Authored by Erik Mokaya via Avondale Asset Management,
Each week we read 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. Click here to receive these posts weekly via email.
The common thread in this week’s notes is a heightened awareness of both cost push and wage push inflation. Companies are citing that wages are rising (due to a tight labor market) and prices for raw materials like steel are rising. Both of these are being reflected in companies’ aims to increase prices of goods and services. In Europe, growth is moderating as inflation picks up.
The Macro Outlook:
Strong economic activity is causing bottlenecks in the supply chain
“the U.S. rail system is experiencing high demand driven by strong economic activity. This increased overall demand is adding stress to the rail system…This increased overall demand is adding stress to the rail system…After rail, the next logistics bottleneck is trucking. The issue today is not in tractors and trailers, it’s finding qualified drivers and dealing with congested infrastructure.” –Halliburton’s (HAL) CEO Jeff Miller
A tightening labor market is leading to wage inflation
” The labor market is tight. U.S. unemployment is at an all-time low and in some basins it’s just above 2%…there will likely be wage inflation and additional pricing will be necessary for cost recovery.” –Halliburton’s (HAL) CEO Jeff Miller
Raw materials prices are also rising
“Raw material inflation was significant year-over-year headwind” –Whirlpool’s (WHR) CEO Marc Bitzer
“The revised outlook does reflect an assumption for higher material cost…we have also increased our estimate for price realization, partially due to a mid-year price increase” –Caterpillar’s (CAT) CFO Brad Halverson
” So we expect raw materials to be up and they are in the first quarter…steel is up about 15% and aluminum is up about 5% as of yesterday. So with that we expect even higher unfavorability in the raw materials part of our P&L” –Harley-Davidson’s (HOG) John Olin
“so just on food basket inflation, we’re still anchoring to the 2% to 4% for 2018, but what the stores in the U.S. will experience lines up pretty much with what we’re seeing in the rest of the industry” – -Domino’s Pizza (DPZ) CFO Jeffrey D. Lawrence
Clearly there is underlying commodity cost pressure that affects everybody. Colgate-Palmolive’s (CL) CEO Ian Cook
But long term trends may keep wage growth down
“at this rate of unemployment, one could have expected wage inflation to be stronger than what it is…[but companies] also have more alternatives. So, we think that has a dampening effect on wage inflation. And we don’t – while we expect wage inflation to increase, we don’t think it’s going to increase very rapidly or for that matter, reach levels that we have seen in the past, despite a much lower unemployment rate than we’ve seen in a very long period of time.” –ManpowerGroup’s (MAN) CEO Jonas Prising
And trade war talk is affecting business confidence
“this escalation of protectionism and tensions, you can feel it not only in terms of business activity, but [also] are starting to somehow dent the confidence of investors” –UBS Group AG’s (UBS) CEO Sergio Ermotti
“the trade wars and the executive branch, which I’m not sure it’s easy to distinguish between the effects of both of those. Look, I think they are having an effect.” –Moelis & Co’s (MC) CEO Kenneth Moelis
“The increase in commodity cost was largely metals-driven, in part by the market’s reaction to potential increases in U.S. tariffs.” –Ford Motor (F) Robert L. Shanks
We’re in a tightening phase, not a shortage phase
“when we talk to our customers, they – and we ask them quite frankly. Do you see a shortage or do you see a tightening? And the answer we get is, we see a tightening.” –Nucor’s (NUE) CEO John Ferriola
Meanwhile the lower tax rates are:
-reducing willingness to tap debt markets
“[Lower tax rates are] providing at least a modest headwind, but it is very concentrated in terms of the number of firms that have large cash hordes overseas and may not feel they want to tap the debt markets given their repatriated cash…it’s a headwind not a serious one at this point ” –Moody’s (MCO) CEO Ray McDaniel
-improving competitive advantage
“the tax changes should make us somewhat more competitive, and that’s, by reducing the disadvantage we’d had against many of our competitors like the offshore reinsurers.” –Reinsurance Group of America’s (RGA) CEO Anna Manning
-making clients bullish
“[our clients] are bullish about the future, the economic outlook is positive, and tax reform has helped create that positive outlook.” –ManpowerGroup’s (MAN) CEO Jonas Prising
-and creating incentives to grow
“most certainly a lower tax rate, and therefore, better after-tax returns certainly helped on the margin, to put a little bit more incentive in there for the franchisees to grow.” –Domino’s Pizza (DPZ) CEO Richard E. Allison
…But having no impact on hiring
“I would not say that there are clients that have said because of tax reform, we are looking to hire more people at this stage.” –ManpowerGroup’s (MAN) CEO Jonas Prising
International:
Growth is moderating in Europe
“Following several quarters of higher than expected growth, incoming information…points towards some moderation, while remaining consistent with a solid and broad-based expansion of the euro area economy.” –ECB President Mario Draghi
Housing demand outstrips supply in Sweden
“the mismatch between housing supply and demand has not been solved, so we still see a high demand but for more affordable housing” Swedbank’s (SWDBF) CEO Birgitte Bonnesen
There is room for more coffee in China
“per capita coffee consumption in China is only about one half of one cup per person per year compared to roughly 300 or so cups per person per year in the U.S. and even more than that in certain Western European markets.” –Starbucks (SBUX) CEO Kevin Johnson
Financials:
The IPO market is healthy
“With 16 U.S. venture backed IPOs in the first quarter, the best quarter for innovation IPOs in three years, the IPO market has improved and the pipeline remains relatively healthy.” –SVB Financial’s (SIVB) CEO Greg Becker
But excessive liquidity is helping companies stay private
“later stage funds, they’re putting some very, very big rounds, we like to call them private IPOs. And those are rounds that are more than $100 million and there’s a significant amount of those rounds taking place…With so much available liquidity…the bar for a successful exit is high, which could further slow the exit markets” –SVB Financial’s (SIVB) CEO Greg Becker
Lower rated issuers are tapping bank loan markets over high yield
“The bank loan market has been a bit more active than the high yield market. We’re seeing a lot of first time issuers come through the bank loan market. We’re also seeing a lot of issuers that are rated very low in the credit spectrum.” –Moody’s (MCO) CEO Bob Fauber
Mobile traders trade more often
“One of the things we know about, when a client adopts our mobile platforms, they clearly are more active with us, they login more often, and they trade more often.” –TD Ameritrade Holding’s (AMTD) CFO Steve Boyle
A bad flu season and harsh winter drove higher reinsurance claims
“we had elevated claims beyond our seasonally adjusted expectations…the flu season and the winter weather was especially severe this year, and thus we were not entirely surprised that we saw higher claims” –Reinsurance Group of America’s (RGA) CEO Anna Manning
Consumer
Retail inventories may be balancing out
“we continue to see retailers work down inventory but on our businesses for this quarter in a more measured way or a more modest way than we saw in the first quarter of last year” –Colgate-Palmolive’s (CL) CEO Ian Cook
Dominos sells 1 out of 6 pizzas in the US
“We are proud that we are now the largest player in pizza. But tonight, five out of six pizzas sold in the U.S. are going to be from somebody other than Domino’s. Globally, if you add in our international, 9 out of 10 are going to be sold by somebody other than Domino’s.” –Dominos (DPZ) CEO J. Patrick Doyle
New data regulation in Europe (GDPR) will impact digital advertising
“the amount of uncertainty there is for us and all the other companies in the digital advertising industry is reasonably higher than it’s been right now because we’re in the process of rolling out GDPR.” –Facebook (FB CFO) Sheryl Kara Sandberg
Technology
Businesses are embracing the subscription model
“partners and our customers are embracing the subscription model.” –Citrix Systems (CTXS) CEO David James Henshall
The transition to cloud is happening at an even faster rate
“the transition to cloud continues to occur. It’s occurring at a bit even faster rate, so that you do see that trend going on…our forecast for the long term is still in that high teens, low 20s range for that kind of growth. ” –Intel (INTC) CEO Brian M. Krzanich
Which is driving investment in cloud infrastructure
“Growth continues to be very strong in semiconductor manufacturing and data centers, with robust demand for cooling fluids and interconnect solutions.” –3M Co’s (MMM) CFO Nicholas Gangestad
“Blockchain is here to stay”
“The blockchain infrastructure is here to stay.” –Advanced Micro Devices (AMD) CEO Lisa T. Su
“We are excited about the long term potential blockchain and what it might be able to do in terms of distributed trusted applications and…I don’t just mean crypto….blockchain is still in the very first innings.” –PayPal Holdings’ (PYPL) CEO Dan Schulman
Industrials, Materials and Energy:
Demand for oil has been high
“demand has been fairly strong last couple of years…it’s been in excess of the 10-year average…Going forward, we see it fairly similar to 2017” –Exxon Mobil (XOM) Jeff Woodbury
Supply and demand has come into balance
“the absence of the normal seasonal stock builds in the first quarter clearly demonstrates that supply and demand is now in balance, which combined with increased geopolitical risk is what has driven oil prices up” –Schlumberger Limited’s (SLB) CEO Paal Kibsgaard
Consumers in energy markets like Houston are feeling more confident
“We finally are starting to see a brighter picture in the energy-related markets…the sentiment in consumer confidence are definitely improving ” –Group 1 Automotive (GPI) CEO Earl J. Hesterberg
Things are looking up in mining
“We continue to see robust rebuild demand; strong utilization in the mines is driving improving aftermarket parts demand and orders.” –Caterpillar’s (CAT) Amy Campbell
The LNG market is oversupplied
” the LNG market is becoming oversupplied in the short term as new projects continue to ramp up…the demand drivers appear mostly sustainable ….the LNG market should rebalance with a supply gap expected to open before the middle of the next decade.” –Chevron’s (CVX) CEO Pat Yarrington
Miscellaneous Nuggets of Wisdom:
Customers’ needs change with their daily rhythms
“[We’ve recognized] that the dominant customer need state in the morning is the need state of convenience. And…as we transition into the afternoon day-part, the need state starts to balance between both convenience and community…what we know about the occasional customer in the afternoon is that they don’t shop with us as frequently, and they’re not aware of our offerings as our Starbucks Rewards customers…We know that the afternoon customer is looking for refreshment, and they are really interested in cold brew.” –Starbucks (SBUX) COO Rosalind Brewer
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