The C-Suite Speaks: Stable, But Uninspiring
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.
Earnings season officially kicked off last week. The early read appears to be that economic growth is stable, but uninspiring. Expectations are low, and growth will be hard to achieve because comparisons will be difficult for the next few quarters. Although optimism has rebounded with the markets, CEOs are still cautious, while March was a weak month for industrial markets. Capital markets have opened up for strong issues, but confidence is fragile.
The Macro Outlook
Economic growth is stable, but uninspiring.
“I think we still see the overall economy progressing in that 2% to 2.5% range, kind of uninspiring growth.” — CSX (CSX) EVP Fredrik Eliasson (Railroad)
“I think we still feel we’re. . . in the same low-growth . . . environment that we’ve been operating in for a couple of years — not enough to make it feel like rates are going to move as a result of it but not enough to feel like we’re stalling either.” — Wells Fargo (WFC) EVP and CFO John Shrewsberry (Bank)
“To me the outlook is less about any sort of explosive growth. The word I would use is ‘potential for stabilization.’ So things have been at a low level.” — MSC Industrial Direct (MSM) co-president and CEO Erik Gershwind (Industrial Distributor)
Taiwan Semiconductor anticipates global semiconductor growth of just 1% this year.
“Due to the world macroeconomic uncertainties, we reduced our estimate of 2016 smartphone growth from 8% to 7%, PC from minus 3% to minus 6%, tablet from minus 7% to minus 9%, while maintaining digital consumer electronics growth rate at minus 5%. . . . For the whole year of 2016, we estimate the growth of world semiconductor to be about 1%.” — Taiwan Semiconductor (TSM) president and co-CEO Mark Liu (Semiconductor Manufacturer)
CSX sees volume declines continuing in the second quarter.
“Looking forward, we again expect volumes to decline in the second quarter. The challenging freight environment will continue as headwinds in coal, energy, and metals volume are expected to more than offset the markets that will show growth.” — CSX (CSX) EVP and CFO Frank Lonegro (Railroad)
Alcoa reduced its demand growth forecast for aluminum.
“We’re revising our 2016 global demand for aluminum from 6% to 5%, with consumption on pace to reach 59.7 million metric tons. The slight decline in demand is from two key markets: China and North America. Chinese growth is being reduced to 6.5% versus our prior forecast of 8% due to slower growth in the construction and electrical segments. North American demand growth is being reduced to 4%.” — Alcoa (AA) EVP and CFO William Oplinger (Aluminum)
Comps will remain difficult for many companies until the fourth quarter.
“The second quarter and probably even third quarter are going to be challenging quarters from the volume perspective. It’s not really until we get to the fourth quarter [that] we will have a little bit easier comparisons year-over-year.” — CSX (CSX) EVP Fredrik Eliasson (Railroad)
“The group comparators do get tougher in the second half of the year, but we remain confident of delivering against our objectives.” — Unilever (UL) CFO Graeme Pitkethly (Consumer Packaged Goods)
Companies are being careful in a tough environment.
“We remain extremely expense aware in the current market environment, and we will continue to be prudent with our discretionary G&A spend. . . . In challenging markets . . . we need to make tougher and smarter decisions.” — BlackRock (BLK) senior managing director and CFO Gary Shedlin (Asset Management)
Private equity and venture capital are growing more cautious.
“More recently we have seen our private equity and venture capital clients exercise greater caution, which has slowed the pace of their investing and, in turn, has decreased borrowings on capital call lines of credits.” — First Republic Bank (FRC) EVP and chief banking officer Michael Selfridge (Bank)
March was soft.
“When I look at March, we’re a little disappointed in the month. The month weakened as we got through it. Easter is part of it. The calendar is part of it, but the month did weaken a little bit, and so it was a soft finish to the quarter.” — Fastenal (FAST) president and CEO Daniel Florness (Industrial Distributor)
“March started out quite strongly, but we then saw considerable mid-month softness driven by a confluence of factors.” — MSC Industrial Direct (MSM) co-EVP and CFO Rustom Jilla (Industrial Distributor)
There is optimism that things are turning up though.
“We just completed a survey of our customers and the prevailing sentiment is that business will at least stay the same and possibly improve in the months ahead. We would certainly like to see a bit more time pass before forming our own conclusions.” — MSC Industrial Direct (MSM) co-president and CEO Erik Gershwind (Industrial Distributor)
Semiconductor buyers are cautiously rebuilding inventory.
“Most of our fabless customers may see an above seasonal growth in 2Q 2016, driven by OEMs’ new product launches and inventory restocking in the supply chain. . . . We do see the customers, and even the end-market demand is increasing.” — Taiwan Semiconductor (TSM) president and co-CEO Mark Liu (Semiconductor Manufacturer)
Loan growth has been surprisingly strong.
“Our loans are growing across the franchise and, compared to the prior year, are up 11% in our business segments.” — Bank of America (BAC) chairman and CEO Brian Moynihan (Bank)
“We had continued strong loan growth in the first quarter, up 10% from a year ago and 3% from the fourth quarter.” — Wells Fargo (WFC) EVP and CFO John Shrewsberry (Bank)
Bank of America doesn’t see any shifts in its customer base.
“During the first quarter, there was a lot of talk with the market volatility. . . . However, we don’t see any evidence of our customer base changing. Spending by consumers remains strong.” — Bank of America (BAC) chairman and CEO Brian Moynihan (Bank)
John Stumpf said that consumers are in great condition.
“Consumers have never been in better shape. I mentioned in my comments just the debt service requirements is 15% of their earnings. . . . These are some of the strongest savings rates we’ve seen in some time.” — Wells Fargo (WFC) chairman and CEO John Stumpf (Bank)
Markets are strong enough that companies should be able to raise capital.
“Obviously, the markets right now are stable. People can finance if they want to. I think it’s just a question . . . of making sure that the stability we’re seeing right now is something that they can count on as they go to market.” — Bank of America (BAC) CFO Paul Donofrio (Bank)
But even though confidence has improved, markets remain fragile.
“Markets are still quite illiquid in certain parts and will be prone to somewhat abrupt corrections. So while investors have started to deploy cash and capital markets are wide open for well-understood names, there is still remaining caution for more challenging issuers. . . . There is an emerging belief that it’s fundamentally better but we need to continue to see no downside surprises. And as such, we remain somewhat cautious about the second quarter.” — JPMorgan Chase (JPM) CFO Marianne Lake (Bank)
The global business climate continues to be a cloudy one.
“In January, we said that we were prepared for the business environment to become even more challenging and that has proved to be the case. In Europe, markets continue to decline with stable volumes but falling prices, while in North America, growth in our categories has eased back to only around 1%. In Brazil and Argentina, market volumes are contracting as consumers struggle with rising unemployment and the high local inflation brought on by currency adjustment.” — Unilever (UL) CFO Graeme Pitkethly (Consumer Packaged Goods)
Though the dollar has weakened, it still may be several quarters before it impacts global trade flows.
“Even with that sort of a relief over the last two months on the dollar, you’re looking in to the fourth quarter, I think, until you’re going to start seeing meaningful improvements in the volume performance.” — CSX (CSX) EVP Fredrik Eliasson (Railroad)
The San Francisco–area real estate market will have a lot of new supply to absorb.
“We do have a lot of new buildings coming on the line over the next 24 months. So I think the jury is out a little bit on the commercial real estate demand forward 12 to 24 months in the Bay Area. I don’t know if the new buildings will be fully absorbed. If they are fully absorbed, it could ripple backwards into the older buildings.” — First Republic Bank (FRC) chairman and CEO James Herbert, II (Bank)
JPMorgan Chase and PNC still expect two rate hikes this year.
“We are positioned for rising rates. It is our central case that that will happen. The market is pricing less than one hike in this year. The Fed dots say two. Our research says two. We’re just going to have to wait and see.” — JPMorgan Chase (JPM) CFO Marianne Lake (Bank)
“Yes, we still have two in there. As a practical matter, only one matters because . . . the second would be at the end of the year . . . it would impact 2017 as opposed to what we do this year. But that is in there.” — PNC (PNC) chairman, president, and CEO Bill Demchak (Bank)
Bank credit quality remains robust outside of energy.
“Credit quality continues to be very strong. Non-performing assets remain extremely low at just 10 basis points.” — First Republic Bank (FRC) EVP and COO Jason Bender (Bank)
“Beyond the energy book and certain exposures in the steel industry, we don’t see negative trends in other areas of credit.” — PNC (PNC) chairman, president, and CEO Bill Demchak (Bank)
The US Federal Reserve’s experiments with quantitative easing (QE) have penalized people who acted responsibly.
“Punishing. There is no other way to describe the financial impact on our company from the unprecedented experiments taken by the Federal Reserve since 2008. While the Fed experimented with zero interest rates and printing money under the guise of a fancy term — quantitative easing — savers suffered, responsible people who had avoided large debt suffered, and our company suffered as well.” — Charles Schwab (SCHW) president and CEO Walt Bettinger (Discount Broker)
Negative interest rates are impairing pensions’ ability to meet liabilities.
“We hear worldwide how negative interest rates or low interest rates . . . are actually harming [clients] objectives of attaining an asset base to meet their liability needs. . . . We’re hearing this worldwide. We’re hearing from savers worldwide. They’re not going to meet the needs of building their pool of savings to meet the needs of retirement. We’re hearing some insurance companies that they’re going to have a really hard time meeting their liabilities.” — BlackRock (BLK) chairman and CEO Larry Fink (Asset Management)
Monetary policy has gone as far as it can. A fiscal policy response is needed.
“I believe a lower negative interest rates has served a great purpose in the short run. But I don’t believe lower negative interest rate was supposed to be a permitted feature of the investment landscape. We are now entering the eighth year . . . and the IMF has lowered their forecast even more, all right, I think the fifth time in a row. We are going to need a policy response by governments. And I think the dependency on central bank behavior is one of the problems that we have in the world and we need policy response by governments related to fiscal policy.” — BlackRock (BLK) chairman and CEO Larry Fink (Asset Management)
Excessive promotional activity is the new normal for retailers.
“Increased competitive activity, especially from on- and offline deep discounters, has altered the home furnishings playing field considerably. . . . It’s clear to us that the high level of promotional activity we’ve been witnessing across the retail spectrum for some time now is here to stay. It’s regrettable, but the industry has done it to itself.” — Pier 1 Imports (PIR) president and CEO Alex Smith (Home Furnishing)
Virtual/augmented reality, deep learning, and artificial intelligence (AI) demand better semiconductor technology.
“VR/AR, deep learning and artificial intelligence, artificial AI are the emerging applications that will require leading-edge technologies. . . . The data transfer rate of VR/AR products in interactive design, remote training, and multi-site conferencing must still be enhanced . . . 10 times from today’s level in order to enable quality viewing experience.” — Taiwan Semiconductor (TSM) president and co-CEO Mark Liu (Semiconductor Manufacturing)
Is there a robo-adviser bubble?
“One of the most over-hyped aspects of investing in the past year is the concept of ‘robo-advice.’. . . That said, there are real benefits to the concept of automated investment advice if it is combined with the availability of live professionals by phone, chat, or in person.” — Charles Schwab (SCHW) president and CEO Walt Bettinger (Discount Broker)
We have not seen the end of credit deterioration in the energy sector.
“If your question is, have we seen the end of NPLs coming from energy, the answer to that is no. . . . We expect that we are going to have a number of credits that we are going to have to liquidate . . . particularly in the services sector . . . So you will see NPLs continue, I think, on the energy book.” — PNC (PNC) chairman, president, and CEO Bill Demchak (Bank)
Miscellaneous Nuggets of Wisdom
Shareholder letters should be used to communicate with shareholders.
“I strive to write this letter with a minimum of jargon, corporate speak, and trendy business buzzwords . . . it is written with the goal of simply discussing the current state of our company and the future we face together. The litmus test for this letter is: ‘Does it read as if I were corresponding with a business partner who has been out of touch for the past year?'” — Charles Schwab (SCHW) CEO Walt Bettinger (Discount Broker)
Failure and invention go hand in hand.
“Failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention but are not willing to suffer the string of failed experiments necessary to get there.” — Amazon (AMZN) president, chairman, and CEO Jeff Bezos (e-Commerce)
In order to hit it big you have to take big swings.
“Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a 10% chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of 10. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.” — Amazon (AMZN) president, chairman, and CEO Jeff Bezos (e-Commerce)
Corporate cultures are not created, they are evolved.
“A word about corporate cultures: For better or for worse, they are enduring, stable, hard to change. They can be a source of advantage or disadvantage. You can write down your corporate culture, but when you do so, you’re discovering it, uncovering it — not creating it. It is created slowly over time by the people and by events — by the stories of past success and failure that become a deep part of the company lore. If it’s a distinctive culture, it will fit certain people like a custom-made glove. The reason cultures are so stable in time is because people self-select. Someone energized by competitive zeal may select and be happy in one culture, while someone who loves to pioneer and invent may choose another. The world, thankfully, is full of many high-performing, highly distinctive corporate cultures. We never claim that our approach is the right one — just that it’s ours — and over the last two decades, we’ve collected a large group of like-minded people, folks who find our approach energizing and meaningful.” — Amazon (AMZN) president, chairman, and CEO Jeff Bezos (E-Commerce)
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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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