It's not just Halliburton ("What we are experiencing today is far beyond headwinds; it is unsustainable") and Intel (12,000 layoffs amid re-evaluation of programs) that are facing up to a new normal very different from expectations. As Avondale Asset Management notes, having poured over 100s of earnings transcripts, while most CEOs don’t see signs of an imminent downturn, the environment still feels a little fragile. It seems that almost everyone is on high alert for a macro curve-ball...
There are some green shoots that capital markets are opening back up, but there are also signs of sluggishness. Overall the economy appears to be ok, not deteriorating, but not robust either.
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 curve ball 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 Labs CEO Miles White (Healthcare)
The environment still feels a little fragile
“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 CFO Harvey Schwartz (Investment Bank)
But while many are uneasy, few see signs of a downturn
“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” —Manpower 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 it. They got ten-year old equipment, and so stuff just wears out. And so, that’s why you have to keep investing.” —BB&T CEO Kelly King (Regional Bank)
Most agree that the economy isn’t great, but it hasn’t deteriorated
“things haven’t deteriorated, but things haven’t improved” —Visa CEO Charles Scharf (Credit Cards)
There are some green shoots
“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 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 – they didn’t a year ago” —US Bank CEO Richard Davis (Regional Bank)
But there are also a lot of areas that just feel sluggish
Intel projected a greater than expected decline 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 cautions than third-party estimates.” —Intel 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 billion 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 President Derek Aberle (Semiconductors)
Steel industry capacity utilization is only 71%
“For the steel platform as a whole, driven by the our 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 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 EVP Eric Butler (Railroad)
Venture lenders are focusing a little more on credit quality
“There’s been a lot of discussions about things actually pulling back a little bit in [Technology & Life Sciences]…Today, we’re probably focusing more on credit quality, more on granularity.” —Comerica CEO Ralph Babb & EVP Patrick Faubion (Regional Bank)
The market for IT jobs may be slightly softer
“I would describe the demand for IT skills to still be healthy, maybe slightly softer.” —Manpower 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 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 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 U.S. exports.” —Union Pacific EVP Eric Butler (Railroad)
Pepsi is incrementally less optimistic about 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.” —Pepsi CFO Hugh Johnston (Sugar Water)
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 Railway COO Keith Creel (Railroad)
March was a disappointing month 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 Macao. That was not the case in Singapore, but in Macao, we saw a downturn.” —Las Vegas Sands CEO Sheldon Adelson (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 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 CEO Ralph Babb (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 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 Bank 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.” —Coen and Steers CEO Bob Steers (Real Estate Investment Management)
Consumer:
We have now lapped the sharp declines 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 U.S. domestic volumes in the second half of fiscal 2016. This has not happened, as gas prices remain below the lows of last year.” —Visa CFO Vasant Prabhu (Payments)
Technology:
Technology startups have done a great job of marketing, but are still working on proving their business models
“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 and Brown CEO 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 CEO Kevin Plank (Apparel)
Google’s CEO says that they’ve only scratched the surface of what’s possible
“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 CEO Sundar Pichai (Internet)
Reed Hastings thinks that VR will probably be primarily a gaming format for at least a couple of 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 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 U.S. 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, et cetera.” —YUM! China CEO Micky Pant (Restaurants)
Healthcare:
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.” —United Health CEO Stephen Hemsley (Health Insurance)
Industrials:
Flat rolled steel prices are rising thanks to positive 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 U.S. steel producers.” —Reliance Steel CEO Gregg Mollins (Steel)
Materials, Energy:
Core Labs believes that we will see a V bottom in oil markets
“Core believes crude oil markets rationalize in the second half of 2016…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 Labs CEO David Demshur (Oil Service)
However, overbuilt industries don’t alway 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.” —Pulte Home CEO Richard Dugas (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 CCO Peter Guilfoile (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 CCO Peter Guilfoile (Regional Bank)
Oil companies are eager to turn production back on, but cautious
“I think that they’re being cautious about their next move. I think they want to see 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 biweekly 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 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 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 CEO Thomas Petterfly (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 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 CFO Martin Schroeter (Enterprise Tech)
* * *
Source: Avondale Asset Management