What are CEOs saying to their shareholders as the first half of 2017 is in the books? Here are some excerpts from industry leaders like 3M, Facebook, Boeing and more.
Some common themes this week:
CEOs continue to talk about a strengthening Mexico:
“At a country level, Mexico continued to deliver strong organic growth at 8%. Brazil was up 6% while Canada grew 3%”
-3M (Ticker: MMM)
“In Mexico, revenue grew and margins improved both sequentially and year over year. Revenues were up about 10%.”
-AT&T (T)
“Other America’s revenues which include results from Canada and Latin America were $1.4 billion up 31% versus last year.”
-Alphabet (Ticker: GOOG)
Mastercard’s growing just about everywhere, but Mexico and Brazil were highlighted specifically:
“Cross-border volume grew 14% on a local currency basis. Areas of real strength continued to be Europe, where we are seeing strong UK inbound and outbound volumes, as well as Russia, Italy and France. Latin America continues its recovery ,with Brazil and Mexico leading the way. And in Asia-Pacific, we see strong growth from South Korea, China and Japan.”
-Mastercard (MA)
In addition to Mexico, Asia is a bright spot for many as well:
“Asia has been our fastest growing region for both sales and profit. The 11% organic sales growth is primarily driven by a combination of project startups and increased demand across chemicals, electronics and metals end markets.”
-Praxair (PX)
” Asia Pacific led the company with organic growth of 10% in Q2. All business groups within APAC posted strong growth in the quarter, including a double-digit increase in Electronics and Energy and high single-digit growth in each of our other four business groups. Organic growth was 17% in China/Hong Kong and 8% in Japan”
-3M (MMM)
The fastest segment of growth for internet companies is video:
“We’ve talked about how video will continue to be a big focus and area of investment for us. It’s growing quickly, and we’re introducing new features to make the video experience even better.”
-Facebook (Ticker: FB)
“The biggest contributors to growth again this quarter were mobile search and YouTube.”
-Alphabet (Ticker: GOOG)
“we’ve been able to really ramp the live streaming capabilities to all four of those verticals reaching 1,200 hours of live premium video in the last quarter, and that’s up from 600 hours in our first quarter in Q4 and that’s across 625 events. And it has 55 million unique viewers. That’s an increase of 22%. We are actually seeing evidence on a like-for-like basis when events are happening with the video on Twitter, with the curated timeline compared to the events happening without the video, without a curated timeline… When we had the video on Twitter and we curated a great timeline below that and the discussion is there so that the individuals feel like they’re at the concert hall, the number of tweets increased 70% with the video on the curated timeline compared to not having the video. The number of authors increased 50% and the number of tweets seen increased 4.5 fold.”
-Twitter (TWTR)
The Auto Industry is still a lagging sector for most:
Ford is seeing the decline solely in America and Europe:
“declines in North America and Europe on a year-over-year basis is what drove the decline in the segment. All the other regions improved.”
-Ford (F)
“a projected annual 6% decrease in U.S. vehicle production will negatively impact automotive volume in the second half, with the largest year-over-year decrease in the third quarter. “
-Norfolk Southern (NSC)
“Two areas where we are cautious heading into the third quarter are metals and automotive end markets. While we don’t have much direct exposure to OEM or Tier 1 automotive producers, lower vehicle production would negatively affect steel and general manufacturing. So we’ve incorporated this view into the outlook. However, the U.S. Gulf Coast project bidding activity continues to be a bright spot for future growth. “
-Praxair (PX)
But some are seeing the auto downturn turning around:
“Used vehicle price, according to our internal index, declined around 5% year-over-year in the second quarter, which is not as severe as what we saw in 1Q.”
-Ally Financial (ALLY)
On e-commerce and retail:
A surprise (to me at least) beneficiary to the rise of e-commerce? The Railroad companies:
“We are generating opportunities, as our customer supply chains adapt to the rapidly evolving e-commerce and consumer markets…which will provide ongoing growth for years to come.”
-Norfolk Southern (NSC)
As much as we talk about the “rise of retail”, there is a long way to go:
“…With 90% of transactions still happening offline, we want to help consumers find what they are looking for in brick and mortar stores.”
-Alphabet (GOOG)
Opportunities for Growth:
For Boeing, it’s the services market. Owners of high flyers like HEICO and Transdigm, keep a look out, Boeing is coming for your parts business:
“we see the $2.6 trillion services market over the next 10 years as a significant growth opportunity for the company. To capture an increasing share of that growth, our new Boeing Global Services business is focused on traditional services such as parts, modifications and upgrades as well as new offerings, utilizing data analytics and information based services…Boeing Global Services successfully began operating as an integrated new business unit on July 1st and it has already begun capturing key market opportunities.”
-Boeing (BA)
Hess seeing a turnaround?
“We believe our company has the best long-term growth outlook in our history…Our growth is underpinned by four key areas; the Bakken; North Malay Basin in the Gulf of Thailand; Stampede in the deepwater Gulf of Mexico; and offshore Guyana.”
-Hess (HES)
Corning is bringing its glass technology to the medical sector, and it is very excited about its potential:
“this is going to be a very, very large business. It is going to grow for decades, and that’s why we’ve been pursuing it so strongly. “
-Corning (GLW)
AT&T is building its moat wider:
“Bundling obviously helps subscriber and revenue growth, but perhaps the biggest impact is on wireless churn. We’ve seen postpaid churn fall 25 basis points since we closed the DIRECTV deal.”
-AT&T (T)
“The Data says to be Cautious, But We Don’t Believe It”:
“For the first time since 2009 industry-wide card charge-off rates have registered a sustained rise, we believe, driven largely by an increasing supply of consumer credit. Although our charge-off rate remains below the industry average and historical norms, we’ve responded by tightening certain underwriting standards over recent quarters. Major downturns in the credit cycle usually require an economic recession as a catalyst. However, microeconomic and macroeconomic conditions remain favorable for U.S. consumers, but with a robust labor market, rising housing prices, and manageable debt to disposable income levels. Therefore, we are taking advantage of these favorable conditions to grow loans to prime customers.”
-Discover Financial (DFS)
How to Value Companies
I really liked this from Praxair:
“Slide Five (Shown Below) provides a simple view of three different valuation techniques comparing an average of publicly traded industrial gas companies versus the S&P 500 and the S&P 500 Materials Indices. The upper left graph shows the traditional price to adjusted earnings ratio that is often used to compare valuation across industries.
From my perspective, there are two challenges to this metric. First, the extensive use of different non-GAAP earnings has made comparability across companies and industriesquite challenging. Second, the IG industry has a large amount of noncash depreciation which has a negative impact on book earnings. Therefore, a P to E ratio by nature would penalize companies with significant D&A versus those that don’t have as much.
Based on the traditional P to E ratio, IG companies appear to be trading at a premium to market which may attempt to compensate for the noncash D&A impact to earnings. However, when using price to cash ratios, the story becomes quite different. IG companies trade at a noticeable discount to the market when using price to operating cash flow. Operating cash flow is not affected by the use of non-GAAP metrics since it cannot be adjusted under U.S. GAAP, which improves comparability.”
As I read so many earnings reports, I hate how the answer to so many questions is: “We don’t disclose how ____ breaks down, sorry”. Praxair is making their accounting much more transparent by breaking down CapEx, very nice:
“Over the years, investors have asked us to separate out the project backlog CapEx to better capture the value of our company. So starting today, we’ll disclose CapEx in two parts. Backlog CapEx and base CapEx. Backlog CapEx represents spend, specifically in support of our project backlog. Base CapEx will represent all other CapEx including maintenance, safety, smaller growth efforts, cost reduction and other.
Furthermore, we’ll start to report a metric called available operating cash flow which simply represents operating cash flow less the base CapEx. It’s a form of free cash flow that excludes CapEx spent for backlog projects where we would have more confidence in their returns and growth impact. Similar to how free cash flow excludes acquisitions that are immediately accretive upon close, so too does AOCF exclude backlog projects that would be immediately accretive upon startup.”
