Making the (Earnings) Call
Here's how we approach company conference calls.
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Tomorrow begins another leg up in the quarterly earnings season with a rash of bank earnings, including those from Action Alerts PLUS portfolioholding Bank of America BAC .
In the coming days many earnings press releases will be hitting the tape and management teams will hold their earnings conference calls. While the earnings press release contains the reported results for the quarter, some color on that performance, and usually some forward-facing comments about business expectations, it's the earnings call that offers far more color and insight as well as Wall Street's grilling of management.
While you can't have the earnings conference call without the reported figures found in the earnings press release, more often than not, the earnings call is more insightful and reveals the next move near-term move in a company's share.
What is a company's earnings call?
The usual quarterly earnings call lasts 60-90 minutes with a company's management reviewing the quarter's performance, which can include how its business sectors performed. Some will recant key wins during the quarter, others will talk about other strides made during the period. A review of the income statement and how it relates to a company's business segments is a staple of these events as is some additional color behind management's guidance either for the current quarter or the current year.
Once the management presentation is finished, the Q&A part of the call begins. Wall Street analysts line up to pepper the management team with questions. Some can be softballs the management team can bat away; others can be more intricate. You can almost bet the house this group of folks will attempt to ask the same or similar questions multiple ways to see if they can pry any additional information from the executives. That's what makes this part of the call a must-listen for us, even though it can be repetitive at times.
What do we listen for on a company's earnings call?
Over the last few decades, we have logged thousands of hours of earnings conference calls. The two words that sum up how we approach a company's earnings call are "compare" and "contrast".
While we look forward to management pulling the curtain back on the quarter's results, one of our strategies going into an earnings call is to review what was said during the prior one. We do this so we can compare the management's comments about the reported quarter with the prior one to determine what has changed, both good and bad, for the company's business. We do something similar, contrasting what one company says during its earnings call with what is revealed during the earnings calls of its customers, suppliers, and competitors. For example, when ahead of Apple's AAPL earnings call, we will revisit what it said about iPhone, iPad, Mac, services, and others business during the previous quarter's earnings call and contrast its comments about the latest quarter with those from Taiwan Semiconductor TSM , Qualcomm QCOM , Skyworks SWKS , Samsung SSNLF , Cirrus Logic CRUS , Intel INTC and others.
What we're trying to accomplish with this compare and contrast is to determine areas of strength and weakness inside the company, are the most profitable businesses accelerating or slowing, and whether margins are expanding or contracting. The answers to those questions help determine the direction of a company's top line and profits, two key drivers of its earnings per share, and how that stacks up against consensus revenue and EPS expectations for the company. As much as we would like to see our holdings beat quarterly revenue and EPS expectations, understanding the why and how behind that beat and if the drivers behind it have more gas in the tank is more important.
We also listen to the tone of the presentation from the management team. Are they more upbeat than the last earnings call, are they more downbeat, or is the tone more sobering than the prior earnings call? It could be a tell about the tone of the business or the conviction in their guidance and forward comments. And if management gets testy with analysts' line of questioning it is something we'll take note of.
How do you listen to all those earnings calls?
The volume of earnings calls makes it rather difficult to listen to all those conference calls, especially when multiple ones are being held at the same time. Some nights during earnings season, a few hundred companies may report and it's only possible to listen to half a dozen or so. Fortunately, there are several services that supply earnings call transcripts in a timely fashion. Being able to spread out several transcripts across a company and its competitors, suppliers, and customers is extremely helpful in getting an updated view of the landscape a company competes in.
AAP is long BAC, AAPL and QCOM.