US Research Trip March 2020 commentary

At last year’s conference I had a few days welcome respite from the dreaded B word (Brexit). This year there was no such luck in escaping the even more dreaded C word (Coronavirus).

However, despite attendee figures being down 15% and a few companies cancelling last minute, I still managed to meet twenty seven management teams, almost all including CFOs. The industries covered were hotels, an airline, industrial distribution, consumer, semiconductors, regional banks, house builders, energy companies, technology distribution and waste management.

Apart from lower numbers, the other biggest change from prior years was that a noticeable number of attendees and managements were opting for fist pumps rather than handshakes – I don’t think this was a culture statement!

I saw two house builders before the Fed cut rates on Wednesday and they were both very optimistic about the outlook for new home sales due to low unemployment, low interest rates and decent wage growth. Limited supply was also helping the sector, particularly in the starter home segment. Both companies had seen stellar order growth recently and this added to their optimism.

Both Walmart and Home Depot were similarly upbeat about the US consumer and their respective benefits of scale to gain share amidst decent growth. Mattress company Tempur Sealey affirmed that US sales were ahead of plan year to date in the US as of the 2nd of March and the same was true in Europe. China was likely to break even this quarter versus plan for a $4m profit and there was a spill over into the rest of Asia. The CEO added he spoke to five competitors on Monday 2nd and none had reported a change in US business. He actually said the industry was in the best shape it had been in for years as a previously struggling big competitor was now acting rationally on price and the collapse of WeWork had choked off capital to loss making internet based rivals.

Analog Devices (semiconductors) said that pre virus trends were implying Q1 would be the trough and then sequential growth would ensue. In their quarterly release (out early February) they stated the virus would take c.$70m sales out of an original target of just over $1.3 billion. This assumes auto and industrial sales trough just above zero at the nadir and the 5G rollout is deferred. Management added that subsequent warnings from similar semiconductor companies were in line with Analog’s estimate of the impact and no further tweaking was required at the moment. They did, however, add that the situation was fluid. Another point to note was that pre virus Analog’s customers were doing better than Analog but Analog was continuing to run down inventory. This gives comfort about the long term situation.

Arrow and Avnet, the semiconductor distribution behemoths, were phlegmatic. Avnet said they had been around nearly 100 years and this was just another issue to deal with. There are 20 billion connected devices in the world, on the way to 50 billion and the virus wasn’t going to prevent that. As of January all of Asia, Europe and the US had positive trends with new orders exceeding existing shipments (Book to Bill above one in industry parlance). In February Asia dropped to 0.8 and despite Chinese suppliers output being back up to 60-80% of capacity, supply disruptions are inevitable. He said most likely this will lead to over ordering by customers who are eager to get their hands on parts. A last point is that Avnet said there had been practically no cancellation of orders. Arrow had a slightly different take from Avnet. They said all three regions were in downturn in late 2019 but that Asia had started to grow again as they went down first. The US turned down second and business there had stabilised (pre virus) whilst Europe was still up against tough comparisons and therefore hadn’t bottomed. Surprisingly he added that factory automation was one of the segments that slowed most last year despite the secular growth theme. The CFO said that the world’s biggest component maker, Foxconn (1 million employees, mostly in China) expected to be back at 100% capacity utilisation by the end of March.

So the conclusion from the semiconductor world is that the long awaited fundamental recovery was under way, to varying degrees, but has been postponed, not cancelled by the virus.

Industrial distribution firms were still dealing with tariff impacts as well as the Boeing 737 Max fallout. Grainger opined that most Chinese plants were back to 60-70% of normal capacity and that if the situation only lasted two more months then there would be no supply issues but there would be if it lingered longer. Management said pre virus heavy engineering had been slow but everything else had been fine. They thought part of the issue was they had been perhaps too aggressive with price increases last year and would not be quite so aggressive this year. MSC Industrial put the sluggishness of their business in part down to a sales force reorganisation and added that the best lead indicator for them (metalworking diffusion index) had turned up of late after several sub par quarters. As MSC run a lot of inventory as a customer service this is actually a benefit at the moment. Unlike Grainger they are going to be selectively more aggressive with price increases.

Stanley Black & Decker have 10 Chinese plants supporting 40% of their tools and Storage business. Their plants were at just over 50% capacity utilisation and were expecting to be at 100% within three weeks. They are testing all returning employees and the wearing of masks in factories will be encouraged. Chinese sales ‘ground to a halt’ from a $250m run rate. “Will stay down through Q1”. As of Tuesday there had been no spill over into either the US or Europe. Even before the virus, management had been moving production closer to where actual sales were, in other words,  localising it. Current events will accelerate this process. 40% is currently localised. Indeed the one long term impact from the virus is likely to be an acceleration in the trend to localise manufacturing. Management said tariffs, a strong dollar and inflation had not been helpful the last two years and now the virus has come along. They plan on margins going back to c37% from 34% when the situation normalises. They are using data analytics to achieve better pricing which could be a long term boon. As their busy selling season is Spring they will be particularly exposed if supply does not normalise soon.

Hotel and airline companies are obviously in the immediate firing line. As an example the RJIS conference itself had 15% cancellations as well as a few presenting companies calling off. Hyatt said 26 of their 86 Chinese hotels closed but are now re-opening. However, occupancy fell 90% and is still low. The vast majority of cancellations are through June and not beyond but that is a static view amidst an evolving situation. The rest of Asia has seen occupancy fall 30%. Hilton originally closed 150 hotels but only 72 are still closed. By March 15th all hotels will be reopened as “things are getting back to normal in China”. Hilton are 70% corporate travel so company travel bans impact them badly. They added that it was February 27th that travel in the US turned down as that was the day company travel moratoriums started. Again they added that nothing has been cancelled beyond June and that in the past such bans had been quickly reversed. A longer term issue is that the presenter acknowledged it was late in the hotel cycle and that supply growth has accelerated with an even bigger pipeline now in place. Wage growth remains in the low single digits. New York City seems to be the most vulnerable US city from both a supply and cost perspective. 20% of all new rooms Hilton are bringing on are in China so growth will be affected if virus concerns linger.

All the oil companies I met, along with the gold miner, claimed to be leaders in Environmental, Social and Governance (ESG) practises. All oil companies highlighted how much they were going to reduce flaring of gas that had traditionally happened alongside oil production. All had a carbon plan. US onshore oil company Pioneer Natural Resources said they would slow growth if WTI oil was below $50 and would even contract at low prices in order to preserve capital. At $55 WTI oil they will be able to grow mid teens for years. They are not worried regarding stranded assets as hydrocarbons will be needed for decades to come and anyhow the US Permian is one of the lowest cost sources of oil in the planet and will continue to gain share. He added a point unknown to me that was US shale is the second best source of hydrocarbons in North America in terms of carbon emissions. Tar sands in Canada are the worst. Occidental Petroleum claimed that unlike some peers they had concrete plans in place to enable them to be carbon neutral by 2040-2045. For example they will end all routine flaring by 2030. Like Pioneer they said they will cut capital expenditures if oil prices remained low. Obviously all presentations have been upstaged by the Saudi-Russian spat so I would imagine production cuts are on the way.

Hess produced a chart showing that even if the world hits its 2040 carbon goal then oil and gas will still constitute 47% of energy use, versus today’s percentage of 54%. The implication is that there is still a great need for hydrocarbons. They are very bullish on their own prospects, hoping that they will grow over 20% per annum through 2025 and still grow strongly through 2030. This is primarily through their interest in the gigantic finds that have occurred in Guyana. Their claim that their free cash flow growth will beat both S&P 500 and Big Tech over the period was perhaps unnecessary but did show confidence. It should be noted that cash flow is currently negative as the big projects are just ramping up. All the Energy meetings had scant attendance despite being in small rooms. In 2015 the large rooms for such meetings were packed out. How times change. Gold company Agnico Eagle had what they termed a short term production issue so their share price has fallen sharply even as the gold price has risen appreciably. Gold is another basic industry where investors are now demanding excess cash be returned to them rather than reinvested by the companies. At industry level there is also much more focus on cash generation than before so Agnico are optimistic on the whole industry and very optimistic in respect of themselves. They note that the gold price is at an all time high in most currencies except the dollar and it could reach $2000 if the dollar weakens. However, the caveat was added that it is a very volatile commodity and the price, for example, fell $400 in just six weeks in 2013. His final point is that miners have been forced to be environmentally friendly for a decade now so are way ahead of other industries in respect of the E in ESG!

I met two bank companies which focus on small business customers. Loan losses are in very good shape and both were optimistic about the US consumer. However, both lamented the current year low rate environment and Zions Bank actually culled 5% of all positions last year in response to the Federal Reserve changing tack to cut rates. I am sure this is not what the Fed had in mind when they cut rates. Community Bank said they had no intention of following suit.

Both Republic Services and Casella Waste loved the garbage industry because pricing has been accelerating for several years now while cost inflation was under control at both a lower level and with less acceleration of late. Casella have also been able to reduce Selling, General and Administration (SG&A) costs as a percent of sales via the use of technology.


I realise it is a bit of a parallel world with seasoned CFOs and seasoned long term investors making up most of the attendees at the RJIS conference but the mood was one of resolute calm and focus on long term opportunities. This is obviously not the case among short term traders and an increasing proportion of the Western World populace. Despite this, we have already seen in China that however bad the very short term is (reference the 90% or more revenue falls mentioned above) the wheels keep on turning and things get back to normal. When one considers the global economy was improving in the lead up to the outbreak and the fact the system is being flooded with additional liquidity then a recovery within a few months is inevitable.

Some heavily indebted companies, mostly within travel related industries, will likely fail but by year end the virus will be another talking point in annual reviews rather than something like Lehman which fundamentally changed the global economy.

Best Regards,


Ian Brady

Chief Investment Officer

10th March 2020

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