Practical analysis for investment professionals
03 May 2016

The C-Suite Speaks: Earnings Avalanche

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The C-Suite Speaks: Earnings Avalanche

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 is in high gear. We read more than 50 earnings calls last week, and there are still more to get to. Generally, a similar view of the economy recurred throughout all of them: Things are sluggish and people are still cautious, but there’s no reason to believe that a downturn is imminent.

Other findings include: The Chinese economy is doing better than many people think, according to several CEOs; the oil industry will still be under significant pressure even if oil prices rise; and Jeffrey Gundlach has some ominous forebodings about the macro environment.

Of course, a lot got left on the cutting-room floor this week, but it’s worth perusing the Gundlach interview and the transcript from Silicon Valley Bank.

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The Macro Outlook

The market threw a fit in Q1.

“The market tantrum in the first part of the year resulted in lots of dislocation, some of which has normalized, some of which has not . . . Segments of the debt market still remain under considerable pressure. Investment sentiment is fragile and characterized by significant caution around choppy economic data, negative rates, political rhetoric, and other factors.” — Blackstone (BX) chairman, CEO, and co-founder Steve Schwarzman (Private Equity)

But the industrial economy appears to be stabilizing. Parker-Hannifin saw a moderation of declines.

“Orders during the quarter sequentially got better as we saw January going through March . . . we saw a number of markets move from accelerating declined to decelerating decline.” — Parker-Hannifin (PH) chairman and CEO Tom Williams (Industrial Components)

AIT also saw positive signs throughout the quarter.

“We had improvements really each month throughout the quarter, with a couple of days remaining. April is consistent with March, . . . We’re seeing a stabilization perhaps as we go . . . on through calendar 2016.” — Applied Industrial Technologies (AIT) president and CEO Neil Schrimsher (Industrial Distributor)

Chicago Bridge & Iron experienced improved bookings.

“Now year-to-date, we’ve already seen improvement in new work bookings early in the second quarter.” — Chicago Bridge & Iron (CBI) CEO Philip Asherman (Engineering and Construction)

Most people expect better results as the year progresses.

“I was just with a lot of our international teams recently at our brand week, and I would say everybody is expecting their results to improve as the year progresses.” — Kimberly-Clark (KMB) chairman and CEO Tom Falk (Consumer Packaged Goods)

Capital markets still aren’t fully healed though.

“I think the stock market has rebounded 95%, 99% of the way back to where it was. And the credit markets are a little slower, the spreads are still wide, there is still caution in the market, deals are still being more diligent on covenants and structure. So it’s a little different in the middle market. It’s a little slower on the comeback.” — Moelis & Company (MC) chairman and CEO Ken Moelis (Investment Bank)

Capital continues to be tighter for venture backed companies.

“The tech markets seem to have calmed somewhat following a volatile first quarter, sparked by a long buildup of fears over a possible unicorn bubble. While those fears may have been overstated, valuations have pulled back and capital is tightening, especially for early-stage companies.” — Silicon Valley Bank (SIVB) president and CEO Greg Becker (Bank)

Auto sales may have reached a plateau and inventories are rising.

“Industry inventories were elevated with retail day supply outstanding at approximately 80 days. As we indicated earlier this year, the new vehicle market is plateauing.” — AutoNation (AN) EVP and COO Bill Berman (Auto Dealership)

“The US new vehicle inventories stood at 31,400 units, which equates to an 85-day supply compared to a 69-day supply for the first quarter of 2015. Luxury brand inventories drove much of the year-over-year increase.” — Group 1 Automotive (GPI) CEO Earl Hesterberg (Auto Dealership)

There are a number of retailers whose survival is not assured.

“We are consumer-oriented company. . . . The worldwide economy is flattening. There is a lot of stuff out there. And we are just being a little bit . . . cautious. . . . I mean, we all know there [are] a few tenants out there that may or may not go bankrupt, may or may not close [a] bunch of stores.” — Simon Property Group (SPG) chairman and CEO David Simon (Mall REIT)

There are also signs that negative interest rates may be backfiring.

“So there is mounting evidence that negative interest rates do the opposite of what the central bankers were hoping for. Negative interest rates are designed to fight deflation. But they are the very definition of deflation: Your money is disappearing. As an investor, you are going to have less money in the future than you have today with negative interest rates. That’s deflation! So negative interest rates are deflationary and they are tremendously negative for monetary velocity.” — DoubleLine CEO Jeffrey Gundlach (Asset Management)

If you’re looking for sentiment to guide you, there aren’t extremes in either direction. Demand hasn’t gotten late-cycle hot.

“In prior cycles, late stage has been indicated by this white-hot hyper demand where permanent placement grows at very high double-digit rates. That hasn’t happened. . . . We still don’t see that type of hyper demand that we would typically see late cycle, but instead we continue to slug it out in this relatively sluggish macro environment.” — Robert Half (RHI) chairman and CEO Harold Messmer, Jr. (Temp Staffing)

Nobody panicked in February either.

“Interestingly, client cash balances remained relatively consistent. They grew pretty much in proportion to organic overall client growth . . . indicating, I think, that clients really didn’t panic even during that first half of the last quarter.” — Charles Schwab Corporation (SCHW) president and CEO Walter Bettinger, II (Retail Brokerage)

Tread carefully.

“It’s all about capital preservation. If you can get a few percent return in a deflationary environment, you’re doing fine. . . . The US stock market seems egregiously overvalued versus other stock markets . . . Also fundamentally, it’s very hard to believe in US stocks. Earnings and profit margins are dropping. . . . The high-yield market has enjoyed the easy rally. I think it’s basically over. . . . [High-yield bonds] are facing enormous fundamental problems. . . . The leverage . . . is enormous and you’re about to have a substantial increase in defaults. I wouldn’t be surprised if the cumulative default rate in the next five years [is] the highest in the history of the high-yield bond market.” — DoubleLine CEO and CIO Jeffrey Gundlach (Asset Management)


Tim Cook said that China’s supposed weakness is exaggerated.

“I think China is not weak as has been talked about. . . . Maybe [we do] not have the wind at our backs that we once did, but it’s a lot more stable than what I think is the common view of it. And so we remain really optimistic on China.” — Apple (AAPL) CEO Tim Cook (Consumer Electronics)

Jeff Immelt also glimpses progress in China.

“I was in China last week and saw improvements in our business. Most of the portfolios are strong and we’re delivering. There’s plenty of business out there to achieve our goals.” — GE (GE) chairman and CEO Jeff Immelt (Conglomerate)

Caterpillar is seeing an uptick in China for the first time in three years.

“This is the first post-Chinese New Year in probably three that we have seen a continued industry uplift for the industries that we serve around construction. It’s not a hockey stick. It’s not a boom. It’s not a 2010. But it is the first time we’ve seen that happen, and we have lifted our schedules as a result of that this year.” — Caterpillar (CAT) chairman and CEO Doug Oberhelman (Construction Equipment)

Caterpillar’s CEO has his doubts about whether the uptick can be trusted though.

“I would share the caution in China. . . .Our folks over there were pretty emphatic that that’s going to hold and that this is beyond pre-buy. But I am very cautious about how far that goes. . . . We’re going to have to watch this month by month and see where it goes. . . . I’m not going to declare a bottom in China. I don’t know.” — Caterpillar (CAT) chairman and CEO Doug Oberhelman (Construction Equipment)

Europe’s strength surprised Honeywell’s CEO.

“If there was any region that surprised me in this past quarter, it was Europe [which] did a lot better than I expected. I don’t know if this is just a one-time bounce or something that’s going to stay consistent, but I was quite encouraged by seeing that. It was a nice surprise.” — Honeywell (HON) chairman and CEO David Cote (Diversified Industrial)

Brazil is mired in its most severe downturn ever.

“In Latin America, Brazil is still in the worst recession in the country’s history, and, of course, economic conditions in Venezuela are deteriorating further.” — MasterCard (MA) president and CEO Ajay Banga (Payments)


Companies are relying on M&A to generate “growth” in a low-growth environment.

“Generally speaking. the catalyst behind this cycle is pretty powerful, which is this disinflationary, deflationary trend. And M&A becomes an important tool for boards and companies to have in their toolbox to address difficulties or challenges around organic growth and challenges around driving earnings through additional efficiencies in the business.” — Lazard (LAZ) chairman and CEO Ken Jacobs (Investment Bank)

“I think corporates are back and looking [at] how they can improve their business. It’s a very low-growth environment out there. They still have to look at M&A as a way to either take out cost or increase growth.” — Moelis & Company (MC) chairman and CEO Ken Moelis (Investment Bank)

Jones Lang LaSalle continues to be positive on commercial real estate markets.

“So there’s nothing really out there, which at this point says that even though we are in the fourth quarter here, there is anything imminent that suggests that this cycle is about to win.” — Jones Lang LaSalle (JLL) president and CEO Colin Dyer (CRE Broker)

Bank loan growth has been very strong.

“Another item that appears to be an emerging trend in the last six months is stronger loan growth. In the first quarter, loans increased at an annualized rate of 7.6%. . . . It was one of the best first quarter growth rates Zions has posted in the last decade.” — Zions Bancorporation (ZBK) chairman and CEO Harris Simmons (Bank)

But loan growth is risky at this stage of the cycle.

“The massive amount of growth that we see in the credit market place is not lost on us. . . . We know that in the end the growth . . . can affect credit with the selection quality of new origination and can impact existing customers who take on more debt from other players.” — Capital One (COF) chairman and CEO Richard Fairbank (Bank)

Online “robo-advising” ultimately isn’t that differentiated. Everyone will have the offering.

“With respect to the digital or online advice . . . I just think that everybody is going to have . . . these types of products, these types of solutions. . . . I would be surprised if you see major market share move as a result of it because it’s just not that differentiated in many cases from one firm to the other.” — Charles Schwab (SCHW) Corporation EVP and CFO Joseph Martinetto (Retail Brokerage)

The hedge fund industry may be on the verge of collapse.

“The result of all of this was one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fund. . . . There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies.” — Third Point CEO Dan Loeb (Hedge Fund)


US diaper buyers have been trading up from private label.

“We saw private label shares flat to down in nearly every category that we’re in, which is again another sign of health of the consumer for us, and are probably maybe more bullish on the outlook in North America at this point in time than maybe we would have been even at the beginning of the year.” — Kimberly-Clark (KMB) chairman and CEO Tom Falk (Consumer Packaged Goods)

Retailers have invested a lot of money in e-commerce and the returns aren’t showing up.

“The internet is not the panacea. A lot of capex have been spent there. It’s not showing the returns for retailers, so I think . . .their biggest and best opportunity continues to be bricks and mortar and you know we’ll keep plugging along.” — Simon Property Group (SPG) chairman and CEO David Simon (Mall REIT)

Chipotle said sales started to pull from their lows in the first quarter.

“We begin to see sales recover in the second half of the first quarter as our transaction trends reversed course from the lows we saw in January. Since the beginning of February, we have seen an 18-point improvement in comp transactions compared to the full month of January.” — Chipotle (CMG) chairman and co-CEO Steve Ells (Burritos)

Advertisers are coming to the conclusion that TV is still an important part of a successful advertising campaign.

“I think the emotion of the market has swung pretty dramatically over the last year. I think people have come to the realization that broad television reach is really important in a campaign, that digital has a place but television has a big place.” — Comcast (CMCSA) senior EVP and CEO NBCUniversal Stephen Burke (Media)

The Los Angeles Times quoted some hooligan about Comcast’s DreamWorks acquisition.

“Comcast is definitely trying to [emulate Disney’s strategy] . . . but they are not getting top content. Studios have always had animation studios, and for whatever reason nobody has ever really been able to copy Disney’s success.” — Avondale Asset Management CEO Scott Krisiloff, CFA, author of the piece you’re reading


Tim Cook said that macroeconomic weakness was primarily responsible for slowing smartphone growth.

“Do I think the smartphone market is mature? I think that the market, as you know, is currently not growing. However, my view of that is that’s an overhang of the macroeconomic environment in many different places in the world. And we’re very optimistic that this too shall pass and that the market and particularly us will grow again.” — Apple (AAPL) CEO Tim Cook (Consumer Electronics)

Mark Zuckerberg’s interests appear to be straying from Facebook.

“While helping to connect the world will always be the most important thing that I do, there are more global challenges that I also feel a responsibility to help solve to create a better world for my daughter and all future generations, things like helping to cure all disease by the end of the century, upgrading our education system so it’s personalized for each student, and protecting our environment from climate change.” — Facebook (FB) co-founder and CEO Mark Zuckerberg (Social Media)

Acquisitions have played a central role for internet companies.

“Acquisitions have been critical in creating value for the internet sector, consumer internet sector, over the last two decades. Many of our competitive peers have bought assets at very early stages that have resulted in billions of dollars of value.” — Twitter (TWTR) CEO Jack Dorsey (Social Media)

T-Mobile’s CTO vowed to overtake Verizon’s network within the next two to three years.

“If I’m Verizon, one . . . I’m looking over my shoulder because T-Mobile may match my breadth if not exceed it with the largest network in the US before too long. . . . The next two to three years, you will see us push and be the fastest growing, the fastest network, and the most advanced network with what we’re doing on LTE.” — T-Mobile (TMUS) EVP and CTO Neville Ray (Telecom)

Some examples of the way that companies are using the cloud:

“Microsoft announced Azure contracts with BMW and Toyota to assist in making their cars smarter and more connected. This is in addition to contracts Microsoft has with Volvo and Nissan. BMW is using Azure to power its open mobility cloud for their new BMW connected app. Toyota will use Azure to run Toyota Connected to support in-car services, telematics, Internet of Things, home connectivity and smart city integration.” — DuPont Fabros (DFT) president, CEO, and director Christopher Eldredge (Data Centers)

Health Care

Express Scripts is using big data to better understand its patient population.

“And so we use great amounts of [big data] to not only in our own book [look out for] fraud, waste, and abuse, but increasingly for our health-plan clients to help power their programs, power their provider networks, power their payment mechanisms by virtue of being able to have a very complete look at prescribing patterns, at patient outcomes, and so forth.” — Express Scripts (ESRX) president Tim Wentworth (Prescription Benefits Manager)


Aircraft demand continues to be supported by growing passenger miles.

“I’ve said many times the biggest aerospace driver we have is flight hours. And it’s not tied to OEM schedules or airline profitability or any of that generally. The long-term trend is going to be driven by flight hours. If they’re flying, everything ends up working out.” — Honeywell (HON) chairman and CEO David Cote (Diversified Industrial)

“Passenger traffic is off to its strongest start in eight years, with traffic growing 8% in early 2016. Over the past three years, we have seen passenger traffic growth consistently outpace global GDP and airline capacity growth.” — Boeing (BA) chairman, president, and CEO Dennis Muilenburg (Aerospace)

Industrial companies are putting sensors in everything.

“This whole focus on total system innovation going forward, combining hardware with sensors, instrumentation, and software controls, this is the way of the future for the industry.” — Schlumberger (SLB) chairman and CEO Paal Kibsgaard (Oil Service)

“Today, we’ve got 400,000 connected assets and growing. By this summer, every one of our machines will come off the line being able to be connected and provide some kind of feedback in operational productivity to the owner, to the dealer, and to us.” — Caterpillar (CAT) chairman and CEO Doug Oberhelman (Construction Equipment)

Materials, Energy

The oil industry is facing a “full-scale cash crisis.”

“Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels. . . . Our industry is now in the deepest financial crisis on record. . . . This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turns.” — Schlumberger (SLB) chairman and CEO Paal Kibsgaard (Oil Service)

Even if prices improve, the industry will still face a great deal of pressure.

“The longer this goes, which it’s going to go, you know, even if prices improve . . . oil-field service will be under considerable stress for the remainder of this year and a fair amount of next year.” — Zions Bancorporation (ZBK) president and COO Scott Mclean (Regional Bank)

No one would be excited about oil prices in the $40s if they hadn’t dipped into the 30s.

“If we didn’t take a short trip down into [the[ low $30s, you would think this was a very distress[ful] level [for] oil. . . . So yes, there has been a recovery, but it’s still at a price that’s going to cause many companies to have to focus on restructuring their balance sheet.” — Moelis & Company (MC) chairman and CEO Ken Moelis (Investment Bank)

At least one positive is that companies are finally capitulating to low oil prices and not expecting them to go higher.

“We’ve seen $40 before. We saw it coming down. And so now we’re seeing it going up. But we could be back at $30 again. So we just prefer to err on a more conservative side” — Zions Bancorporation (ZBK) president and COO Scott Mclean (Regional Bank)

“The story around oil and gas, I guess major OEMs really continue to indicate no significant improvement until the end of calendar 2016, early 2017. . . . It looks like everybody is trying to restructure and look to be profitable around $40 per barrel.” — Parker-Hannifin (PH) president and COO Lee Banks (Industrial Components)

Oil companies are still far from out of the woods.

“In Houston . . . I attend a lot of meetings and I’m on various boards with these oil company executives and they still have quite a way to go in restructuring their balance sheet, and that’s what happening now.” — Group 1 Automotive (GPI) president and CEO Earl Hesterberg (Auto Dealership)

A lot of corn is expected to be planted this year, which could keep corn prices low, along with farm incomes.

“If the weather is perfect and we get 94 million acres . . . we’ll continue to see commodity prices at that low end of . . . that 320 to 420 kind of operating range. And that will continue to put stress on that farm income.” — DuPont (DD) EVP James Collins, Jr. (Chemicals)

Miscellaneous Nuggets of Wisdom

Recessions don’t drive financial markets, financial markets drive recessions.

“We will be on watch for [a recession] in the coming months. But it doesn’t really matter. Recessions don’t drive financial markets. It’s the other way around.” — DoubleLine CEO and CIO Jeffrey Gundlach (Asset Management)

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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: © Padovani

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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