Practical analysis for investment professionals
02 August 2016

The C-Suite Speaks: No One Called This an Expansion

The C-Suite Speaks: No One Called This an Expansion

There are many reasons to be optimistic about the global economy.

But C-suite executives found plenty of cause for pessimism this past week, too. Even those companies that were executing well cited a slow economic backdrop with “anemic” growth. At least the economy is growing though, and positive feels good when you were running at a negative before.

Energy companies seem to be increasingly upbeat about the cycle even as oil prices have been sliding. Internationally, Brazil may be on an upward trend, but China is still showing signs of weakness.

Meanwhile, financial services executives are feeling the pain of low interest rates. Attentive readers of the Enterprising Investor may have seen that coming.

The Macro Outlook

Post-Brexit performance is both welcome and unexpected.

“I think we were all pleasantly surprised . . . by how the markets have performed post-Brexit . . . I think we’ve probably . . . settled down a little bit quicker globally than probably people originally anticipated given the surprise of the vote.” — Lazard chairman and CEO Ken Jacobs (Investment Bank)

There are more things to be heartened by.

“Most recent data on the US economy continues to be encouraging. Consumer spending remains strong and job creation, wage growth, and unemployment trends point to a steady growth environment, although more likely in the 2% GDP growth range as opposed to the 3% plus that we would all like to see.” — United Technologies EVP and CFO Akhil Johri (Industrial)

But no one ever said we are in a booming economy.

“I don’t think we’ve ever referred to this environment as being expansionary. And the way I would describe the overall performance and why we say strong: if you take a look at the cash we generated, if you take a look at the operational margin rate improvement.” — Honeywell chairman and CEO David Cote (Industrial)

It’s just that 1% feels good when you were running at -2%.

“I sure hate to brag about a sales number that’s around zero, but . . . the reason it feels better is we were plus 1% organically. For the whole company, we were plus 2% on a volume basis. And the quarters before that, four or five quarters before that, organically, we were kind of running a negative 2%.” — DuPont chairman and CEO Ed Breen (Chemicals)

Confidence is still weak in many areas.

“When we were sitting here a quarter ago, we were expecting sales in a range of $40 billion to $42 billion. . . . We’ve taken that down. . . . And the gist of that is just everything that we’re seeing in the economy today around the world . . . It’s not any one thing, I would say . . . we have sluggish economic growth throughout the world in general, but not enough to drive growth in our end markets. And the news we’ve seen over the last few months is definitely not giving us more confidence.” — Caterpillar VP Michael DeWalt (Construction)

Starbucks noted a “profound weakening in consumer confidence.”

“What we did not and could not have fully anticipated was the profound weakening in consumer confidence in Q3 that has caused sharp declines in QSR and restaurant traffic overall and has many of our competitors struggling with negative transaction comps. . . . Starbucks is not immune to macro challenges that impact our competitors and retail overall.” — Starbucks chairman and CEO Howard Schultz (Beverages)

Venture capital markets are still soft.

“[Capital raises] were dominated by a small number of very large rounds to late-stage private companies. At the same time funding to early stage start-ups declined. . . . Concern over late-stage valuations and uncertainty in the markets continue to weigh on IPO prospects. . . . As you can hear from our remarks, our innovation market is still a little bit soft.” — Silicon Valley Bank president CEO Greg Becker (Bank)

Hotel developers are slowing down their pace of construction.

“I think in some respects that in a somewhat weaker market . . . we see that the construction pace has been expanding just a little bit. We are not seeing cancellations of projects, however, and I think generally what we’re talking about is projects that formally we would have expected to open probably in the fourth quarter of the year opening some time in 2017.” — Marriott International president and CEO Arne Sorenson (Hotels)

The industrial economy continues to be sluggish.

“We’re seeing cautious customers and a general reluctance to invest capital across most of our end markets . . . it really seems like the last six months things have slowed a little bit. I mean, again, it’s not dramatic, and I’m not predicting anything to fall off a cliff. But definitely in the last six months the environment has got a little softer from my standpoint rather than better.” — Graco president and CEO Patrick McHale (Industrial Components)


No indication of a need to pivot as a result of Brexit.

“There is no reason for us to change the strategy in Europe based on the outcome of the Brexit. No reason for us to do that.” — 3M chairman, president, and CEO Inge Thulin (Industrial)

Export-oriented companies benefit from a weak sterling.

“A weaker pound benefits our core earnings, not just through a stronger topline, but also in the operating leverage across the businesses. We continue to have a higher proportion of our costs in the UK than revenues.” — GlaxoSmithKline CFO Simon Dingemans (Pharmaceuticals)

The economic outlook in Brazil isn’t great, but there may still be hope.

“I was on the phone with our guy who runs Brazil last week, and I think there are some early signs of optimism perhaps there that they’re expecting things to be a little bit better in 2017. And so we’ll see.” — Kimberly-Clark chairman and CEO Tom Falk (Consumer Goods)

The Chinese market may not be as strong as advertised.

“China . . . no question, the overall consumer environment is weakening due to the economy’s economic transition. . . . We always knew that for a country as large as China, transitioning to a consumer-led economy was going to have its challenges. Those may have turned out to be more than we expected in the short-term . . . [there are] strong affordability needs across the rural and blue-collar areas.” — The Coca-Cola Company president and COO James Quincey (Beverages)


Low interest rates are causing financial services CEOs to choke up.

“We have discontinued the low interest rate environment around the world and it’s really gotten to the point that it could almost make your eyes tear.” — W.R. Berkley Corporation president and CEO W. Robert Berkley, Jr. (Insurance)

Ultimately you have to accept the investment environment for what it is.

“Fifteen or 18 years ago I wrote a memo called ‘It Is What It Is,’ in which I said the investment environment is what it is, if we give in, we can’t change it and we can’t order up the new one, we have to work within it and this investment environment offers us lower prospects than ever. . . . Ten to 15 years ago, 10% looked like a modest accomplishment, now it looks like nirvana. . . . You have to be modest about your expected returns and modest about the amounts you can manage. The one thing you can’t do is say, ‘Well, the capital market line is lower but I want the same returns I used to get with the same risk on the same amount of money.'” — Oaktree co-chairman Howard Marks (Asset Management)


Restaurants are testing the delivery initiative.

“We’ve come to believe delivery is the Usain Bolt of initiatives at Panera. It’s powerful, it moves very quickly, and it’s getting out of the blocks fast.” — Panera Bread founder, chairman, and CEO Ronald Shaich (Restaurant)

Social networks are running out of opportunity to increase ad load.

“We anticipate ad load on Facebook will continue to grow modestly over the next 12 months, and then will be a less significant factor driving revenue growth after mid-2017. Since ad load has been one of the important factors in our recent strong period of revenue growth, we expect the rate at which we are able to grow revenue will be impacted accordingly.” — Facebook CFO David Wehner (Social Network)


Deep learning appears to be the talk of the town.

“We’ve been piloting robotics and machine learning processes to automate work and eliminate repetitive manual tasks.” — BNY Mellon chairman and CEO Gerald Hassell (Trust Bank)

“We’re also using machine learning in many other ways across our products and services, including recommending songs, apps, and news . . . Deep learning within our products even enables them to recognize usage patterns and improve their own battery life.” — Apple director and CEO Tim Cook (Consumer Electronics)

“We’ve been applying a lot more machine learning and deep learning to our onboarding, so we can match people faster to their interests.” — Twitter CEO Jack Dorsey (Social Media)

Materials, Energy

Recent oil price weakness is largely being written off.

“Over the last quarter, we have seen oil prices strengthen in anticipation of this rebalancing, with some weakening primarily due to the strong dollar in the last week or so. The longer term fundamentals for the industry also remain robust.” — BP group chief executive Robert Dudley (Integrated Oil)

Companies are penciling in $60 oil.

“I am now encouraged that a sustained $60 oil price environment is likely to emerge as we move into 2017. This price level should provide the necessary cash margins and resulting cash-cycle improvements to encourage us to accelerate activity and achieve strong returns. In this scenario, we would evaluate redeploying some of the incremental proceeds from asset sales towards our highest quality US onshore assets later this year.” — Anadarko Petroleum chairman, president, and CEO R.A. Walker (Oil and Gas)

Miscellaneous Nugget of Wisdom

Things of value take hard work and perseverance.

“I found over the many years in building Capital One, just about anything that’s really value creating involves digging a hole before the benefits come. If it weren’t that way, everybody would rush in and do it and actually would kill the opportunity.” — Capital One founder, chairman, and CEO Richard Fairbank (Bank)

Each week our team at Avondale Asset Management reads dozens of transcripts from earnings calls and presentations as part of our investment process. If you find these posts useful, click here to receive them every week via email.

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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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