The Newsletter
The Transcript 10.28.19
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Succinct Summary: The consumer is strong but manufacturing is weak. Everyone is tired of Brexit and tech IPOs probably still have a path to market as long as they have a path to profitability.
Macro Outlook:
The consumer is still strong
“Across the board, we’re seeing continued consumer strength” – Procter & Gamble (PG) CFO Jon R Moeller
“…consumer and retail spending continues to be strong in the U.S.” – 3M (MMM) CEO Mike Roman
“…consumer confidence is still reasonably high” – Hilton Worldwide (HLT) CEO Christopher Nassetta
There aren’t any flashing lights
“We’re not really seeing, really any flashing lights or anything that sort of give us too much concern in U.S. consumer credit from, if you like, more leading indicators, whether be they delinquencies, be they affordability, be they spending patterns, spend behavior even.” – Barclays (BCS) Group Finance Director Tushar Morzaria
“We have seen no signs of weakness.” – Procter & Gamble (PG) CFO Jon Moeller
Consumer debt levels are lower than they were in the last cycle
“I think broadly, people’s leverage levels are lower. I mean as compared to going into the great recession I would say, well debt is fairly available – abundantly available. It is not as crazy available as it was then.” – Hilton Worldwide (HLT) CEO Christopher Nassetta
But tariffs could eventually impact the consumer more
“If the tariffs and inflation persist, we feel like the more cash-strapped consumer will have to make some decisions, not much different than what we would face with rising fuel prices and ordinary inflation.” – O’Reilly Automotive (ORLY) CEO Greg Johnson
And manufacturing activity has slowed down
“…manufacturing sector activity has slowed down” – Nucor (NUE) CFO James Frias
“…you’re seeing a broader impact on industrial production, broader manufacturing,” – 3M (MMM) CEO Mike Roman
“Industrial demand deteriorated as the quarter progressed…the weakness in industrial demand is broad based with some acute pockets of softness in areas like automotive, heavy truck, oil and gas and agriculture” – MSC Industrial Direct (MSM) CEO Erik Gershwind
Manufacturers are shrinking production amid weak demand
“The primary factor impacting our third quarter results was lower volume driven by reductions in dealer inventory and lower-than-expected demand from end users…we’re taking actions to reduce production levels to reflect dealer order patterns” – Caterpillar (CAT) CEO James Umpleby
Employment numbers may start to feel impact
“We are seeing some customers and suppliers eliminate shifts and in some pockets restructure including layoffs. We are also hearing of shrinking order backlog…the weakness in industrial demand is broad based” – MSC Industrial Direct (MSM) CEO Erik Gershwind
“…the caution flags are out, people are doing fewer things. I think you’ll see it ultimately in hiring numbers. You’ll see it certainly in investment numbers. And it is showing up. And we’re a decent sort of lead indicator, on some of on some of the shorter-term transient trends” – Hilton Worldwide (HLT) CEO Christopher Nassetta
Inflation too
“…construction costs are …still growing, but in the low to mid-single digits versus high single-digit low-double-digit, which is helpful to a degree.” – Hilton Worldwide (HLT) CEO Christopher Nassetta
“…we have experienced product acquisition cost inflation driven by tariffs and other input cost increases passed on from our suppliers.” – O’Reilly Automotive (ORLY) CEO Greg Johnson
International:
Everyone is tired of Brexit
“Obviously, famous last words, we didn’t expect Brexit to be still ongoing.” – Barclays (BCS) Group Finance Director Tushar Morzaria
“…yes, it’s really wearing on clients, right. It’s been about Brexit transition has been a long and difficult” – Invesco (IVZ) CEO Marty Flanagan
as it weighs on the British consumer
“…market conditions in the U.K. remain very challenging, primarily caused by continuing uncertainty surrounding Brexit. The total new vehicle industry was down roughly 1% for the quarter” – Group 1 Automotive (GPI) CEO Earl Hesterberg
European banks are envious of high US interest rates
“…we wish we had the 10-year that they have in the U.S.” – Barclays (BCS) CEO James Staley
There’s less growth in emerging markets than there used to be
“…the emerging markets have become more volatile and there’s less growth in the near term” – Stanley Black & Decker (SWK) CEO James M. Loree
Financials:
What’s the impact of soft IPOs?
“We have seen a small number of high profile IPOs decided to postpone listings, while others have seen soft performance in the immediate aftermarket, but we are always quick to remind investors that the success of a company in the public markets is driven by the company’s fundamental business and financial performance over time, not by the trading behavior in the first few days and months as a public company.” – Nasdaq (NDAQ) CEO Adena T. Friedman
SVB says soft IPOs are not affecting venture capital markets
“…despite that timing of those IPOs that were softer during the earlier part of the year. Again, we’ve not seen a slowdown in liquidity. We’ve not seen a slowdown in activity over all the portfolio and we actually don’t believe it’s going to have a meaningful impact on the outlook. From our view, it’s pretty isolated.” – SVB (SIVB) CEO Gregory W. Becker
Blackstone says that investors are becoming more skeptical of companies without a path to profitability
“…investors are now taking a closer look at underlying business models, particularly in the equity markets businesses that do not have a near-term path to profitability and consume a lot of capital are facing headwinds. And if you look at other faster growing companies that are profitable, actually the market response is pretty good.” – The Blackstone Group (BX) CEO Stephen Schwarzman
and that this may be a healthy thing
“I would say the equity markets are still in pretty good shape, investors are receptive to good companies. But the idea you can sort of show up with the business and say, hey look, I’ll start making money six or seven years from now that’s becoming increasingly difficult. And I think for market participants, that’s a healthy sign.” – The Blackstone Group (BX) CEO Stephen Schwarzman
The move to zero commissions was very painful
“…it was very painful and the revenue give up wasn’t helpful at all. But it’s actually a bit liberating in terms of really trying to understand where we can create value for clients and then potentially charge for it.” – TD Ameritrade (AMTD) CEO Tim Hockey
Consumer:
E-Commerce does not disadvantage big brands
“…when you think about eCommerce as the fastest growing channel…I can make a pretty strong arguments for why it should advantage big brands …but certainly doesn’t disadvantage big brands” – Procter & Gamble (PG) CFO Jon Moeller
Technology:
Apparently the PC isn’t dead yet
“We expect our second-half PC client supply will be up double-digits compared to the first-half, and we expect to further increase our PC client supply by mid-to-high single-digits in 2020. But that growth hasn’t been sufficient. We’re letting our customers down and they’re expecting more from us.PC demand has exceeded our expectations and surpassed third-party forecasts. We now think the market is stronger than we forecasted back in Q2, which has made building inventory buffers difficult. We are working hard to regain supply demand balance.” – Intel (INTC) CEO Robert Swan
The race is on in 5G
“One of the comments that I will make related to mobile is, that we are seeing some selective pricing pressure, as competitors seek to gain footprint in 5G.” – Nokia (NOK) CEO Rajeev Suri
The cloud migration journey continues
“Every Fortune 500 customer today is on a cloud migration journey, and we are making it faster and easier.” – Microsoft (MSFT) CEO Satya Nadella
Soft demand in electronics remains
“…demand remains soft in consumer electronics, semiconductor and factory automation end-markets.” – 3M (MMM) CFO Nick Gangestad
Industrials:
Aerospace markets remain strong despite Boeing’s troubles
“Aerospace is one of the few end markets that remains strong.” – MSC Industrial Direct (MSM) CEO Erik Gershwind
“…global passenger volume continues to be resilient, building on nine straight years of above trend growth. Passenger traffic this year is growing at a solid 4.5% through August, again outpacing global GDP and tracking with long-term growth rates.” – Boeing (BA) CEO Dennis Muilenburg
Inventory de-stocking may be bottoming
“Structural business has been challenged this year. No doubt about it, a lot of it was a result of heavy stocking last year…I would comment that we think that we’re seeing the bottom of that stocking” – Nucor (NUE) CEO John Ferriola
Metals recycling having a tough year
“This year has been particularly difficult in the metals recycling world. Not only have ferrous scrap prices declined eight of the last 10 months, but the combination of trade and uncertainty around some of China’s environmental policies have also pressured non-ferrous demand and prices.” – Steel Dynamics (STLD) CFO Theresa Wagler
Materials & Energy:
US Oil production growth may begin to slow
“As I think about the US upstream industry, I think we’re going to move into a period of slowing growth.” – Phillips 66 (PSX) CEO Greg Garland
“On a macro basis, there is concerns on US oil production next year that are mounting, there is rig counts falling” – Citigroup (C) Analyst Prashant Rao
Operators are trying to squeeze every last barrel out of existing assets
“In today’s environment, customers aim to squeeze every available barrel from their existing assets.” – Halliburton (HAL) CEO Jeff Miller
The well service industry remains very challenged
“…the industry’s marketable rig fleet will continue to suffer attrition as the current market rates do not support economic reinvestment in the assets. The well service industry remains very challenged” – Precision Drilling (PDS) President and Chief Executive Officer Kevin A. Neveu
Operators are buying more integrated service packages
“…some of our customers are changing their buying behavior. They have started contracting for services and integrated packages, rather than discretely.” – Halliburton (HAL) CEO Jeff Miller
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