Practical analysis for investment professionals
10 May 2016

The C-Suite Speaks: Ongoing Weakness

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 US economy continues to be sluggish, and there are signs that industry is not seeing the bounce it had hoped for. One week does not necessarily make a pattern, but until we have inflation, it will be tough for businesses to show the type of top-line growth that investors are used to.

Also in this week’s post: Oil companies are now optimistic, Elon Musk sleeps at the office, and our director of research, Jeremy Saltzberg, was in Omaha for the Berkshire Hathaway meeting, so there are a number of words of wisdom from Buffett.

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The Macro Outlook

The United States may not be rebounding as much as hoped.

“The one surprise we had is in the last couple months we’ve seen the US spending rate come back down again, which bothers us. . . . I feel a little bit more worried about sales because of the US marketplace in particular . . . this slow to start turning that nose up really bothers me.” — Emerson Electric chairman and CEO David Farr (Industrial Components)

GDP growth has slowed.

“US GDP has obviously weakened . . . consumer spending continued to be the primary economic driver in the US. On the other hand, industrial production has been disappointing.” — UPS chairman and CEO David Abney (Logistics)

Restaurant data has shown recent weakness.

“According to the National Restaurant Association, restaurant sales have been uneven during the first three months of 2016, after steadily rising throughout 2015. Both NPD and KNAPP-TRACK have also shown recent traffic and sales declines. . . .We may be seeing a little bit of a softening out there right now.” — Sysco president and CEO Bill DeLaney, III (Restaurant Distributor)

Flextronics continues to see a very slow, very weak, but stable environment.

“We’ve been mentioning that the macro’s been soft . . . for at least three quarters. We continue to see the same kind of softness . . . we don’t see the market getting stronger, but we see it somewhat stable. We don’t see a significant downside. We just see it very slow and very weak.” — Flextronics CEO Mike McNamara (Electronics Manufacturing)

Avis saw an “unusually weak” spring break, but does think that things are turning up.

“Our soft President’s week . . .was the start of what turned out to be an unusually weak spring break. Coupled with the soft commercial demand, weak inbound volume and a mild winter . . . our view is that this unusually soft pricing event . . . is an anomaly, not a trend . . . March was better than February, April was better than March, and May bookings are indicating a continuation of the favorable pricing trend.” — Avis Budget Group CEO Larry De Shon (Rental Cars)

Expeditors’ customers are more cautious about their spending.

“Our people . . . adapted to . . . slowing global trade and excess carrier capacity. Many of our customers are being cautious about how to spend their logistics dollar, taking advantage of abundant capacity in search of lower rates where possible.” — Expeditors International president and CEO Jeff Musser (Freight Forwarding)

Trophy real estate assets are showing some potential price vulnerability.

“Particularly with regard to trophy office, we’re not seeing as many bidders in some cases. . . . If we were going to circle some assets and say these are the ones that might be vulnerable, it clearly would be the trophy office assets.” — CBRE Group president and CEO Bob Sulentic (Commercial Real Estate Broker)

Markets have rallied back, but has it just been a technical bounce?

“We are happy to see the fear in the market . . . subsiding a bit . . . With that being said, we believe this recovery is largely technical and without a meaningful change in fundamentals, our attitude and our approach is generally unchanged.” — Ares Capital director and CEO Kipp deVeer (Business Development Company)

Oaktree thinks that we are about to see more distressed debt.

“The credit markets’ panic attack . . . reminds us that market psychology is fragile, liquidity can suddenly become scarce, and capital markets can quickly shut. Moreover, we believe that signals that an upswing in defaults has finally started, and that we are a big step closer to the next expanded distressed debt opportunity.” — Oaktree co-chairman and CIO Bruce Karsh (Asset Management)

A large percentage of US profit growth has historically come from inflation.

“There are a lot of headwind coming at us, as you know, that is putting downward pressure on sales, because historically in the US market the growth did not come from volume. If you look back for the last number of years, it came from inflation and that inflation was based on commodities inflation. Now, we are living in an environment where there is no inflation in commodities, so it is harder to . . . have a bullish approach to grow.” — Kraft Heinz COO George Zoghbi (Packaged Food)

And no one really knows when inflation will come back.

“I wish I could tell you when we were going to cross over between deflation and inflation. . . . I think we said that we expect it to last at least another quarter, it could be longer than that based on what we’re seeing. And so I’m not really sure when to make that call.” — Sysco president and CEO Bill DeLaney, III (Restaurant Distributor)

Beware market illiquidity.

“One of the hallmarks of the capital markets today is that there just isn’t a lot of liquidity. And when the sellers emerge, prices drop, in many cases well below fundamental value. . . . In some cases, we were stymied, because there wasn’t as much supply as we would have liked of the companies that we found attractive. . . . When the recovery came, again, some of these securities traded up 20 points or 30 points, again because of the lack of liquidity.” — Oaktree co-chairman and CIO Bruce Karsh  (Asset Management)

It would not be abnormal to go into a recession after seven years of expansion.

“If we go into a recession after six-seven years of economic growth, it won’t be unusual.” — Fairfax Financial chairman and CEO V. Prem Watsa (Insurance)”


Europe has improved.

“I just came back from Europe. Europe, our Western European business has continued to improve. I finally see some good momentum there. No, the economy is not going to be robust there, but they clearly are making investments.” — Emerson Electric chairman and CEO David Farr (Industrial Components)

Sentiment in China is not all bearish.

“I have to say, having just returned from Latin America and India and China, the consumer that you see on the ground, the behavior that you see on the ground, is really quite vibrant in India; and in China, is not doom and gloom. Some concerns, but not the headlines that we read every day.” — Colgate Palmolive chairman, president, and CEO Ian Cook (Packaged Goods)


Tom Gayner is struggling to comprehend negative interest rates.

“I remember that it was hard learning about negative numbers in fifth grade, I’m finding it even harder to understand them as a grown up as they pertain to interest rates. Fortunately, I figured out negative numbers and made it to the sixth grade eventually, and we will all do so as well with negative interest rates.” — Markel co-CEO Tom Gayner (Insurance)

Warren Buffett has a good way of explaining them.

“We had a rule for 2600 years from Aesop . . . that a bird in the hand is worth two in the bush. But a bird in the hand now is worth about nine-tenths of a bird in the bush in Europe. . . . These are very unusual times.” — Berkshire Hathaway CEO Warren Buffett (Textiles)

Extremely low rates have a real effect on business valuations.

“If you ask me whether I paid a little more for Precision Castparts because interest rates were zero, than if they had been 6%. The answer is yes. I try not to pay too much more but it has an effect. If interest rates continue at this rate for a long time, if people ever really start thinking this is normal, that will have an enormous effect on asset values. It already has had some effect.” — Berkshire Hathaway CEO Warren Buffett (Conglomerate)

The hedge fund space is overcrowded.

“We’ve been reducing our hedge fund investments over the past year or year and a half. . . . The space has become very crowded and returns have been competed away. When 20 years ago there were one or two or 10 traders, market neutral hedge funds could earn very, very attractive returns. Now that there are hundreds of them, the rate of return that those hedge funds can earn has come down rather dramatically.” — Loews Corporation president and CEO James Tisch (Investment Company)

Reinsurance markets may be starting to improve.

“There are some signs that reinsurance terms, especially ceding commissions may be bottoming out.” — Arch Capital Group chairman and CEO Constantine Iordanou (Insurance)

Antitrust enforcement has gotten more harder recently.

“Obtaining the US antitrust approval of large complex business combinations, regardless of the industry, has become increasingly time intensive and difficult.” — Halliburton chairman and CEO David Lesar (Oil Service)


Used car prices are falling because more people are leasing cars.

“You can see that we have seen a decline in both 24 months and 36 months auction values versus a year ago. . . . We have, across the industry, more units coming back from the increasing rates of lease over the last number of years.” — Ford Motor Company EVP and CFO Robert Shanks (Automobiles)

Electric cars have momentum in China.

“As . . . was reinforced in Beijing last week, customer interest in electrification is gaining momentum. Our customers increasingly see the need for electrification of the power train to close the regulatory gaps on CO2 emissions and fuel economy.” — Delphi president and CEO Kevin Clark (Auto Supplier)

Television is enjoying a resurgence in interest from brand advertisers.

“We’re seeing some of our inventory sell for upwards of 30% to 50% higher than last year’s upfront levels. . . . We think all signs point to, frankly, the best upfront we will have seen in years. . . . television is experiencing resurgence in the minds of brand advertisers.” — TimeWarner chairman and CEO of Turner John Martin (Media)

Whole Foods is trying to stay ahead of its competition with prepared foods.

“Our commitment around culinary is really what separates us compared to the competition. . . . We really feel like [it is] a big, big differentiator for us as a company.” — Whole Foods EVP of operations Ken Meyer (Grocery)


Tinder’s user growth is strong overall but has slowed in North America.

“In terms of Tinder MAU, it continues to grow well. Again, as I’ve said, it’s slower growth in North America than in the rest of the world, which is natural just given the rollout.” — Match Group chairman and CEO Greg Blatt (Online Dating)

Apparently there is a Chinese “Alphabet” after all. Baidu appears to be a mirror image of Google.

“We have invested in AI for many, many years. We believe we are leading in this sector not only in China, but around the world. This enables us to do disruptive things like autonomous driving. And it’s kind of early for us to talk about this model because right now our focus is to solve those technical problems. The first to make that autonomous driving fully autonomous.” — Baidu co-founder, chairman, and CEO Robin Li (Chinese Google)

Health Care

CVS’s front of store is primarily a tool to drive pharmacy sales.

“Ultimately we see the role of the front store as essentially a door into the pharmacy. This is where consumers get connected to CVS, and ultimately over time, they start using us for prescription.” — CVS Pharmacy president and EVP CVS Health Helena Foulkes (Pharmacy)

Emergency rooms and urgent care are filling a gap caused by a shortage of primary care physicians.

“You see urgent care, freestanding emergency rooms, and even hospital-based emergency rooms [are] providing the solution that patients are looking for when they can’t get into a physician clinic because of physician shortages or because of payer dynamics.” — HCA COO Samuel Hazen (Hospital)


Manufacturers may be nearing the end of their inventory liquidation.

“We completed the inventory correction back in December quarter.” — Microchip chairman and CEO Steve Sanghi (Semiconductors)

A shift to a 48-volt electrical system could create opportunities for auto suppliers.

“Things like 48-volt, where you can get a significant benefit at a fraction of the cost, it’s a great value proposition. It’s a terrific value proposition.” — Delphi president and CEO Kevin Clark (Auto Supplier)

Materials, Energy

The oil industry is breathing easier than it did 90 days ago.

“I think it almost goes without saying that things feel better today than they did 90 days ago. . . . The very fragile energy capital markets . . . appear to be stabilizing, the outlook for commodity prices are improving, and I think for industry our operating environment is definitely strengthening.” — Anadarko Petroleum chairman, president and CEO R. A. Walker (Oil E&P)

Companies are starting to talk about expanding their capital budgets again.

“If the current oil price environment prevails, it’s more likely that we will maintain or even increase drilling and completion activity from current levels, which would result in increased capital spending. . . . At this point, the environment’s getting much better. I mean, we like the direction on the cost, we like the direction on the oil price, so I think we’re at a point where things are starting to look pretty darn attractive.” — Apache EVP and CFO Stephen Riney (Oil E&P)

People are expecting oil companies to move cautiously.

“I do think commodity prices have to go up and they have to stay there a while before you really see activity and purchasing follow, as customers repair balance sheets and basically get comfortable that commodity prices are going to stay high.” — National Oilwell Varco chairman and CEO Clay Williams (Oil Equipment)

But producers have maintained their ability to increase production quickly.

“Apache has maintained the organizational capacity and personnel to operate a significantly higher number of rigs and we are well prepared to ramp-up activity when appropriate.” — Apache president and CEO John Christmann, IV (Oil E&P)

And they have cut costs significantly.

“In key areas of North America where Apache was actively drilling, our average drilled and completed well costs were down approximately 45% in the first quarter compared to average 2014 levels. Notably in the Delaware Basin, our most recent well costs are now down approximately 60%.” — Apache president and CEO John Christmann, IV (Oil E&P)

High levels of storage could be an overhang on the market for some time too.

“While production in the US peaked several months ago, oil storage is proving quite stubborn and is rivaling levels from over 80 years ago. Until production declines translate into meaningful oil inventory storage reductions in the US, I believe we will continue to operate in a challenging upstream environment.” — Distribution Now CEO Robert Workman (Oil Service)

Recovery may not come until 2017.

“We continue to believe that the upturn is really a 2017, not a 2016 story, i.e., the oil and gas market upturn.” — Ecolab chairman and CEO Douglas Baker, Jr. (Services)

In the meantime, oil companies are confident that they’ll have access to capital if they need it.

“I think what we’ve seen is they’ll be able to get the money to do that either through commodity prices or through going back into the equity markets or the debt markets. So, yeah, they are feeling better and I think they’re trying to survive to 2017 and then get on with things.” — Halliburton chairman and CEO Dave Lesar (Oil Service)

Cliff’s Natural Resources’ CEO is one of a kind . . .

Analyst: “Yes, hi, Lourenco. My question was answered already.”
Lourenco Goncalves: “But mine was not, what’s the current price expectation of the desk of JPMorgan for iron ore, Mike?”
Analyst: “Well, let me just say they’re below your expectations. I realize that our commodity team . . . ”
Lourenco Goncalves: “When are you guys going to fire these guys at the desk? They are making your company look ugly.” — Cliff’s Natural Resources chairman, president and CEO Lourenco Goncalves (Iron Ore)

Miscellaneous Nuggets of Wisdom

Crystal balls tend to break.

“One of my favorite sayings is, ‘He who lives by the crystal ball must learn to eat ground glass.'” — Loews Corporation president and CEO James Tisch (Investment Company)

Dedication means being willing to sleep at the office, even if you’re a billionaire.

“I’m personally spending an enormous amount of time on the production line . . . I have a sleeping bag in a conference room adjacent to the production line, which I use quite frequently.” — Tesla chairman and CEO Elon Musk (Automobiles)

Move your desk from time to time.

“I move my desk around to wherever the most important place is for the company. And then I sort of maintain a desk there over time to sort of come and check in on things.” — Tesla chairman and CEO Elon Musk (Automobiles)

“Management works on the system and employees work in the system.”

“We always say that management works on the system and employees work in the system.” — Microchip chairman and CEO Steve Sanghi (Semiconductors)

Know what you’re good at and stick to it.

“I think one of the smartest things we’ve done for 10 years is have a very small to-do list and a big don’t-do list . . . we stayed to our knitting. . . . We stayed core to our business, and that’s why 10 years later we are the best in the world at what we do.” — Live Nation  president, CEO, and director Michael Rapino (Ticketmaster)

Never hire people you don’t need.

“Tom Murphy had the best approach. He never hired a person they didn’t need, and therefore they never had layoffs. The idea that you give up your staff . . . because business has slowed down: If you don’t need them now then you didn’t need them in the first place.” —Berkshire Hathaway CEO Warren Buffett (Textiles)

Government always has been and always will  be a big factor in business and business has always found a way to adapt.

“Government is a very big factor in our business and in all businesses. There’s the very broad policies that affect practically everybody and sometimes there can be some pretty specific policies. . . . We’ve operated under price controls. We’ve had 52% federal taxes applied to our earnings for many years. I mean, they were higher at other times, but we’ve had regulations come along and in the end business in this country has done extraordinarily well for a couple of hundred years, and it has adapted to the society and the society has adapted to business.” — Berkshire Hathaway CEO Warren Buffett (Textiles)

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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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