One part of being a successful investor is staying informed about the news and events surrounding the companies in which you are a shareholder. Your job is made somewhat easier because, as a publicly traded company, a business is required to provide existing shareholders with relevant information including annual reports, financial statements, notification of shareholder's meetings, and changes to their board of directors. Even if the company does not mail shareholders this information, they will have a section of their website where this information is captured usually entitled something like "Investor Relations".
One of the resources investors have available, but frequently do not maximize as they could, is the conference call. Sometimes called the "earnings call" this is an important event during which the CEO and other senior executives discuss the state of the company with analysts. As a shareholder of the company, you are entitled to listen in on this call.
The focus of this article is to go into detail about the process of a conference call, how investors can prepare for the call, and what to listen for to get the information they need to make sound investing decisions.
What is a conference call?
A conference call is an event that allows companies to provide information to any interested party. This includes institutional investors (such as the large investment banks and stock analysts) but is also available to individual investors. Conference calls are usually scheduled every quarter and typically coincide with the release of a company's earnings report. While most companies take advantage of the opportunity to have a conference call with analysts, there is no legal obligation for them to do so.
In the past, conference calls were restricted to Wall Street analysts and institutional investors. However, largely due to the accessibility of a call via the Internet, virtually all public companies allow individual investors to listen to the call live. In fact, you don’t have to be a current shareholder to listen to the call.
Why do companies do conference calls?
A conference call is a form of marketing and public relations for a company. It is an opportunity for them to control or, in some cases, change the narrative of the company. For example, if the company had a solid quarter marked by exceptional growth, the conference call can be a way for them to highlight their accomplishments. On the other hand, if they had a poor quarter, the conference call gives them the opportunity to calm investors who may be looking to jump ship. Sometimes despite positive earnings, analysts are concerned about a company’s future growth because of some known event. Conversely, sometimes a company’s poor performance can be easily explained. Because a conference call typically takes place after the earnings report has been released, executives are not going to lie about their results, but they have a fiduciary obligation to present their company in the best light possible.
Most successful companies know that it's good public relations (not to mention investor relations) to be forthcoming. It doesn't mean that companies won't put a spin on their conference call. Of course, they will. But in general, there is more harm to a company if they avoid analysts then to speak with them.
How is a conference call structured?
Most conference calls follow the same basic format. For participants who are listening to the call on the phone, there will be a dial-in number and passcode. For those who are listening to the call over the Internet, they will be provided with a link to stream the call. At the beginning of the call, the host of the call (someone from the company) will introduce the members of the management team who will be making statements on the call. After this, someone from investor relations or from the company's legal department will go over what can be called the "fine print" of the call. Basically, it's a reminder that past performance doesn't indicate future results, and that while much of what is going to be talked about will be in future terms, there is no guarantee that any events discussed will happen with certainty.
The next section of the call is perhaps the most tedious, but depending on how much research you’ve done can be valuable. This is when the earnings report is reviewed in detail. All of the raw financial data is explained and reviewed. The officers of the company will typically provide some commentary that may go “off script”. For the most part, however, any information in this section of the call is readily available through press releases that have generally already been posted on the company’s site.
So is there any value to this part of the call? Yes, if you know what to listen for. In many cases, this part of the presentation will be divided among several executives including the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and other executives. With the caveat that most companies are looking to put the most positive spin on their results, you can get a lot of information by their future projections. Does what they report track with any research you’ve done? If there were major issues that affected their performance negatively, have those issues been resolved, or will they be resolved soon?
The last part of the call is a question-and-answer period between the company executives and analysts/investors. This is perhaps the most useful part of the call for investors because analysts will quickly cut through the marketing speak and push for clarity on areas that might be unclear or that warrant a deeper explanation. Think of this like the manager, or coach, of a college or professional sports team addressing the media. The reporters will generally ask the coach questions that they don’t necessarily want to answer. The answer they give can give you a clue about how confident they are about a particular outcome.
Why is the conference call important?
The conference call generally occurs after a company has released its earnings reports. After the call, analysts and investment banks will make their “buy”, “sell”, or “hold” recommendations. So for a company that reported good earnings, the conference call is a way to inspire confidence that they will continue to provide a good return on investment (ROI) for their shareholders. On the other hand, if their report disappointed or “missed” either in terms of revenue, earnings per share (EPS) or both, the conference call gives companies the opportunity to mitigate any damage done to their share price.
How do you prepare for a conference call?
The basic steps you take to prepare for a conference call are really no different than the steps you’d take for making any major purchase. You have to do some prep work in advance of the call, you listen to the call, and then you form your analysis.
- Preparing for the call – the two basic steps to take when preparing for a conference call are to review the company’s earnings statement from the previous quarter and compare it to recent company news and their current earnings report. What were analysts concerned about after the last earnings report? Were those issues resolved or in the process of being resolved? How do their results track with other companies in their sector, and if relevant with the broader economy? For example, you might expect that an oil company's stock might be going up as crude oil prices rise. But if the company you are investing in has a share price that is declining, this should be a caution flag, if not a red flag. You should also then compare their past quarter's earnings statement with their most recent statement. Obviously, you're looking for consistency if the last quarter was good, and improvement (or maybe just no further erosion) if the report was not good. Much of this information is available either on the company's website or on other financial sites. It may take a few hours to digest all the information, but it will be time well spent.
- Listening to the call – this means actively listening, particularly to the question-and-answer period in the end. Remember, there is a natural tension between analysts and the company. The company is trying to present themselves in the best possible light and the analysts' job is to paint as realistic a picture as possible. Although individual investors very rarely get to ask questions (in some cases, there are thousands of listeners on a call), the analysts will probably ask the questions that you were thinking of. And, let’s face it; they’ll probably come up with a few that you never even considered.
- Analyze the call - By doing your research beforehand, you are in a better position to form opinions. Are there any questions in your mind that were left unanswered? Can you make any educated guesses about that answer based on the information you have? Did any of the financial information provided by the company seem irrelevant or self-serving? It's okay to answer yes to this question. The thing about statistics is they can be twisted to make any conclusion you want to make. So if some metric seemed odd to you, chances are the analysts saw it the same way. In the end, trust your gut. In many cases, a conference call will simply confirm what you may have already felt, but in some cases, you may get some surprises. And finally, pay attention to the stock price in the days immediately following the call. That is usually the best indicator of how institutional investors felt about the company's performance on the call.
Are conference calls recorded?
Obviously many individual investors may not have the time to stream an hour-long conference call while they’re e at work. The good news is, in most cases, the conference call will be recorded. Usually, the recording can be found on a company's website in the investor relations section. In the event, the company does not choose to make the recording accessible, it can generally be found on other financial websites. Even if you can only find a written transcript, it can still be valuable.
The bottom line on conference calls
If you're planning to invest in individual stocks as opposed to mutual funds, then it is imperative that you become comfortable with doing the ongoing research to evaluate your stock's performance. Too often, investors miss valuable clues that are hiding in plain sight and hold on to a stock longer than they should, or miss a chance to increase their investment of a stock that is ready to take off. Preparing for, listening to, and analyzing a conference call is one of the simplest ways to make an informed opinion about a stock or stocks in your portfolio.
A company, while not necessarily trying to be misleading, will always be trying to put their best foot forward. Analysts, while not necessarily trying to be combative, are trying to get clear answers. Keeping those two opposing forces in mind, and doing your own research in advance of the call can help you form solid opinions. Of course, sometimes stock prices take on a life of their own so even if your analysis tells you one thing, it may be wise not to fight the movement of a stock.