencies were 0.82% as compared to 0.68% a year ago. Greater than 60-day delinquencies were 0.51% as compared to 0.41% a year ago. . . . We’re certainly not alarmed by it, but we think we’ve reached the trough of charge-offs and we expect them to go up.” — Cabela’s EVP and CFO Ralph Castner (Sporting Goods)

“The increase was a function of a shift to subprime during . . . the prior year. . . . We’ve taken several steps that have tightened credit for subprime during the first quarter of this year to counteract that phenomena that we saw in the prior year. So, yeah, we are very focused on this issue.” — T-Mobile EVP, CFO J. Braxton Carter (Telecom)

The FOMC unanimously agreed that a cap should be reintroduced on repurchases at some point.

“Participants reiterated that the Committee expects to phase out the facility when it is no longer needed to help control the federal funds rate, and they unanimously expressed the view that it would be appropriate to reintroduce an aggregate cap on ON RRP operations at some point.” — FOMC Minutes (Central Bank)


Competitors are feeling an impact from McDonald’s all-day breakfast.

“We experienced the effects of both the heightened competitive focus on value and the impact of McDonald’s all-day breakfast, primarily between the hours of 10:30 am to noon.” — Jack in the Box chairman of the board and CEO Leonard Comma (Restaurant)

E-commerce is growing rapidly in China.

“And talking about online channels in China, e-commerce is of extreme importance and we have heavily engaged with this. And already 50% of our sales in pet care goes via e-commerce in China, 30% in coffee, 30% also infant formula.” — Nestle S.A. CEO Paul Bulcke (Packaged Foods)

“We expect to focus primarily on e-commerce. That is the most rapidly growing path to market in China.” — iRobot chairman of the board, CEO and co-founder Colin Angle (Consumer Robotics)


Amazon is destroying its competition in cloud.

“We found that as Amazon really leveraged their strengths, which are pouring capital under their product, building their developer ecosystem, training people on APIs, etc., they really picked up a lot of momentum that took public cloud apps further and further into their model. And that was a — just — you’ve seen them, right, they’re a tornado. So we think that was an impact that was larger to our public cloud than we anticipated at the time.” — Rackspace president and CEO Taylor Rhodes (Cloud Support)

True 5G probably isn’t coming until 2020.

“One competitor has pushed out and talked about, I think in a somewhat misleading fashion, about consumer 5G. . . . When you think about 5G in a smartphone, you’re talking a 2020 story. And nobody that understands the technical space and where we are with standardization would really tell you anything different.” — T-Mobile EVP and CTO Neville Ray (Telecom)

Digital advertising may be generating disappointing ROIs.

“I think there’s no question that there’s a bit of noise out there about digital advertising not having quite the same ROI as we do, as broadcast. . . . In addition, you see things from programmatic, and you hear noise that maybe not everybody recorded is really a person. It’s a machine.” — CBS chairman, president, and CEO Les Moonves (Broadcast TV)

Health Care

It has been a weak season for the flu.

“A slower flu season created a headwind to our cold, cough, and flu business this quarter.” — Walmart US president and CEO Greg Foran (Big Box Retail)

“Our volumes, including emergency room visits, were lower than expected in the quarter as compared to a year ago, mainly attributable to the lack of flu and respiratory illness, which we historically see during this period.” — Community Health Systems chairman and CEO Wayne T. Smith (Hospitals)

Express Scripts may be interested in investing more in the health care IT space.

“I think HCIT [health care information technology], there’s a lot of fragmentation there. We obviously have a lot of internal capabilities that we can invest in, but as we look out both from a payer and a provider standpoint, there may be some interest there.” — Express Scripts president Tim Wentworth (Pharmacy Benefit Management)


Autos and aerospace are still considered robust markets.

“Demand for automotive, which we service mainly through our toll processing operations in the US and Mexico, was strong throughout the year; a trend we expect to continue in 2016.” — Reliance Steel & Aluminum Co. EVP, Operations James Hoffman (Steel Distributor)

“Aerospace . . . continues to be one of our strongest end markets for us, due to its relatively stable pricing and strong demand trends.” — Reliance Steel & Aluminum Co. EVP, Operations William Sales, Jr. (Steel Distributor)

Renewable energy accounts for almost 30% of the power supplied by Pacific Gas & Electric.

“In 2015, nearly 30% of PG&E’s electric deliveries came from qualifying renewable resources, and even more meaningfully, nearly 60% of the energy that we delivered was carbon free.” — Pacific Gas & Electric chairman of the board, CEO and president Anthony Earley, Jr. (Utility)

Materials, Energy

Distressed assets that are for sale in the mining space are distressed for a good reason.

“Right now, there is distressed assets that are out there and they’re distressed for a good reason; high costs, low quality, no infrastructure, people trying to get rid of — I was going to say get rid of their trash, but I could never say that.” — Rio Tinto chief executive Sam Walsh (Iron Ore)

Most mining CEOs speak favorably about copper.

“Certainly in the area of copper, as Chris said, if there was an attractive project in that area, that could be of interest to us, at the right price or right value.” — Rio Tinto chief executive Sam Walsh (Iron Ore)

Miscellaneous Nuggets of Wisdom

Focus on the bottom line, not just the top line.

“We tend to be very fastidious about having all of our games be profitable. We don’t pay so much attention to the top line as we do to the bottom line. . . . We try to maximize every foot of the casino with one metric in mind, contribution of EBITDA per foot.” — Wynn Resorts chairman and CEO Steve Wynn (Casinos)

“We’re not as focused on the number of subscribers we have, we’re a bit more focused on the actual profitability of the subscribers.” — Dish co-founder, chairman, and CEO Charlie Ergen (Telecom)

Know what your customers want and give it to them.

“We know who our customers are, we know what they want. And we’re going to try and figure out a better way to give it to them. That’s my ace in the hole. That is my secret.” — Wynn Resorts chairman of the board and CEO Steve Wynn (Casinos)

Having a headquarters off the beaten path can be a competitive advantage.

“One last aspect of the secret behind Hormel Foods that I’d like to share with you really relates to our team, where we are — I mentioned to you we’re in a small town in Minnesota. We’re little bit of a throwback in that regard. When someone joins our organization, they tend to join it for a life, and indeed our average tenure of our officer team at Hormel Foods is 26 years. That’s not 26 years of industry experience, that’s 26 years of experience at Hormel, which I think does make it somewhat unique in the industry.” — Hormel Foods chairman of the board and CEO Jeff Ettinger

When times are lean, you may have to sacrifice profitability to avoid cutting into muscle.

“Let me give you also a little bit of the strategic view that we have when it comes to expenses. . . . We are going to maintain underwriters even if the market might cause us to reduce underwritings. . . . I am not going to give my underwriters to the competition.” — Arch Capital Group chairman and CEO Constantine Iordanou (Reinsurance)

Doing what’s right for the long term sometimes means being penalized in the short term.

“We’re making money over [a] long period of time. We’re very fortunate in that regard because we don’t feel any pressure for short-term gains, right? And so we can make long-term decisions. . . . Sometimes we’re penalized in the short-term stock price for that, but that’s a small price to pay if you’re doing the right thing for your shareholders long term.” — Dish co-founder, chairman of the board and CEO Charlie Ergen (Telecom)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Scott Krisiloff, CFA

Scott Krisiloff, CFA, is the CEO of Avondale Asset Management, an independent investment advisory firm located in Los Angeles. Krisiloff is the author of the firm's blog, Company Notes.

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