Earnings conference calls are presented by a company's management shortly after the company announces its quarterly earnings. When it announces earnings, the company will typically issue a press release providing financial information and some commentary on the quarter. The conference call often expands on the information in the release. Management gives a prepared presentation and then answers questions from analysts who follow the company.
Who participates in the conference call?
The participants in the conference call on behalf of the company usually include, at a minimum, the chief executive office and the chief financial officer. Other participants may include the chief operating officer and the leaders of various business segements within the company. Analysts at investment banking firms that cover the particular company will also participate in the question and answer session at the end of the call. And, occassionally, an individual investor or other interested party may ask a question during the Q & A session.
What topics are discussed by management during the call?
The chief executive officer and possibly other management officials typically will give a prepared presentation concerning an overview of the company's performance during the quarter or the year. They may also discuss (1) new products the company may be releasing, (2) new strategies for growing revenue, improving margins or containing costs, and (3) recent or pending acquisitions or divestitures. In some cases, management may discuss broad economic trends they are seeing or trends in their particular industry.
The chief financial officer also will give a prepared presentation addressing the highlights of the company's financial performance. Subjects typically discussed include sales/revenue growth, margins, operating expenses, earnings per share growth, the amount of cash and cash equivalents, inventory, debt, stock repurchases and dividends. Since much of this information is also given in the press release, some companies do not go into a lot of detail, while other companies provide considerable detail, breaking down a lot of these numbers by business segment and geography. The value in this discussion often comes not from the disclosure of the numbers themselves, but the company's explanations for the numbers. For instance, the company can explain whether lower or higher sales or margins are part of a longer trend or whether they are a result of a one-time occurrence.
Finally, in some conference calls, company management will provide some projections about future performance of the company. Some companies do not like to give future estimates at all. Others will speak rather broadly (we see double digit growth in sales in Q3), while others will be very specific, giving a particular range of estimates for sales, margins or earnings per share growth. This information may be disclosed by the CEO or the CFO.
What type of questions are asked by the analysts?
The analysts can ask pretty much any question they want. They may ask for clarification of the statements by management or clarification of the information in the press release. They may ask about topics that were not covered by the prepared remarks or the press release. Much of the time, they request more in depth information or "color" concerning some parts of the quarterly performance. They may try to dig deeper into the numbers to see if management is putting too much of an optimistic gloss on the numbers. And, they may ask specific questions concerning the economic or competitive environment, especially if those topics were not covered in the prepared remarks.
There are times when management does not wish to disclose information for competitive purposes, or because a supplier or client insists that it not be disclosed. But most of the time management will answer the question.
What is the value of earnings conference calls to the individual investor?
Earnings conference calls can provide a variety of information that will help an individual investor make decisions about whether to buy or sell a stock. For instance:
1. The call will help provide the "why" behind the numbers to help the investor assess the importance of a particular number. An earnings decline because of a one-time charge may not be as bad as a continuing trend of earnings declines, particularly if management cannot articulate a strategy to reverse the decline.
2. The call will provide some guidance about the company's future performance. Future expectations, not past performance, are more likely to determine the stock's future price. The management's future earnings guidance in the conference call, therefore, may be a more important factor in deciding to buy or sell a stock than the snapshot of past performance in its earnings release.
3. The call will help assess the company's management. Can management articulate visionary goals for the company in its conference call and explain the steps it has taken and will be taking to meet those goals? How accurate is management in projecting its company's future performance? Is there shocking new information released in the conference call that should have been, but was not, forewarned? Is management frank and honest when the company has a bad quarter, or does it try to avoid or gloss over bad numbers? All of this information can be gleaned from conference calls, especially if you follow the calls from the same company over a period of time.
4. The call will help assess future trends in the economy or a particular business segment. Companies are on the front line of the economy and will typically be the first to notice changes in economic trends. Finding the companies who accurately foretell these trends and following their conference calls can be tremendously helpful in assessing the current and future state of the economy.
5. The call may help evaluate competitors, client or suppliers of the company. In some cases, looking at the sales or inventory trends of one company will help the individual investor assess the trends of related companies. For instance, if a company announces that it has gained considerable market share, its competitors may not do so well. If it projects enormous sales gains for the new few quarters, then its suppliers or its clients may also have exceptional performance.
Can I determine whether or buy or sell a stock based on the earnings conference call alone?
No! For one thing, listening to an earnings conference call often feels like you are starting in the middle of a book or a movie. The management and analysts know the company quite well, but you do not. The call may include terms you do not understand and be based on underlying information you simply do not know.
But more fundamentally, it is important to remember that the earnings call is management's perspective, and even when you have honest management, it will typically put its numbers in the best light. It is important to also seek out independent, neutral information about the company before deciding to invest.
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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