Institutional Investors Conference Takeaways
Analysts and industry leaders discuss the outlook for 2017 and beyond.
The Raymond James Institutional Investors Conference marked its 38th year with record attendance of nearly 300 presenting companies and more than 2,000 attendees. The event, held every March in Orlando, offered powerful insight into the market outlook across sectors in the United States and Europe. In addition to presentations from companies in our coverage universe of nearly 1,000 U.S. stocks, our research analysts drew on deep sector expertise to offer attendees these key takeaways for the road ahead.
Constraints are real in the current energy upcycle.
Many bottlenecks are developing in the energy chain as the upcycle unfolds, which will limit the pace of activity growth. This includes the challenges of resupplying adequate labor to the oilfield, limitations on available pressure pumping equipment, and supply/logistical challenges for frac sand. This should be bullish for oilfield service pricing (costs to E&Ps) and supports a bullish oil price view.
E&P productivity efficiencies should continue.
U.S. production per well has improved every year since the shale revolution began, averaging about 30% over the past five years. Continued advances in completion design, lateral placement and sufficient core locations should continue to allow E&P companies to provide an efficiency uplift for at least the next few years.
E&Ps and investors are underestimating service cost inflation.
In our view, both E&Ps and investors are underestimating how much cost inflation will occur across the oilfield over the next two years. This should come across all oil service business lines, but will be particularly evident in labor-focused and capacity-constrained industries such as pressure pumping, where pricing is already up about 30%, and frac sand.
The United States is now the global swing producer.
Long-term U.S. crude production could more than double by 2030 to reach 25 million to 30 million barrels per day. This shift will have significant political and economic impacts across the globe and over the long term, as crude prices may remain capped to the approximately $60 per barrel range.
The current drug pricing environment is less favorable.
Both in terms of frequency and magnitude, price inflation is less favorable than it has been historically with increases moderating to long-term averages – perhaps lower. Initial price points for new products will become increasingly important as there are now fewer opportunities to raise prices later on.
An FDA backlog continues to limit new product cycle.
Many drug manufacturers are struggling against price pressure and are now over-levered as a result of M&A activity. The market is now more competitive and saturated than in recent memory, and double-digit deflation for generics appears likely to continue through the first half of 2017.
The managed care industry continues to evolve.
We are seeing early signs of payor/provider convergence. While it is likely to take various forms, we continue to believe the payors have the upper hand given that the managed care industry is more concentrated, health plans have more experience in pricing risk, and managed care organizations have a broader perspective of healthcare, touching all elements of the system.
Changes to Medicaid will be a big factor.
Relative to the exchanges, legislative changes to the Medicaid program will be a bigger factor and remain a potential source of funds for the new administration’s planned infrastructure spending and tax cuts. 19 states have not expanded Medicaid. Investors will be watching if additional states expand as well as the outsourcing potential of higher cost populations in order to determine the growth prospects for this segment of the market.
Early innings for autonomous driving.
We estimate 5 million to 10 million cars with advanced technology features (like automatic emergency braking and forward collision warning) were shipped in 2016 and that regulations will drive this figure to approximately 25 million by 2020. By 2030, the figure could reach 60 million and, by 2040, 80 million.
Vehicles will keep getting smarter.
We also believe that the technology content in cars will grow 40% to 50% through 2020 and then 15% to 20% through 2035. Because the market is likely to be large and its evolution could take multiple decades, we do not think investors should be concerned with picking winners and losers today.
The auto industry will continue to spend on technology.
Currently, we estimate that the total integrated cost for automatic emergency braking systems alone is approximately $250 per vehicle. Over a long-term time horizon, we suspect the auto industry will spend nearly $200 billion annually on advanced driver assistance systems/autonomous technologies.
The post-election Trump bump may not last.
While bank stocks have materially outperformed the broader equity markets since the election, we believe the move is justified by an improved earnings per share outlook: wider net interest margins, stronger loan growth, less regulation, better credit quality and increased payouts to shareholders.
We maintain our equal weight rating on banks.
While tax and regulatory reform uncertainties keep us from being more constructive on the industry, we have an eye on banks that could materially benefit from a corporate tax rate reduction. Additionally, we believe the sub-$10 billion asset banks have the most upside to completing strategically accretive acquisitions and potential mid-cap bank sellers are becoming more attractive.
The 38th Annual Raymond James Institutional Investors Conference by the numbers:
Source: Raymond James Equity Research