The Art Of The Conference Call

My heart is beating, my palms are sweaty, and I feel like I’m about to hurl. No, I don’t have the flu and I am not about to go sky diving, but rather my top holding is about to report its quarterly financial results. Fifteen minutes after the market close, the headline numbers are due. Company XYZ has just reported EPS results of $.96, a penny above Wall Street expectations. The outcome of the pending 60 minute conference call could have major ramifications, not only to my pocketbook, but also to millions of investors, including mine.

After printing out the fresh press release, hot-off-the-press, the challenge now becomes determining what to do with this mountain of newly available data at my fingertips?

Here are some important factors to consider as you scan through reams of press release data and prep for the next 60 minutes of joy:

Get the Basics: Most importantly, once your figure out what reported revenue and EPS results are relative to consensus, investors must determine whether the numbers are GAAP (Generally Accepted Accounting Principles) or Non-GAAP. Surprisingly to some, Non-GAAP results are preferred because these numbers are generally closer to “cash reality.”

What’s Guidance? The majority of companies reporting their quarterly results will provide investors an outlook of their financial expectations for the following quarter – and sometimes for the full year. This commentary is often more important to the immediate stock price compared to the just-reported actual results.

Bust Out the Red Bull: Now that we have the basics and the conference call is beginning, it’s time to break out the 6-pack of Red Bull. If company XYZ is like any of the other 98% of companies, investors will have the pleasure of listening to 30 minutes of monotonous press release reading. This is a smoke and mirrors approach for management to avoid the upcoming firing line of tough questions.

Numerical Basics: Now is the time to put your multi-tasking skills to the test. First, as management reads the press release in a monotone voice (usually verbatim or to a script), you can gather some of the important financial basics. Cash is king, so the first place I migrate to find the cash generating power of a company (or lack thereof) is the Cash Flow Statement.

The crucial aspect is determining how much discretionary cash is available to the company after accounting for maintenance capital expenditures – this cash power can be used for dividends, share buybacks, and acquisitions. Next on the priority totem pole is the income statement, where we can check out the trends in sales growth, profit margins, and company specific metrics, such as same store sails in the retail industry or BOE in the energy industry (Barrels of Oil Equivalent).

Strong profitability is great, but if the sales, margins, cash flows, and/or company metrics are moving in the wrong direction, then look out below – the stock may be on the verge of cratering. For reference, just take a peek at Zynga [ZNGA], Netflix [NFLX], Facebook [FB], and Research in Motion [RIMM] for proof.

Digesting Q&A: The questions and answers portion of the conference call is the meat and potatoes of the earnings release meal. This is the portion of the call in which management’s feet are held up to the fire with some critical questions. There are plenty of relevant and reasonable questions, but there is always at least one analyst who asks a 10-part question with endless follow-ups, going into the most obscure facets of the company, which will have no bearing on the stock price.

On manzy occasions, the analysts ask the questions are more concerned about listening to the tones of their voice than they are interested in finding critical answers to strategic and operational corporate issues. Nonetheless, in most cases, this segment can be the most valuable part of the conference call.

Hodge Podge And Intangibles: After following the previous steps, the scattered puzzle will begin to take shape. But there are still are some pieces to put in place, in order to create a clearer picture. For example, market share is an important feature – triangulating share gains and losses via revenue trends and industry data can help determine who is winning and losing in the marketplace. The institution of price increases or cuts is another data point that can provide insights into the level of cut-throat competition. And let's not forget aquisitions, these corporate marriages can either be a sign of dominant strength or a sign of weak desperation.

Putting the previously discussed elegant tools to use will help you become a better stock artist, but to truly master the art of the conference call one has to repeatedly practice these steps and add your personal list of analytical intangibles. Then, you will have a profitable piece of art.

Using these previously discussed tools, as it relates to the quarterly ritual of deciphering corporate earnings, can help you become a better stock artist. But in order to better hone your skill paint a better stock picture.