What We’re Hearing from Management...

It’s been another interesting season of listening to corporate earnings calls, and getting management’s take on their companies, industries and the world at large. What have we learned? Here are a few selected themes:

Underlying demand in the U.S. is good. As hard as it is to generalize, things look pretty good for U.S. companies. S&P 500 earnings “beats” have far outweighed “misses.” The U.S. consumer looks healthy, according to numerous retailers and credit card company Synchrony. And there’s been good underlying demand across industries from air travel to movie theaters. That’s the good news, which has meant healthy top-line growth. But costs have been rising too, and unlike the first quarter of the year – when fresh optimism about corporate tax cuts abounded – some concerns have appeared on the horizon.

Tariffs? Not good. Perhaps the biggest worry is that we’re starting to see the impact of tariffs, especially on manufacturers that import raw materials to make finished goods. Thor Industries, the largest RV maker in North America, has been struggling with post-tariff steel and aluminum prices - even though it remains optimistic about strong underlying consumer fundamentals.

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Appliance-maker Whirlpool, initially thrilled when a 20% tariff on foreign washing machines was announced, ended up having a dreadful quarter because it also ended up being hurt by tariff-induced price rises in “certain strategic components and finished good imports and exports.” And CEO Paul Reitz of wheel and tire maker Titan International complained that with the tariffs, “you’re putting these taxes on American companies that are taking raw materials and converting them into finished goods and you’re not putting any tariffs on the finished goods that come in from overseas.”

On another note, contract manufacturer Flex, which provides manufacturing and supply chain management on behalf of its clients, said it expected companies to start reconfiguring their supply chain strategies: “Demand will become more regional as each country works to support its own manufacturing base.” That could mean big changes – but a plus for Flex, since it has facilities around the world and is “the largest industry provider in every major non-China region.”

There are other pricing pressures and shortages too. You just have to look at the 30% to 40% rise in fuel prices for airlines the past year to understand how margin pressure could develop for certain companies. Anne wrote a few months ago about the severe shortage of truck drivers and a big spike in driver wages, which is inflating transport costs. And Alaska Airlines said that its labor costs had risen 20% over the past year. While air travel and ticket pricing have been strong, intensifying competition among airlines has meant that Alaska hasn’t been able to push through price increases large enough to cover rising costs.

Emerging markets have been tough. Emerging markets and currency devaluation have been all over the news, but it gets really nitty-gritty at the company level. Tupperware, which does about two-thirds of its business in emerging markets, said negative currency impacts took 6% off its adjusted earnings. And it, like almost all companies with exposure to Brazil, called out the disruptive truck drivers’ strike that began in May. Much of Latin America has been a basket case. Panama-based Copa Airlines had to deal not only with massive currency devaluations in Brazil and Argentina, but also with the Venezuelan government unilaterally cancelling 900 flights into and out of the country due to a diplomatic dispute.

But of course, the big wild card is China because whither China goes – well, it’s important. From those with businesses on the ground, reports have been mixed. For example, quick-serve restaurant company Yum China had a so-so quarter while Tata Motors’ performance in China was disappointing. On this, we’ll have to wait and see.