Quarterly earnings calls, a routine practice for most U.S. corporations, can be a rich source of insight and ideas for investors.
Hear this: the earnings call, a routine practice for most U.S. corporations, is worth a listen for investors. Earnings calls are a potentially rich source of insight and nuance beyond the pages of financial numbers and boilerplate announcements companies release every quarter.
How so? The quarterly earnings call provides much-needed human texture in our impersonal, text- and instant-message-driven era. These calls are more like a good, old-fashioned, person-to-person conversation. Earnings calls remain a platform for companies to communicate with investors, customers, and the media, and what’s said during the calls often moves share prices, according to Michael Fairbourn, an education coach at TD Ameritrade.
The earnings call, fundamentally, is an opportunity to look ahead. “It’s about forward earnings and revenue guidance from the company,” said Fairbourn. “By listening to earnings calls, investors can gain valuable information that isn’t always apparent in a company’s financial reports.”
Most of the 3,000+ 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, 92% of companies represented by the group’s members conduct earnings calls.
Here are a few important points for investors to know about quarterly earnings calls.
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.
By listening to earnings calls, investors can gain valuable information that isn’t always apparent in a company’s financial reports.
After the earnings call starts, 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). Also, before the call starts, pull up a one-minute chart of the company’s shares (more on that later).
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. You may hear about “core operating performance” and other hard-core finance 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 seem a bit dry, but pay attention. What you hear could help you make a well-informed, long-term investing decision—or help you avoid a bad one.
The previous quarter’s results are in the books, and those results are likely already factored into the stock price (or will be soon). It’s in the earnings report/call “tea leaves” where investors can gain clues to 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 can shed light on how they view business conditions. Cutting a few cents 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 said. 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 question-and-answer 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 is 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? If such questions aren’t posed and answered during the call, ask yourself if it’s a good idea to invest money in shares of the company.
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).
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—health care, manufacturing, retail, etc.—which means they track the company whose call you’re listening to, as well as the company’s top competitors.
Listen for particularly pointed questions, or the same questions asked more than once. If the CEO hesitates, or just 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.
He 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,” Fairbourn said. “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, watch the video below.
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