Practical analysis for investment professionals
27 April 2016

The C-Suite Speaks: Looking for a Curveball

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.


Most C-suite executives don’t see signs of an imminent downturn, but the environment still feels a little fragile. It seems as though most everyone is on high alert for a macro curveball. There are some green shoots that suggest capital markets are opening back up, but there are also signs of sluggishness. Overall the economy appears to be okay: not deteriorating, but not robust either.

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The Macro Outlook

Even though things have gotten better, people are still waiting for a curveball.

“I’m a superstitious person and I think the minute I think this is starting to go well, for some reason we’re going to get smacked down with some change in the market. . . . Call it the curveball discount there. I’m just waiting to see another quarter. And right now, I’d say all indicators are looking favorable for improvement as the year goes on. I actually want to see some of that improvement sustained; meaning, economic conditions and exchange.” — Abbott Laboratories (ABT) chairman and CEO Miles White (Health Care)

The environment still feels a bit delicate.

“Many of the factors that were impacting the market in the first quarter . . . seem to have abated and although the market feels a little fragile from all that, it feels like — for the most part, that’s behind us. But we’ll see how the year progresses.” — Goldman Sachs (GS) EVP and CFO Harvey Schwartz (Investment Bank)

Though many are trepidatious, few see signs of a backwards slide.

“We believe that the global economy will continue to be uneasy . . . at this time we don’t see any signs of a broad-based global downturn. In fact, many companies expressed difficulty finding the right talent as evidenced by the findings of our 2015 talent shortage survey published late last year.” — ManpowerGroup (MAN) chairman and CEO Jonas Prising (Temp Staffing)

“The economy: It is what I would call good but not great. It’s okay. . . . We see no practical possibilities of recession, notwithstanding the fact there’s been a lot of conversation about that. And the reason is because we think there is a very, very strong solid pent-up need for continuing investment. When I talk to business people . . . they’re not excited enough about the future to go out and make major expansions and so forth. But they’re driving trucks that have 250,000 miles on [them]. They got 10-year old equipment, and so stuff just wears out. And so, that’s why you have to keep investing.” — BB&T (BBT) chairman and CEO Kelly King (Regional Bank)

Most agree that the economy isn’t great, but it hasn’t gotten worse.

“Things haven’t deteriorated, but things haven’t improved.” — Visa (V) CEO Charles Scharf (Credit Cards)

There are some positive signs.

“The M&A pipeline is strong and some green shoots suggest the equity underwriting calendar may open up. The S&P level at the end of the first quarter will help with asset pricing in our wealth management business.” — Morgan Stanley (MS) chairman and CEO James Gorman (Investment Bank)

The second quarter is feeling robust for loan growth.

“We already know what quarter two is starting to look like, and it’s feeling pretty robust . . . we are on all cylinders on loans. Mortgages particularly are growing nicely as they . . . didn’t a year ago.” — US Bancorp (USB) president and COO Andrew Cecere (Regional Bank)

But there are also a lot of areas that just feel sluggish. Intel projected a greater than expected slide in PC markets.

“We now expect the PC markets to decline in the high single digits in 2016 versus our prior forecast of mid-single-digit decline. Our projection of the PC market remains more cautious than third-party estimates.” — Intel (INTC) EVP and CFO Stacy Smith (Semiconductors)

Qualcomm lowered its expectations for mobile phone growth.

“We are adjusting our estimate of calendar 2016 global 3G/4G device shipments to 1.625 to 1.725 billion devices, with year-over-year unit growth of approximately 8% at the midpoint, down from our previous midpoint estimate of approximately 10% growth.” — Qualcomm (QCOM) president Derek Aberle (Semiconductors)

The steel industry is only using 71% of its production capacity.

“For the steel platform as a whole, driven by the flat-roll operations, our production utilization rate for the first quarter 2016 increased to 88% as compared to overall industry utilization of approximately 71%.” — Steel Dynamics (STLD) president and CEO Mark Millett (Steel)

Union Pacific expressed some doubt about whether the auto industry could meet sales expectations.

“Turning to autos, light vehicle sales are forecasted at 17.8 million vehicles, a 2% increase above the 2015 seasonally adjustable annual rate of 17.5 million vehicles. . . . While we expect low gasoline prices will continue to sustain demand, we remain cautious with respect to auto sales supporting these levels.” — Union Pacific (UNP) EVP Eric Butler (Railroad)

Venture lenders are focusing more on credit quality.

“There’s been a lot of discussions about things actually pulling back a little bit in [technology and life sciences] . . . Today, we’re probably focusing more on credit quality, more on granularity.” — Comerica (CMA) chairman and CEO Ralph Babb, Jr., and EVP J. Patrick Faubion (Regional Bank)

The market for IT jobs may be slackening somewhat.

“I would describe the demand for IT skills to still be healthy, maybe slightly softer.” — ManpowerGroup (MAN) chairman and CEO Jonas Prising (Temp Staffing)

The market may be a little slower to open all the way back up.

“I think after a tough first quarter like the whole market has experienced, I think that there may be a slow reaction function in terms of how various market participants engage the marketplace. But it feels like, as I said before, the most significant factors impacting the first quarter seem to have abated, at least for now.” — Goldman Sachs (GS) EVP and CFO Harvey Schwartz (Investment Bank)

International

The weakened dollar is turning into a slight tailwind for companies.

“Last year, we had a lot of headwinds, especially on the international revenue line. . . . This year, we’re seeing the reverse of that with the weakening of the dollar . . . International contribution margin is benefiting from that.” — Netflix (NFLX) CFO David Wells (Movie Studio)

The dollar is still high in any relative sense though.

“I’m not a central banker, but I would say the dollar is still very high in any relative sense. It has dropped a little from the peak, but it still is very high . . . The dollar is still a headwind. The strong dollar is still a headwind to US exports.” — Union Pacific (UNP) EVP Eric Butler (Railroad)

Pepsi is not especially bullish on South America and Eastern Europe.

“I think the two places where we’re probably incrementally less optimistic, number one is South America . . . And then number two is Eastern Europe.” — PepsiCo (PEP) vice chairman and CFO Hugh Johnston (Beverages)

Canadian Pacific said that it feels like the Canadian economy is bottoming.

“So that said the Canadian economy though on a positive note appears to be stabilizing and recessionary fears seem to be subsiding. So we do feel that the second-quarter is going to be the bottom. Q3, Q4 obviously are going to be stronger on a demand standpoint.” — Canadian Pacific (CP) Railway president and COO Keith Creel (Railroad)

March was tough for Las Vegas Sands in Macau.

“March was obviously disappointing. We had a really great January, February. March certainly softened up. Worldwide, I think Chinese tourism and consumer numbers are pretty depressing across the globe. And certainly, it was a little bit soft than we hoped in Macau. That was not the case in Singapore, but in Macau we saw a downturn.” — Las Vegas Sands  president and COO Robert Goldstein (Casino)

Low-cost labor will continue to struggle vs. automation.

“As you know, call centers are a very high turnover rate for employees. And with our decrease in calls coming in from our wireless customers because of more online, more chat, more self-service, we will not hire as many customer call centers . . . So there’s opportunity to reduce force just through the attrition rate.” — Verizon EVP and CFO Fran Shammo (Telecom)

Financials

It’s not easy being a bank these days.

“Before getting into our quarterly results, I’d like to directly address the recent discussions of our fundamental performance. I’ve talked to many of our shareholders over the past several months . . . I want to make sure everyone recognizes that . . . [we] hear and understand the desire for improved returns. . . . I know that we must earn our right to remain independent every day, and our management team and board are committed to doing what is in the best interest of our shareholders.” — Comerica (CMA) chairman and CEO Ralph Babb, Jr. (Regional Bank)

BB&T had been strategically acquiring banks, but is now applying the brakes.

“I’m not trying to say that we wouldn’t dare do any tiny little bitty something. But as a practical matter, we are just not focusing on M&A now, in insurance or bank . . . There’s a time to buy, and there’s time to run. And the last 24 months was a time to buy, because the times were right . . . now is the time to take time and to adjust.” — BB&T (BBT) chairman and CEO Kelly King (Regional Bank)

The flattening yield curve negated the benefit of higher short-term rates.

“Make sure you guys are watching the slope of the curve too . . . the moment — the short end came up, the long end came down. And that has the same kind of impact on interest income that you would see on lack of rate movement.” — US Bancorp (USB) chairman and CEO Richard Davis (Regional Bank)

It’s not easy being an asset manager either.

“The asset management industry in its current form is no longer a growth industry for a majority of traditional active asset managers. Overcapacity, chronically poor investment performance, high fees, competition from passive strategies, growing barriers to entry for access to distribution ,and the rapidly growing cost of regulatory compliance, taken together, will challenge future growth and profitability for most legacy investment managers.” — Cohen & Steers (CNS) CEO Bob Steers (Real Estate Investment Management)

Consumer

We have now lapped the big reductions in gas prices, which should impact retail sales comps.

“We have now lapped the sharp gas declines from last year. . . . We had hoped that this would provide a tailwind for US domestic volumes in the second half of fiscal 2016. This has not happened, as gas prices remain below the lows of last year.” — Visa (V) EVP and CFO Vasant Prabhu (Payments)

Technology

Technology start-ups may do well on the marketing front, but they still need to prove that their business models actually work.

“The technology companies that I’m aware of, they have done a good job of sizzle in terms of the marketing but I don’t think that they have done as well a job in the execution of the plan where they are able to make money over a period of time.” — Brown & Brown (BRO) president and CEO J. Powell Brown (Insurance Broker)

“Data is the new oil.”

“Data is the new oil. Like those who have the data, those who have the understanding of the consumer, we believe, are the ones that are going to win.” — Under Armour (UA) chairman and CEO Kevin Plank (Apparel)

Google’s CEO says that the company hasn’t come close to reaching its full potential.

“Google’s mission is to organize the world’s information and make it universally accessible and useful. And after 17 years, we have just scratched the surface of what’s possible.” — Google (GOOG) CEO Sundar Pichai (Internet)

Reed Hastings thinks that virtual reality (VR) will probably be primarily a gaming format for a few years.

“I think it’s mostly going to be an intense gaming format for a couple of years . . . So think of it like the PlayStation 5 or the XBox 2 or something . . . I think the center point for VR will be other sorts of things than watching a TV show in a VR headset. I don’t think that’ll be very popular.” — Netflix (NFLX) founder and CEO Reed Hastings (Movie Studio)

China is more digitally advanced than one might expect.

“I’m constantly amazed at how advanced China is digitally. It’s got twice the number of cell phones, smartphones, as the US population. And even in our offices, people go up and down the elevator to go to lunch, they’re looking up where the offers are available and where they can book a table, etc.” — YUM! (YUM) Restaurants China CEO Micky Pant (Restaurants)

Health Care

UnitedHealth is pulling out of a number of public exchanges.

“The smaller overall market size and shorter term higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis. Next year we will remain in only a handful of states, and we will not carry financial exposure from exchanges into 2017.” — UnitedHealth Group (UNH) president and CEO Stephen Hemsley (Health Insurance)

Industrials

Flat-rolled steel prices are rising thanks to trade case filings to prevent Chinese dumping.

“For the first time in well over a year, we’ve begun to experience rising metal pricing for carbon steel products as well as stainless steel flat-rolled products. This pricing improvement, which accelerated towards the end of first quarter, was mainly result of the recent trade case filings by US steel producers.” — Reliance Steel & Aluminum (RS) president and CEO Gregg Mollins (Steel)

Materials, Energy

Core Laboratories believes that we will see a V bottom in oil markets.

“Our second quarter 2016 results should mark the bottom of our anticipated v-shaped commodity recovery that should lead to increased crude oil prices followed by increased industry activity levels.” — Core Laboratories (CLB) EVP and CFO Richard Bergmark (Oil Service)

However, overbuilt industries don’t always enjoy v-shaped recoveries.

“We have believed since the outset of this housing recovery that it would be more gradual than the v-shaped rebound, typical of most housing cycles. Our thesis is unchanged as we expect an extended recovery will continue to unfold for the next several years.” — PulteGroup (PHM) chairman and CEO Richard Dugas, Jr. (Homebuilder)

Distressed oil companies have been able to sell assets rather than make “defensive draws” on credit lines.

“The vast majority of our borrowers are doing the opposite. They’re selling assets. They’re raising capital to make sure that they are staying within the confines of what they expect the new borrowing base to be. So we’re really pleased to see that.” — Comerica (CMA) EVP J. Patrick Faubion (Regional Bank)

Surprisingly, they are even able to sell assets at significant premiums to where lenders have them marked.

“Since really last summer, our borrowers have sold about $1.7 billion of assets . . . on average the premium has been 93% above what we have those assets valued at in the borrowing base, and in 2016 that premium is even higher. It’s about a 120%. So not only is there a lot of opportunity for our borrowers to sell assets to raise liquidity, but it’s a very accretive process when they’re doing it.” — Comerica (CMA) EVP and CCO Peter Guilfoile (Regional Bank)

Oil companies are eager to rev up production again, but remain cautious.

“I think that they’re being cautious about their next move. I think . . . generally they wanted to see some additional recovery and see some stability in that recovery. I also think that as a group they’ve made themselves very, very flexible. I mean, they are updating their outlook and updating their decision making. It’s no longer an annual process. It seems like it’s a bi-weekly process or something now as they’re looking at things, which suggests that when they do decide to turn things back up, they’ll be able to turn it back up relatively quickly.” — Kinder Morgan (KMI) president and CEO Steve Kean (Oil Pipeline)

Miscellaneous Nuggets of Wisdom

Have the courage to go after the right customers, not just any customer.

“[We worked] to have the courage to go out there and get the right customers. I think there might have been a mentality here and maybe perhaps in other companies, where you’re trying to show some number to Wall Street, but at the end of the day it hurts you long term financially.” — Dish Network (DISH) chairman and CEO Charlie Ergen (Satellite Television)

Laziness can help create an effective moat.

“Our biggest enemy is inertia. The issue is that most people with a brokerage account do not want to bother with switching it. So therefore, even if they are — even if we succeed in convincing them that they would have a financial advantage, a large financial advantage, by bringing their account to us, they still don’t want to do it, because of just laziness.” — Interactive Brokers (IBKR) chairman and CEO Thomas Peterffy (Retail Brokerage)

There are a finite number of experts in a given field.

“If the world created 5,000 cognitive experts, we would hire 5,000 cognitive experts . . . But there is a rate at which it doesn’t make sense for us to keep putting money into these because the world doesn’t create them anymore. It’s not a problem that can be solved by spending more money. It’s a problem that is constrained by the kinds of skills the world’s creating. So we have a global search on for talent.” — IBM (IBM) senior VP and CFO Martin Schroeter (Enterprise Tech)

The best organizations have a gravitational pull to attract those experts.

“What we find is that skills have gravity and highly skilled people want to work with others in their fields who are also highly skilled. So they come here to work with our unique data sets, with our unique technologies, with our unique industry expertise, in order to change the way the world works, in order to change the way industries operate, in order to change professions.” — IBM (IBM) senior VP and CFO Martin Schroeter (Enterprise Tech)

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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.

Image credit: ©iStockphoto.com/Pgiam

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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