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.