The Macro Outlook
UPS confirms what we all know already, the economy rebounded last quarter
“During the quarter, we saw economies around the world pick up a bit. The U.S. economy did rebound as expected from the weather-related problems in the first quarter” (United Parcel Service Inc (NYSE:UPS)
Mastercard has seen retail sales continuing to improve In July too
“early indications for July retail sales, again ex-auto, are showing further improvement over the second quarter.’ (Mastercard Incorporated (NYSE:MA))
The virtuous cycle appears to be working: businesses are ready to invest
“this economy is turning. People are — despite their uncertainty, see business there and starting to invest and take care of the customers” (Cullen/Frost Bankers Inc (NYSE:CFR))
Not just focused on cost anymore, focused on expanding
“The world we are seeing amongst our clients is the willingness to gradually move away from the phase of total concentration on cost to a phase where they’re actually thinking about building and expanding and driving revenues again.” (Jones Lang LaSalle Incorporated (NYSE:JLL))
UPS is a great example of a business ready to expand:
Volume growth was really strong this quarter
“this quarter believe it or not was our largest domestic volume increase, 7.4% that we saw in those 14 years, so it’s pretty impressive to get that kind of growth. So the markets are moving in the right direction.” (UPS)
Huge volume growth leads to a need for new capacity
“To increase sort capacity, we are opening about 50 new hub source in existing buildings. This will add 5% to our capacity” (UPS)
But remember, new capacity weighs on near term margins
“Though these projects will weigh on 2014 earnings, they will pay for themselves in the long run.” (UPS)
Eventually the focus will shift from investment to earning a return on investment–just not yet
“Certainly next year will be a little different story than this year [for pricing]. Our primary focus this year is capacity and service.” (UPS)
Companies are starting to invest, but it might still be a little early in the construction cycle:
E&C companies still have weak pricing power
“The market continues to be very price sensitive. We are not finding any areas in the market where the conditions are such that we can get significant improvements in price, and we are finding areas where price pressures are still pretty high.” (Jacobs Engineering Group Inc (NYSE:JEC))
Jacobs has not yet seen accelerating backlog growth
” in terms of real backlog acceleration, I just — I’m very frustrated, but I can’t predict when that’s likely to happen.” (JEC)
General Cable has been waiting for a recovery in construction that failed to materialize
“the momentum we anticipated going into the construction season failed to materialize” (General Cable Corporation (NYSE:BGC))
Fluor says it hasn’t seen much change in customer behavior
“We really haven’t seen, aside from mining, any change in the decision-making process of our customers over the last little while.” (Fluor Corporation (NYSE:FLR))
On Fluor’s call, one Analyst commented that it seems that construction results have been mixed
Analyst comment: “there’s been mixed messages about the cycle. I’m listening to your competitors, which I’m sure you’ve heard. Some guys have done well; some guys, maybe not so much” (FLR)
It will be tough for construction to remain soft in this environment though:
Jones Lang LaSalle sees intense competition among buyers of commercial real estate
“the capital markets demand levels seem to be high and sustained, and we see no sign of any reduction in demand. We’re seeing a multiple bid summon any transactions which we put out. We’re seeing extreme disappointment on the part of under bidders, which sort of makes them more determined to go out again.” (JLL)
Rents are growing all over the world
“rental rates are now growing in almost all markets, internationally, which is further encouragement for corporate rental activity. We currently seeing no business reasons why these positive market trends, which I’ve covered, should not continue for the balance of this year at least.” (JLL)
Foreign capital is back bidding for US real estate
“If you put that strong equity demand together with the increasing levels of international capital flow, we’re seeing those rising up to the same level, as we saw in the last cycle” (JLL)
Debt is readily available in the US market and becoming more accessible in Europe
“We’ve seen banks make more debt available at lower spreads. So spreads coming in from over the last 12 months, for example, from 250 to 125 basis points or lower, and we’ve seen them loosen the covenant in terms of around the loans they are giving. So putting it all together, and there is adequate debt — more than adequate debt available within the U.S. market. The same comments would apply to Europe but more — the presence has been slower.” (JLL)
Of course: there are eventually consequences to a boom
Deals are expensive even for strategic buyers
“Even though we’re a strategic buyer, meaning that we have access to efficiencies and cost savings that financial buyers usually don’t. We are nevertheless frequently outbid.” (National Oilwel Varco Inc (NYSE:NOV))
Debt may have already been too accessible for too long in Asia
“In Asia Pacific, you can have a great debt problem, the banks were very robust throughout the crisis and came out strongly.” (JLL)
In Cummins’ view, BRIC countries still have soft economies
Chinese construction has slowed
“Demand in construction markets has softened from already weak levels as the pace of investment in infrastructure has not rebounded in China…the underlying economic conditions in China have not been that robust.” (Cummins Inc (NYSE:CMI))
Long term growth expectations for China have been lowered
“We definitely have lowered our long-term growth rates for China. A couple of investor conferences ago, we were saying, hey, we thought we might be growing 9% to 10% for several years. We have of course lowered that down and now what we hear from even from China was a pretty optimistic view is sort of 7% to 8% and increasingly our number is more like 7%.” (CMI)
There’s optimism in India, but it will probably be at least a few more quarters before there’s real improvement
“Enthusiasm over the election results in May and the prospect of pro-business reforms by the new government have not yet translated into significant change in orders…The Head of our India Operations, Anant, believes that it will be still through the end of the year before — we won’t see much improvement maybe until beginning of next year.” (CMI)
Brazil has returned to weakness after the world cup
“We now expect our full-year revenues in Brazil to decline by 15% to 20%, down from our previous forecast of a decline of 15%. Power Generation and Distribution revenues have held up relatively well in the weak environment in Brazil.” (CMI)
Part of the problem for the BRIC may be that international trade has shifted more to intra-regional rather than cross ocean
“We are continuing to see transport or shipments, regional shipments grow at a faster rate than trans-ocean shipments. So intra-Europe, intra-North America certainly seems to be a higher – have a higher velocity and you can see that in our mix change, in our yield change. So, that’s one of the big themes.” (UPS)
Bad news for Euro-bears: Intra regional trade is leading to a more united Europe. Key infrastructure moves as the economy moves
“Europe as a single market is continuing to evolve. Your distribution centers where they are placed there move and as that economy grows and it moves out to the east, the distribution models move with it. The inventories move with it” (UPS)
Financials
Loan pricing has stabilized somewhat
“The first quarter was 93 basis points spread to prime, second quarter was 92.3. So I felt pretty good about that in terms of how we held up spreads. We had sort of begun to see, at least in that prime sector of the portfolio, sort of some stabilization over the last few quarters.” (Cullen/Frost Bankers Inc (NYSE:CFR))
Competitors realize that it’s crazy to give money away
“while there’s still some insanity in pricing loans, I think competition realizes that it’s not healthy to go below 0. There’s still risk and loan in money, which seems to be common sense but it went kind of crazy. But we — we’re doing all right on the pricing. Certainly, we walk away from things we think are ridiculous, but I think that’s kind of stabilizing around this low area.” (CFR)
Institutional investors continue to increase allocations to real estate
“Investors are continuing to increase the allocations to real estate and to move further out along the risk in pursuit of attractive returns.’ (JLL)
Cullen Frost shares JP Morgan’s concerns about deposit outflows, but notes that they thought they would see outflows in 2001 also and it didn’t happen
“We think about [the deposit question] all the time…We did see something similar in 2001, when Greenspan jammed rates down for 1% for such a long period of time, we saw really extremely high deposit growth and really high demand deposit growth. We expect it may — we might see some actual deposit outflows at that time. But we actually saw a flattening” (CFR)
Consumer
Whole Foods argues that there are a lot of people selling organic food, but nobody doing what they do
“Natural and organic products are increasingly available, but no one does what we do. Our brand and our marketing campaign will highlight both our value and our values, reinforcing our leadership around quality and transparency in the marketplace.” (Whole Foods Market Inc (NASDAQ:WFM))
Technology
Elon Musk says that even the best case Hydrogen cell car wont be able to beat today’s electric technology
“in our opinion, the best case fuel cell car, and obviously the fuel cell cars are far from best case, cannot be the current case electric car, well, why even try it? That just makes no sense.” (Tesla Motors Inc (NASDAQ:TSLA))
Among other things, Tesla is revolutionizing the way cars are serviced
“And so we actually bring the car and we kind of hit with a pit crew, like a Formula One pit crew. So instead of having one person per bay, the car gets slowly worked on over several days, it actually comes in and a team attacks it, and we’re constantly improving the tools and the metrics to say, how can we get the car perfect as fast as possible. We actually bring in people from Formula One to help with the training on this. And I think there’s a real opportunity to revolutionize the way service works” (TSLA)
Tesla says that 30% cost savings from the Giga-factory is a conservative estimate
“when you get to the kinds of scale that we’re talking about, you really get to design customer equipment that’s much better at processing each step. And you really get to design the machine that makes the machine, not just do so with off-the-shelf equipment. So it took — everything about it is going to get a whole lot better. That’s why we think the 30% number when the Giga Factory is at full production is a conservative number.’ (TSLA)
Twitter claims the majority of its active users are content creators
“I am not going to comment on any third party data or rumors. It remains the case that the majority of our monthly active users are content creators on the platform that includes tweeting, replying to tweets, et cetera.” (Twitter Inc (NYSE:TWTR))
T-Mobile doesn’t fool itself, Telecom is a game of scale
“We have always been clear. If you look at the long term of the wireless industry, it is a scale game. It is an industry here where the #1 and 2 players are hugely more powerful from a standpoint of scale and capital, et cetera, than the rest of the industry. We’ve been very successful, and we see a path forward to be highly successful as a stand-alone company, but we also know that we could significantly accelerate that growth and create an even higher level of competition in the U.S. wireless industry by various forms of accelerating this platform.” (T-Mobile US Inc (NYSE:TMUS))
Healthcare
Patient volume from healthcare reform has exceeded HCA’s expectations. They explain why:
1) Enrollment has been higher than anticipated
“I think one of the first ones is enrollment was greater than we originally anticipated. At the time in January, we were sitting there with probably 2.5 million, 3 million people enrolled in exchanges and used some assumptions, as you know, bouncing off CBO estimates, and we saw that exceed. So I think that is really a key driver.” (HCA Holdings Inc (NYSE:HCA))
2) Utilization has been higher than anticipated
“And then the corresponding utilization and how it ramped up was probably a little bit more. It happened a lot faster than maybe we anticipated.” (HCA)
3) Medicaid growth has been huge in states that expanded coverage
“On a year-to-date basis, we have seen a 32% increase in Medicaid admissions and a corresponding 48% decline in uninsured admissions year-to-date in our 4 expansion states.” (HCA)
The question is, will these utilization trends remain elevated?
“I think one can kind of argue that as people get newly insured, there may be some pent-up demand. And so in the early periods of coverage, that’s where you start to see some of the higher demand and maybe some of the outpatient and others trails off. And I think the uncertainty around the future of health reform is that’s just a factor of utilization trends we’re going to have to monitor” (HCA)
Materials, Industrials, Energy
Performance in the Permian basin is exceeding expectations for both Anadarko and Apache
“through the first half of the year, the Permian region’s performance is ahead of our plan.” (Apache Corporation (NYSE:APA))
“we have another significant emerging oil opportunity in the Wolfcamp Shale and the Delaware Basin in West Texas…We’re also further evaluating the resource potential of our 600,000 gross acre land position due to success outside our previously defined high confidence area and well performance significantly exceeding early expectations for the production of high margin oil.” (Anadarko Petroleum Corp (NYSE:APC))
Operating unconventional wells takes much different expertise than conventional ones
“I see North American onshore sales as a different business than what we are doing internationally. They take different expertise, they take different time frames, they take different really scientific skill sets.” (APA)
Fluor sees the light at the end of the tunnel for mine construction projects
“the Mining & Metals business line is showing some signs of return, and we could see modest awards for projects later this year, as well as into next year…I think we’re starting to see the light at the end of the tunnel, if you will, relative to mining.” (Fluor Corporation (NYSE:FLR))
Metallurgical coal markets may be close to bottoming
“Of course, we believe that we are close to the bottom in the met markets today. Global production curtailments have accelerated in 2014, and by our account total nearly 20 million tons thus far.” (Arch Coal Inc (NYSE:ACI))
However, Met coal companies still have to work off inventories before production cuts start to impact the market
“As I said, there has been about 20 million tons announced in terms of what’s been implemented, I think a large amount of that may have been implemented, but they are now they are working just as we are, the inventories both at the mine and then those inventories have to work the way clear through the customer. And that’s going to take some time to estimate how quickly that will happen is very-very difficult. I have seen estimates as early as we’ll start to really see the impact of that in the fourth quarter. I’ve seen folks say that they believe that will be early next year, but it’s really very hard to tell.” (Walter Energy Inc (NYSE:WLT))
Thermal coal demand is up even with cooler summer weather
“Turning now to domestic thermal markets, we expect coal consumption to be up by 20 millions tons or so over last year, and that’s with the cooler summer weather that’s been playing out today.” (ACI)
Diana Shipping says the Dry Bulk shipping market still hasn’t reached bottom
“unless the market deteriorates, we are not growing to see a better market…we have not seen a real black spot for the market to turn positive…he market will not turn if we don’t see really bad data.” (Diana Shipping inc (NYSE:DSX))
Shipping is a great industry, eventually things will be good again
“Of course it will become profitable, the shipping market is the best market. Some of the industries in the world. And it’s going to return to earnings again, but it’s not going to be immediately, it will take some time.” (DSX)
Disruptions in railroad service (especially at Burlington Northern) led to problems for several companies this quarter
“I think certainly the rail disruption and the congestion this quarter was significant driving both added expense and creating some real challenges on the service side” (UPS)
Unlikely to be a big pickup in Utility construction spend
“I think that even if you look at the EPA rules, it’s still 20 years before they have to comply, give or take, completely. And I think they’re still going to take time to kind of rationalize what they have. Most of our customers have to deal with a rate base, and going back to the rate base for additional money isn’t something that they relish. So I think they’re going to be very measured in how they go forward relative to not only the coal cleanup fees but also in terms of gas. I do think that we’ve got the potential to maybe surprise a little bit, a little bit, in power as we go into next year.” (FLR)
Miscellaneous Nuggets of Wisdom
Measure yourself against a perfect score
“The key metric we measure in service is the percentage of customers that are delighted, which is a 10 out of 10 score. That’s both the primary thing we look at. And our goal is to get that worldwide to a majority of customers…in the U.S. we’re about 70% of customers who experienced service rated as perfect, or yeah, 10 out of 10 is actually.” (TSLA)
Listen to your customers
“over the last 5 quarters, we turned the declining business into a growth business by simply listening to our customers and offering them what they told us they wanted” (TMUS)
If you want to survive 146 years in a risky business, you had better stay disciplined
“for 146-year history of this company, we believe in our strong credit discipline. We’re not always right, but I think it’s the way to run a bank, and it’s paid off for 100-plus years. And I think in this very competitive, and particularly in Texas, environment, we’re doing what we ought to do” (CFR)
Strive to build relationships not win transactions
“We’re not in the transaction business, we’re in the relationship business, to where we want to make sure that we have that major deposit account and a major relationship before we loan to anybody’ (CFR)
It may take years of hard work to see your payoff
“the change you see is people are starting to use these commitments that we have worked so hard over the last years in relationships to build, and that’s really good news.” (CFR)
Be an aggressive looker and conservative buyer
“We’re aggressive lookers and conservative buyers.” (CFR)
Business is about People and Culture
“That’s the reason this company’s strong is that we have really outstanding individuals, very committed to what we do in our culture.” (CFR)”
Disclosure: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.