Monthly Archives: February 2017

How to Get The Earnings Conference Calls

We are currently in the belly of the beast of earnings season. The earnings call is the quarterly judgment day for all publicly owned companies. Except for the occasional analyst meeting or press release regarding monthly sales, the earnings call is the only opportunity to get a peek into a company’s performance and future expectations.

Personally, I have covered nearly 600 earnings calls for TheStreet. At Seton Hall University, 10% of each student’s grade in my undergraduate class is derived from his or her analysis of an earnings call. This is such an important element of the investment process that I thought that I would share some of my knowledge and experience with you in this edition of “The Finance Professor.”

 

Earnings Calls: 4 Steps

There are several phases to covering an earnings call. Here are the primary steps in the process:

  • Previewing the call.
  • Reading the earnings release.
  • Listening to the call.
  • Analyzing the call.

 

Step 1. Preview the Call

This is where you do the preparatory research in advance of the earnings call. Just as study is important to school exam preparation, we need to do some homework before the earnings report is released and the call is conducted. Here is the homework: Go back in time: Start with the prior quarter’s earnings call. You can listen to an archive of the call (online) or obtain a printed transcript (for a fee). Then, query that stock on TheStreet and read analysts’ reports or other commentary to ascertain how the company performed in the quarter, as well as the guidance provided for the most recent quarter. As an example, read my recent coverage of the earnings call of the casual-dining chain Brinker International ( EAT). Note the benchmarks and metrics: This is the most important part of the preview phase. You need to ascertain Wall Street analysts’ consensus and range of estimates for EPS (earnings per share) and revenue. See how these consensus estimates have changed over the period of time since the last earnings release. Also, obtain the expectations for company-specific or industry-specific metrics such as same-store sale comparisons (“comps” in Wall Street vernacular), gross margins, unit sales, traffic acquisition costs and other metrics. Integrate into this analysis any preannouncements (good or bad) or intraquarter press releases, business updates, sales statements, new product releases, management changes, regulatory or legal investigations and other corporate developments or initiatives.

 

Step 2. Read the Earnings Release

Obtain a copy of the earnings release as soon as possible. A company’s earnings press release is typically issued at least an hour prior to the commencement of the call. Some companies will issue earnings after the market has closed and conduct their conference call the following morning. The earnings press release is made available on the company’s Web site or on financial Web sites such as Yahoo! Finance or Google Finance. In addition, some companies will issue supplemental presentations that are available only on the company’s Web site. When you read the earnings release, closely review any stated benchmarks and metrics. Additionally, pay attention to any future guidance or new announcements, such as stock buyback authorization or dividend changes. Also, factor in or out one-time items, such as special tax items, write-downs or impairments, disposal of businesses (discontinued operations) and any new accounting treatments (such as stock-based compensation or “SFAS 123-R”). Factoring in or out one-time items is done to normalize the EPS to prior guidance and consensus estimates. Finally, look at the balance sheet. Focus on changes in financial position such as cash and short-term investments, inventory, debt, deferred sales and diluted share count.

 

Step 3. Listen to the Earnings Call

By law, earnings calls are open to the entire public. They are easily accessed by telephone (usually toll-free). To get the telephone number for an earnings call, check the company’s Web site (the investor relations section is usually a good place to start) or the earnings release. The earnings call is typically presented in a four-act format: Introduction: This is the reading of the “Safe Harbor” disclosure and some instructions from the conference call moderator. Welcome and overview: This is typically delivered by the chief executive officer or the most senior member of the management team who is present. Sometimes several heads of business units or divisions will also make presentations. Some key metrics and financial results will be disseminated. However, most of this portion of the call is what I call the “commercial.” In the commercial, the company will tell you about its strategic vision for the company, new initiatives, product launches, product enhancements, the business environment and other color commentary. Some CEOs will act as salesmen, while others play the cheerleader. If necessary, during the delivery of a bad quarter the CEO will be somber, cathartic or sometimes clueless.

Dividend Reinvestment Plans

Jim Cramer loves companies that make dividend distributions — because as a shareholder, a.k.a. owner in the company, he believes you deserve your piece of the profits. Which is exactly what dividends are.

And now is the season for quarterly dividend announcements. Dividends are in the air. But what should you do with those quarterly dividend checks? Cash them and go shopping? As fun as that sounds, it’s not doing much for your portfolio. Have you considered a dividend reinvestment plan, a.k.a. a DRIP? Many of you have asked questions about these, so apparently DRIPs are on your mind. Basically, if you plan on holding a stock for a while, you probably should be a part of the company’s dividend reinvestment program. But even if you’re an active trader, a DRIP can still be a great way to add shares to your position without extra fees. So let’s dissect the DRIP.

 

What’s a DRIP?

It would be so easy to make an ex-husband joke here — but I’ll restrain myself. Simply put, a dividend reinvestment plan is a way for shareholders to reinvest their dividends back into the company. Instead of getting those dividend checks sent home, the company keeps the money and buys more shares for you. Take note: Even though you’re no longer getting those checks in the mail, those reinvested distributions are still taxable income to you. You can’t escape Uncle Sam. Reinvesting your dividends can make a huge difference in the amount of shares you hold over the long haul. “You could end up with as many as two or three times as many shares as you started with,” says Bob O’Hara, vice president of development at BetterInvesting, a nonprofit long-term investing advocacy group. Here’s the bigger upside: Since you’re buying the shares directly from the company, there are no broker fees for the purchase. Yippee! And you usually only need to own one share of a company’s stock to be a part of its DRIP. That’s why everyone should start giving little kids shares of stock for special occasions. My stepbrother gave my daughter a few shares of Coca-Cola when she was a baby. I reinvest the dividends for her and, although she’s only 2 1/2, she’s got quite a little portfolio. Brilliant. But my precious little girl is not the only one benefiting from these DRIP plans. Clearly, there must be perks to the companies that offer these plans as well. Of course, to start, they have immediate access to your money. When you buy a share on the open market, you’re essentially buying it from another seller. With a DRIP, you purchase right from the company so your money is immediately in their hands. In addition, companies like a solid shareholder base. If you’re a DRIP investor, you’re pretty committed to the stock. If the market goes down or a negative one-time event happens, you wouldn’t be as quick to jump ship as someone who didn’t have as much of a vested interest in the place.

Read Financial Statements

Last time, I presented a guide to understanding earnings calls. The most anticipated and recognized facet of a company’s financial report during a typical earnings call is its earnings per share (EPS). The EPS (also listed as “net income applicable to common shares on a fully diluted basis”) is referred to as the “bottom line” because it is the bottom line of a company’s profit and loss statement (P&L, also known as the income statement).

While the EPS captures the media headlines and is the most-sought-after metric, it is only part of one of the three major components of a company’s financial documentation that is necessary to understanding both the company’s performance and its financial condition. The other two major financial statements are the balance sheet and the statement of cash flows. In the upcoming weeks, I will highlight each of the individual financial statements. The objective of this series of lessons is to provide the necessary tools to ascertain financial information and understand those reports without having to possess a CPA (certified public accountant) or CFA (chartered financial analyst) designation. (However, it is the role of the CPA to audit and certify the financial statements that will provide the independent account.) This week, let’s kick off this multipart examination of financial statements by looking at the annual report and 10-K for a lesson on financial and regulatory reporting.

 

Getting Started:

As is often the case with any research project, we start by aggregating information and materials that will provide the basis for our financial investigation. This prompts the questions: What should I look for? and where can I find it? Here is our punch list: — Form 10-K
— Form 10-Q
— Annual Report
These documents can usually be found in the “Investor Relations” section of a company’s Web site.

 

Form 10-K

This is an official filing made by the company to the Securities & Exchange Commission (SEC). On the face of the 10-K will be a statement to this effect: “Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended 1996 .” The 10-K will contain the following sections: — An overview of the company and selected financial data
— Director and senior management information including executive compensation, as well as signatures by senior management and the directors
— Consolidated financial statement including the Report of Independent Registered Public Accounting Firm
— Notes to the financial statements

 

Form 10-Q

This is the quarterly and slimmed-down version of the 10-K. It typically only includes unaudited financial statements, notes to the financial statements and a management discussion.

 

Annual Report

This publication is sent to all shareholders and is available from the company for prospective investors. The annual report varies from company to company. Some companies, such as Ruth’s Chris Steak House, just slap a glossy cover over a 10-K and call that an annual report. On the other hand, some companies, such as Amylin Pharmaceuticals, put together a professionally designed annual report that incorporates a message to shareholders; a business overview featuring (but not limited to) the company’s management, products, operations and new endeavors; the auditors’ report; consolidated financial statements; and notes to all of those statements. Yet another spin is the summary annual report as presented by Duke Energy. Duke issues a summary annual report with plenty of gloss, a business overview and financial statements. However, ultimately, the Duke report refers readers to its 10-K for more details.

The Easy Tips for Analyze Stock Fundamentals

Not every investor or trader will execute the same strategy when attempting to make money in the stock market. While everyone will insist that their way is the best market strategy, I believe that you need to stick to the approach that best fits your talent and experience.

I categorize investing/trading styles into four different categories: 1. Fundamental : Decision making based on quantitative analysis of the company’s financial information and qualitative analysis of its business, competition and economic environment. 2. Technical : Using stock charts and chart patterns to discern trading decisions. 3. Statistical: Developing trading models derived from a database of multiple variables. 4. Arbitrage: The simultaneous purchase and sale of a security, securities or derivatives in order to extract a low-risk profit. My personal style is to primarily utilize a fundamental approach to investing. In addition, I have developed a series of statistical index trading models, which I also trade on, but this accounts for only a fraction of the assets I manage. From time to time, I will also employ arbitrage techniques as well as incorporate technical analysis when making a trading decision or risk-managing a position. For this installment of the Finance Professor, I will focus on the fundamental approach to investing.

 

Are You Interested in Growth or Value?

There are two primary schools of thought to fundamental investing: growth and value.

 

Fundamental Investing: Growth

If you consider yourself a “growth investor,” then you are concerned with the rate at which a company will increase its earnings stream over a period of time. Growth investors seek out companies with accelerating or high levels of sustained growth, while companies with declining growth rates will be avoided. As an example, Apple is regarded as one of the best growth stocks in the market today. TheStreet Ratings reports that Apple has grown earnings per share (EPS) at a rate of 62% in the last 12 months. Currently, estimates indicate that Apple will grow EPS at a rate of 56% in the fiscal year 2007. However, stocks can hit the virtual brick wall of growth and exhibit growth deceleration. Starbucks is a prime example of such a stock. Starbucks investors were accustomed to mid- to high-20s growth rates and now the company is maturing to an expected growth rate of roughly 20% to 21% in the next two years. As a result, growth is a two-sided equation where the seductive aspects are balanced by its risks .