The Newsletter

The Transcript 02.03.20

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Succinct Summary: The year got off to a strong start.  There’s a high level of optimism which has helped fuel industries that rely on long term confidence like M&A and construction.  Can the Coronavirus halt the economy’s momentum? Seems unlikely.

Macro Outlook:

The year is off to a strong start

“Consumer confidence still remains relatively high. U.S. economy remains relatively healthy. Unemployment is low. GDP is stable. So pricing remains healthy. I think the market there appears to be pretty solid going into 2020.” – Ingersoll-Rand (IR) CEO Michael W. Lamach

“The global macroeconomic environment remains constructive. Fundamentals for global equity markets are steady, and credit conditions remain favorable.” – LAZARD (LAZ) CEO Kenneth Jacobs

“On the macroeconomic environment, consumer spending remains relatively healthy, and we expect this to continue in 2020..In the US, we are seeing stable growth with low unemployment and healthy consumer confidence. Our SpendingPulse estimates for Q4 show retail sales remained solid, up 3.1% versus the year-ago ex-auto, ex-gas.” – MasterCard (MA) CEO Ajay Banga

Optimism is high

“…we sense noticeably more optimism about the outlook for the U.S. economy as we head into 2020.” – Nucor (NUE) CEO Leon Topalian

“…this year feels better than last year at the start.”  – LAZARD (LAZ) CEO Kenneth Jacobs

That’s helping M&A activity

“We’re seeing momentum in global M&A, including Europe, as business confidence grows… despite global trade tensions, we’ve seen an increase in cross-border transactions around the world. The forces driving global strategic activity remain in place. Technology-driven disruption continues to be a catalyst for M&A across industries.” – LAZARD (LAZ) CEO Kenneth Jacobs

And construction

“It appears that construction lending is becoming constructive again” – Bank of Hawaii (BOH) CEO Peter Ho

“We are particularly optimistic about construction activity, which has shown strong demand in typically weak seasonal periods.” – United States Steel (X) CEO David Burritt

Old concerns have been resolved

“For the three months to December, the easing of US-China trade friction and progress toward Brexit helped alleviate market uncertainties, leading to increased client activity during the quarter.” – Nomura Holdings (NMR) CFO Takumi Kitamura

But new concerns have emerged

“…over half our stores closed in the market…The magnitude of the impact will depend on the duration of store closures as we work with local authorities to manage the situation and protect our partners and customers. …we expect these events to have a material impact on our International segment and consolidated results for the second quarter and full year of fiscal 2020.” – Starbucks (SBUX) Group President, International, Channel Development and Global Coffee & Tea John Culver

“…it may have three potential impacts. One is the China domestic market. Obviously, when people don’t go into stores, the market will decline….Two is then on production and three is on components….The third element is components. Keep in mind, this whole thing happens around the Chinese New Year. Every year around Chinese New Year, you plan with your supplier inventory levels, when they stop production, when they start production.” – Whirlpool (WHR) CEO Marc Bitzer

Manufacturing remains a bit challenged

“Despite recent progress on trade agreements, the manufacturing sector globally is feeling the negative effect of trade wars and industry-specific challenges such as in the automotive sector. This is impacting both economic growth and employment and will take some time to moderate.” – ManpowerGroup (MAN) CEO Jonas Prising


Certainty around Brexit has been helpful to business

“In terms of Brexit, clearly, having more certainty around Brexit is helping the investment client and the decision-making climate in the U.K., in particular. And I would expect that we expect that there will be a pickup activity in the U.K…I think we’ve already seen some of it starting, and dialogues are increasing. And I think with credit conditions, the way they are and such, I think we will see a pickup there.” – LAZARD (LAZ) Kenneth Jacobs

Labor markets are tight around the world

“A survey of 25,000 employers and 14,000 workers globally, which is showing record high talent shortages across over 40 countries.  Globally, 54% of employers are struggling to find the talent they need, almost double what it was a decade ago. And in the US, that figure is 69%” – ManpowerGroup (MAN) CEO Jonas Prising

India looks attractive

“We’re still big fans of India, which is a market that has a bit of financial turmoil, but has really great long-term fundamentals particularly in the IT space and we’ve done a lot in real estate and private equity.” – BlackStone (BX) COO Jonathan Gray


Gen Z is pushing companies to care about the climate

“…when you think about becoming climate positive and water positive and waste positive, that is over the next few decades going to really redefine Starbucks…through the research, look, our customers want this. 36% of the world’s population is Gen Z. And this is what they want.” – Starbucks (SBUX) CEO Kevin Johnson

Climate risk is becoming increasingly relevant to company valuations

“Shareholder activism has become a global phenomenon. Last year, almost half of all activist campaigns had an M&A thesis. In addition, climate risk is becoming increasingly relevant to company valuations and is an emerging catalyst for strategic activity” – LAZARD (LAZ) Kenneth Jacobs

ESG investing is a permanent secular trend

“…the ESG investing or sustainable investing is a major permanent secular trend in the world driven by…the shrinking of the world in terms of dissemination of information, connectivity, communication, transparency of what’s happening and the like….societies around the world have access to a lot more information, a lot more transparency on a real-time basis about what’s happening in all institutions of society. Those societies are going to hold those institutions accountable for their actions.” – MSCI (MSCI) CEO Henry Fernandez

Equity market valuations are bifurcated

“…on the equity side, just for whatever it’s worth, while the PE multiples are on – the median PE multiples are relatively high, it’s very bifurcated…when you look at the top 20% of S&P 500 companies, they trade in the mid- to high 20s on a TEV basis. When you look at the bottom 20%, they trade under 13, 12. And so it’s not necessarily the case if the equity markets are hospitable. They’re hospitable in certain situations, they’re not in others.” – Apollo (APO) CEO Josh Harris

“Valuations, probably a little rich in parts of the market, a little more reasonable in other parts of the market.” – LAZARD (LAZ) CEO Kenneth Jacobs


Delivery is slightly margin dilutive for Starbucks

“We have over 3,500 stores in 130 cities, which is 80% of the store base having delivery available to them. We see it as an incremental for these existing customers as well as attracting new customers. In total, dollar profits continue to increase because of it. It’s slightly margin dilutive, but it does provide a higher ticket as well as a higher food attach. And we also see stronger demand in the mornings and during the lunch daypart.” – Starbucks (SBUX) Group President, International, Channel Development and Global Coffee & Tea, John Culver

Higher adoption rates for delivery in China than in the US

“One thing I’ll say about the US business is, if you compare it to China in terms of delivery, the adoption rate is still pretty modest in the US and so we’re just moving right along with the customer and making it available to as much coffee coverage as we can in the US. But it’s modestly being adopted in the US if you compare it to China.” – Starbucks (SBUX) COO Rosalind Brewer

Growth in the food industry to come through stealing market share from competitors

“…growth in this industry at this point is going to have to come through stealing share. Traffic in the industry is pretty muted. There’s very little traffic growth. In fact, if you’re not growing units, you’ve got a headwind there.” – McDonald’s (MCD) CEO Chris Kempczinski


Microsoft’s cloud business is growing rapidly

“…was another strong quarter with double-digit top and bottom-line growth, driven by the strength of our commercial cloud..Commercial cloud revenue was $12.5 billion, growing 39% and 41% in constant currency. Commercial cloud gross margin percentage increased 5 points year-over-year to 67%” – Microsoft (MSFT) CFO Amy Hood

Cloud providers demand more processors

“Cloud adoption with the largest providers continues to accelerate…Shipments to cloud providers increased sequentially by a significant double-digit percentage to support expanding build-outs at Amazon, Google, Microsoft, Oracle and Tencent. Microsoft announced the availability of four new virtual machines, and AWS announced two new EC2 instances powered by second-gen EPYC processors.” – Advanced Micro Devices (AMD) CEO Lisa Su

The world is producing more and more data that needs to be processed

“There will be 175 zettabytes of data by 2025, up from 40 zettabytes today. Processing this data in real-time will be an operational imperative for every organization.” – Microsoft (MSFT) CEO Satya Nadella

Phone upgrades have been slow but expected to ramp up as 5G adoption rates increase

“There is an important point to be made here once we have 5G nationwide. As you know, smartphone upgrades across the industry have been down for a while now. In fact, we’re coming off a record low upgrade rate for any fourth quarter in our history. But fast forward to the back half of this year when popular 5G smartphones and devices should be more available at scale, you can expect higher upgrade rates and equipment revenue growth.” – AT&T (T) President John Stankey


The US steel industry a winner in the US-Canada-Mexico deal

“The new trade deal with Canada and Mexico is a significant win for the U.S. steel industry, especially given the revamp of rules of origin that will greatly incentivize the use of North American steel and autos, auto parts and other products containing steel.” – Nucor (NUE) CEO Leon Topalian

And the industry outlook is positive

“We are encouraged by improving conditions in the U.S. steel markets entering 2020. We believe this reflects the end of the severe inventory destocking that occurred last year and ongoing modest growth in end-use markets overall. We expect first quarter earnings in the steel mills segment to increase from the fourth quarter due to price increases and expected higher volumes.” – Nucor (NUE) CFO James Frias

Transport markets are challenged

“We expect the transport markets to move through a short-term correction period in 2020.We’re expecting to see steep declines in North American trailer and APU and mid-single-digit declines in truck.” – Ingersoll-Rand (IR) CEO Michael Lamach

737 MAX expected to be back in H2 2020

“…we are currently estimating the ungrounding of the 737 MAX will begin mid-2020.” – Boeing (BA) CEO David Calhoun


Energy markets remain challenging in the short term

“Near or at 10-year lows on price and margins for gas refining and chemicals….Despite the challenging market environment, long-term demand fundamentals remain strong. In fact, growth in demand in 2019 for upstream liquids and natural gas distillate products and polyethylene was at the higher-end of the compound annual growth rates experienced over the past 10 years.” – Exxon Mobil (XOM) CEO Darren Woods

A surprising percentage of carbon emissions come from HVAC and food loss

“Today 15% of the world’s carbon emissions come from heating and cooling buildings and another 8% comes from global food loss and these numbers are growing.” – Ingersoll-Rand (IR) CEO Michael Lamach.

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