Practical analysis for investment professionals
29 February 2016

The C-Suite Speaks: Glass Half Full

Posted In: Drivers of Value

The C-Suite Speaks: Glass Half Full

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.

Everyone is watching the market’s volatility, but most CEOs continue to say that the market isn’t reflecting the reality that they are seeing. Consumers appear to be particularly healthy, and aren’t showing signs of slowing down. Credit markets are troublesome though. Defaults are certain to rise among energy companies, and more and more credit-focused firms are citing concerns in unrelated industries like restaurants and retail.

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The Macro Outlook

Everyone is honed in on volatility but nobody is paralyzed by it.

“We are all like you looking at the opening of 2016 and seeing the volatility. . . . We find in our client dialogue that while everyone is focused on it, no one is frozen by it.” — Heidrick & Struggles president and CEO Tracy Wolstencroft (Executive Search)

In fact, most CEO’s seem to disagree that the market is an accurate reflection of what’s occurring.

“The reality sometimes of what’s going on versus the market’s perception are completely different. This is one of those times.” — Stifel chairman and CEO Ronald Kruszewski (Investment Bank)

They don’t see the vultures circling the way that others do.

“I guess there’s a bit of a bearish tone . . . coming from the press. . . . I’m pretty bullish about our position in the marketplace. . . . So the glass is half full, and I don’t see the doom and gloom that a lot of people [do].” — Fluor chairman and CEO David Seaton (Engineering and Construction)

Many are observing “strength and positive momentum” in their sectors.

“The stock market seems to be pricing in a steep decline in the economy, and along with it, our sector. We, on the other hand, are seeing signs that reflects strength and positive momentum in our business.” — Toll Brothers executive chairman Bob Toll (Homebuilder)

Consumers have a similar outlook. They see their own finances as more or less solid but their overall perception of the economy has deteriorated.

“The results from our most recent consumer sentiment survey where favorable perceptions around personal finances remained stable even though respondent’s assessment of the national economy declined slightly.” — Lowes chairman, president, and CEO Robert Niblock (Home Improvement)

Consumers are actually pretty healthy.

“On the bright side, the US consumer may come to the rescue as we are nearing full employment, wages are slowly rising, and there is an effective tax cut in the form of low energy prices.” — Greenlight Capital Re non-independent chairman David Einhorn (Reinsurance)

Which is probably why consumers continue to spend.

“Peter, we’re not seeing [consumers pull back]. Our business was good and continues to be good.” — Home Depot EVP Corporate Services and CFO Carol B. Tomé (Home Improvement)

“Yeah, the US consumer, we could spend the next 30 minutes on that. We are pleased with the mind and the spirit of the US consumer, certainly compared to many other geographies outside of the US.” — Best Buy chairman and CEO Hubert Joly (Electronics Retail)

So is it time to take advantage of all the nerves?

“I go back to what Buffett says . . . he’s nervous when people are greedy, and he’s greedy when people are nervous. Well, right now people are nervous.” — Fluor chairman and CEO David Seaton (Engineering and Construction)

“In terms of crisis in some countries, that’s when we feel even more excited about investing, because that’s when competition normally takes the foot off the pedal.” — Anheuser-Busch InBev CEO Carlos Alves dBrito (Beverage)

Valuations are still high.

“I would say, the market is fairly richly valued at this point in time. . . . Ultimately, we want to do deals that we know we can get very good returns on long term. . . . We’ve seen this cycle before. It does come and go, and we’re going to be very careful while we’re in a frothy environment.” — Ecolab chairman and CEO Doug Baker, Jr. (Sanitation Services)

And deflationary pressures could make it tough to generate returns.

“And deflation is a very difficult environment to make a return in. You’re seeing interest rates in Japan, 10-year rates are negative. . . . Ten-year German rates are below 0.3% . . . in that environment it’s very difficult to make a return. . . . With interest rates at zero for sometime and in many cases it’s going negative and a ton of debt in the system, we think that the possibilities on the downside are significant.” — Fairfax Financial chairman and CEO V. Prem Watsa (Insurance)


Credit markets are showing signs of distress.

“I think we as a team have a pretty strong view that 2016 is a transition year for the credit markets. We see a lot more stress and distress just as we look across credit business.” — Ares Capital Corp director and CEO Kipp deVeer (Business Development Company)

The difficulties that energy companies pose for the high-yield markets are not fully appreciated.

“I think that the problems that the oil and gas markets in particular are going to present . . . for the high-yield market is misunderstood. . . . We expect defaults will go up this year. They’re already going up.” — Ares Capital Corp director and CEO Kipp deVeer (Business Development Company)

And credit markets are more and more wary of sectors other than just oil and gas.

“Markets continue to be spooked . . . by oil and gas, by mining and metals, and increasingly by industries that are cyclical, whether it’s retail, restaurants, manufacturing, specialty chemicals, etc.” — Ares Capital Corp director and CEO Kipp deVeer (Business Development Company)

There are some indications that loan delinquencies are turning very slightly in the wrong direction. Macy’s is keeping a watch on the bump in delinquencies.

“We are closely monitoring a rise in delinquency levels that could generate some increase in losses in 2016.” — Macy’s CFO Karen Hoguet (Department Store)

TD said losses are returning to the mean from unsustainably low levels.

“US portfolio losses have largely normalized from unsustainably low levels in 2015.” — TD Bank Group group head and CRO Mark Chauvin (Bank)

BMO saw delinquencies tick up, but it may just be because the quarter ended on a Sunday.

“The difference between this quarter and the last quarter was that this quarter was on a Sunday . . . . And that explains the difference, because right after the weekend, the delinquency rate did go back to normal levels.” — BMO Financial Group CRO Surjit Rajpal (Bank)

Toll Brothers is seeing encouraging traffic at the outset of the spring selling season.

“I think we’re very encouraged by the increase in traffic, in numbers and, even more importantly, in quality. . . . It’s early in the spring season. We’re about three weeks in. And so we’re encouraged by the traffic numbers and the quality of that traffic.” — Toll Brothers director and CEO Douglas Yearley, Jr. (Homebuilder)

Americans still believe that their homes are great investments.

“Roughly half of homeowners believe the value of their home has increased. . . . We saw a significant increase in future home value expectations. And while most homeowners indicated their spending levels are saying the same, they’re more likely to allocate funds to home improvement compared to other areas.” — Lowes chairman, president, and CEO Robert Niblock (Home Improvement)


Retailers are struggling to adjust to a fundamental change in their business models.

“I think one of our slides indicated by the end of this decade that we’re going to have a large proportion of our business, about 30%, being done online. That’s all the way from 5% that it was back in 2005 and that is a model that behaves enormously different than the mall-based model. And so we have a lot to learn about that, and we have to keep our lens on as it relates to how the customer sees us and how the customer wants to be served. But at the same time, we have to do it effectively.” — Nordstrom EVP and CFO Michael G. Koppel (Department Store)

“It’s clear, though, that we need to move at greater speed and agility, accelerate plan changes in our business model more quickly, and focus our resources on the most productive assets and projects while moving away from those that are not delivering results. We need to embrace the evolving behaviors of our customers and take actions to support the long-term health and success of our business.” — Kohl’s chairman, president, and CEO Kevin Mansell (Department Store)

Most retailers believe that their store base is a competitive advantage.

“I think . . . our talent in the whole fashion arena, from picking, editing the assortments, presenting it, and the vendor relationships — I think that is a huge competitive advantage to date vis-à-vis Amazon. But I think it starts with the store base, and our understanding of the fashion customer, which is different.” — Macy’s, Inc CFO Karen Hoguet (Department Store)

TJX argued that there’s plenty of room for off-price retailers to expand.

“Sometimes there’s a concern there’s going to be a lack of goods as we continue to grow and add all these stores. . . . . We actually have to hold the merchants back still. There’s so much merchandise out there. We’ve never not had it be that way.” — TJX Co. president and CEO Ernie Herrman (Off-Price Retail)


Mobileye said that an open architecture system makes sense for autonomous vehicles.

“When you talk about autonomous driving, it’s really a multi-player game. It’s very, very hard to think about it in terms of a closed system. Sensing alone, it’s okay to think about it as a closed system. But once you start adding mapping, you start adding your driver policy, you start adding differentiation between different players, an open architecture makes more sense.” — Mobileye co-founder, CTO, and chairman Amnon Shashua (Auto Supplier)

Mobileye also said that it thinks consumer electronics companies don’t appreciate how difficult it is to make a car.

“Our belief is that consumer electronics companies today underestimate the challenge of automotive . . . When you look at consumer electronics, the kind of product that we are used to have lots of imperfection. . . . We are not tolerant to imperfection with cars. . . . And when you think about autonomous driving, where there is safety involved, the level of perfection is really foreign and unparallel to the consumer electronics world.” — Mobileye co-founder, CTO, and chairman Amnon Shashua (Auto Supplier)

Materials, Energy

This energy downturn is about as tough as they come.

“This particular downturn, which will be about the fifth of my career . . . makes others pale in comparison, both in severity and longevity.” — DistributionNOW CEO Robert Workman (Distributor)

Apache’s 2016 CapEx will be down more than 80% from 2014.

“With this in mind, we announced in this morning’s press release a 2016 capital budget of $1.4 billion to $1.8 billion, the midpoint of which represents over a 60% decrease from 2015 and over an 80% decrease from 2014 levels.” — Apache Corporation president and CEO John Christmann IV (Oil and Gas Exploration)

Apache still expects well costs to decline even further this year.

“In terms of our Permian well cost, we see things coming down and even further this year. As a rule, we’re looking at mile-and-a-half laterals. We have seen the intensity of the frac concentrations going up. So those are the types of parameters we’re going to use or using in those estimates.” — Apache Corporation president and CEO John Christmann IV (Oil and Gas Exploration)

BHP Billiton says that buying assets has now become more attractive than building them.

“This is an environment where in many respects buy rather than build is more attractive and I think doubly so, one because buy is potentially cheap and Peter referred to that a little bit and saying it’s not quite a war chest, but who knows what might come under distress in this sort of environment?” — BHP Billiton Ltd. director and CEO Andrew Mackenzie (Mining)

Investment opportunities are good but may get even better.

“We believe that, especially in North America, the opportunities for investment are going to be better in the future than they are now. There are some good ones now, but we believe they’re going to be even better.” — Apache Corporation EVP and CFO Steve Riney (Oil and Gas Exploration)

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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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