Quarterly earnings calls, a routine practice for most U.S. corporations, can be a rich source of insight and ideas for investors.
Investors stare down an information deluge every day: stock ticker crawls, charts and graphs, highs and lows, financial network talking heads, and so on.
Quarterly earnings calls are different. The old-school earnings call can be a fertile source of human-generated detail and a respite from the endless digital streams of numbers. How are your investor listening skills? Quarterly earnings calls are a good way to find out.
Although earnings calls are a routine practice for most U.S. corporations, what’s said during the calls is not always routine or expected by the market. Sometimes a chief executive officer’s comments on business conditions or profit expectations can move the company’s share price, according to Michael Fairbourn, education coach at TD Ameritrade.
For investors, earnings calls offer opportunities to be “in the room” with company leadership and take a look ahead. “Listen to earnings calls and you can often hear right then and there about forward earnings and revenue guidance straight from the CFO’s mouth,” Fairbourn said. “By listening to earnings calls, investors can gain valuable information that isn’t always obvious in a company’s financial reports.”
Why listen to quarterly earnings calls, and what should investors listen for? Here are a few key points.
Most of the 3,000-plus U.S.-based, publicly traded companies listed on major exchanges hold conference calls shortly after reporting quarterly earnings. According to the National Investor Relations Institute, over 90% of companies represented by the group’s members conduct earnings calls.
Quarterly earnings calls (most are actually webcasts; to get access, you may need to register through the company’s website) are usually held an hour or two before the U.S. stock market opens or after the close (though sometimes during regular trading hours). Calls last 30 minutes to an hour and are typically archived on the company’s website.
To access earnings calls, log in to your account at tdameritrade.com. Select Research & Ideas > Markets > Calendar > Earnings, then select a date and scroll/swipe down for a list of companies reporting earnings on that date. Select the speaker icon to listen to a conference call.
Before the call starts, pull up a one-minute chart of the company stock or stock shares (more on that later). After the call begins, you’ll be in “listen-only” mode. (Typically, only industry analysts are allowed to ask questions during the Q&A session; earnings call transcripts can be found through some third-party services.)
A typical earnings call starts with a “safe harbor” statement from the company’s management, which alerts listeners that the discussion of financial results may include forward-looking statements, meaning that estimates of financial results based on the forward-looking statements may substantially differ from the actual results. The disclaimer “is intended to limit the company’s liability if the forward-looking assumptions made by the company’s management drastically differ from the actual results in the future,” the Corporate Finance Institute stated on its website.
During the early part of the earnings call, the chief financial officer, the head of investor relations, or another company official will often recite directly from the just-announced results. They may talk about “core operating performance” and other complex financial terminology. The CEO may offer a few remarks about the latest results, maybe congratulating employees for their outstanding “execution” in a good quarter.
The first 15 to 30 minutes of the earnings call may not seem like earth-shaking “news,” but investors should pay close attention. What you hear could help you make a well-informed, long-term investing decision—or help you avoid a bad one.
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The company’s previous quarterly results are in the books, and those results are likely already factored into its stock price (or will be soon). But by carefully listening to what executives say during the call, investors can gain insight into what the future may hold for the company and its stock.
Companies often update their own revenue and per-share profit projections for the current quarter or the full year, which might say something about their big-picture view of business and economic conditions. Shaving a few pennies from the full-year per-share earnings estimate may not seem like much, but there are real business reasons for that.
“I’ve seen companies report what appears to be good news—sales or earnings doubling, for example,” Fairbourn explained. But after the markets open, “the shares drop like a rock because the company’s forward guidance was weak, or company leaders talked about greater uncertainty or more competitors or said that they anticipate a more challenging environment.”
The first half or so of the earnings call is usually followed by a Q&A period, which is when things can get interesting. Sometimes the CEO will stray from the script and speak candidly or off the cuff about something with implications for the business or the stock price—say, buyout speculation or an activist investor who’s targeted the company.
What’s the “tone” of the call? Do executives seem less optimistic than they were a few months ago? Have sales slowed? Is a new product launch struggling? Have new competitors emerged? Have global economic trends adversely affected the company? For example, amid the COVID-19 pandemic, supply chain disruptions affected sales, manufacturing, and distribution of the products of many companies, and comments from company executives during conference calls helped put sales and earnings numbers in the context of the macroeconomic environment—for better or worse.
This is where the aforementioned one-minute chart comes in handy. Many short-term traders also listen to earnings calls, so following an earnings call “blow by blow” via an intraday chart can give you an idea of what market professionals consider key issues for a company. Executive comments on profit outlooks or other matters can move the stock price, even if just for a few seconds (see figure 1).
For many companies, forward guidance—the company’s best guesstimate of earnings projections over the coming quarters based on internal metrics—has been a common staple of the conference call. Historically, when a company amends prior guidance to the downside (or worse, declines to offer guidance), some analysts would raise a red flag.
But the pandemic may have changed the rule of thumb, at least temporarily. According to FactSet, 52% of the 285 S&P 500 companies that historically issued guidance declined to do so during their 2020 and 2021 fiscal years, citing unprecedented levels of uncertainty. For the most part, the market seemed to cut them some slack.
As the pandemic-related uncertainty ebbs and markets return to some sort of normalcy, it will be interesting to see if analysts and investors expect a return of guidance and whether they’ll view lack of guidance as a negative sign.
Usually, in the Q&A sessions, only the analysts at big Wall Street banks or investment shops can ask questions. These analysts often follow several other companies in a specific industry, which means they track the company whose call you’re listening to, as well as the company’s top competitors (be sure to check for any analyst rating changes on the company’s stock afterward).
Listen for particularly pointed questions, or the same questions asked more than once. If the CEO hesitates or regurgitates something from the press release, that’s worth noting. “If analysts come back with repeated questions about something, that subject may be an area of concern,” Fairbourn noted.
Fairbourn also suggested keeping eyes and ears open for comments on other earnings-related matters such as write-offs (usually a one-time hit to earnings). “Writing off” a business unit that was recently sold or divested “isn’t necessarily bad,” he explained. “But look at things like that in more detail. The shares may go up [on news of a write-off] because the company sold off a less-profitable, slower-growing business, or because they’re focusing more on core areas. It could help them in the future.”
For more on what to listen for in an earnings call and on the risks of trading earnings announcements, watch the video below.
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