How Financial Report Readers Can Decode Analyst Calls

Today investors and financial report readers get information not only by reading press releases or newspapers, but also by attending company calls for analysts, which used to be open only to financial analysts and institutional investors. Companies usually sponsor these calls when they release their annual or quarterly earnings reports.

But special events — such as a change in company leadership or the purchase of another business — can also prompt companies to set up analyst calls. By listening in on these calls, you usually get more details about whatever issues are being discussed.

The question-and-answer part of the call is often the most revealing, as you can judge how confident senior managers are about the financial information they're reporting. Questions from the audience usually elicit information that press releases or the annual or quarterly reports haven't revealed.

Pay attention to how the executives handle the call and to the words they use. When management is pleased with the results, you usually hear very upbeat terms, and they talk about how positive things look for the company's future. When management is disappointed with the numbers, they're more apologetic, and the mood of the call is more low key.

You most likely need to listen to more than one call hosted by a particular company before you start picking up the nuances and moods of the executives. Many companies actually post recordings of their analyst calls on their websites, just like they post press releases.

Take the time to read the financial reports before the call so you're at least familiar with the key points that management discusses during the call. After you listen to a few calls for the same company, you'll find that the information management discusses is much clearer.

Earnings expectations

All calls about a company's financial results include information about whether the firm has met its own earnings projections or the projections of financial analysts. If a company misses its own earnings projections, the mood of the call will be downbeat, and the stock price is likely to drop dramatically after the call.

The key for you as a shareholder or potential shareholder is to analyze what's being said and whether you think the company has a good chance of turning around the bad news. Good news, on the other hand, can drive the stock price higher.

Be careful not to jump on the bandwagon right after major good news is announced. Usually, the stock price falls back down to a more realistic price after the initial rush to buy is completed.

Revenue growth

Listen for information about the company's revenue growth and whether it has kept pace with its earnings growth. Growth in revenue is the key to continued earnings growth in the future. During an economic slowdown, watching revenue growth becomes very important because a company can play with revenue numbers to make them look better.

In fact, some companies practice what's called window dressing to make sure their earnings meet expectations. Earnings growth is easier to manipulate than revenue, so earnings usually become part of that window dressing.

If you hear numerous questions from the analysts about revenue growth figures, it may be a sign that they suspect a problem with the numbers or are disappointed with the results. When you repeatedly hear analysts’ questions about revenue or any other issues, take a closer look at these numbers yourself.

Analysts’ moods

Listen carefully to the analysts’ tone as they ask their questions. Take time to assess their moods. Do they seem downbeat? Are they asking very probing questions, or are they upbeat and congratulating the executives on their performance? When analysts are disappointed with a company's results, they dig for more information and ask for more details about the areas where they see a problem.

You may find it difficult to judge the mood of the analysts or company executives when you listen to your first call, but as you listen to more calls for the same company, you'll be able to judge more easily how the mood differs from that of previous calls.

The right facts

You can judge whether the executives are confident in their reporting by how quickly they answer the questions. When executives are comfortable and confident in the numbers, they answer questions quickly, without rustling through papers. If they're cautious with their answers and are constantly taking time to look through their papers, you can be sure they're not comfortable with the report.

If company executives seem unsure or respond slowly, take this as a red flag that you need to do a lot more homework before making any decisions about buying or selling that company's stock.

An eye to the future

Listen to the vision that the company's executives portray for the future. Does the vision they present inspire you, or are they unclear about their vision for the company's future? If you find the executives uninspiring, they may not be doing a good job of inspiring their employees, either. When executives lack inspiration for the company's future, you have good reason to stay away from investing in that firm.

Employee satisfaction

Keeping employees happy is important for the future of any company. During the call, you can judge whether employees are satisfied by listening for information about the success or failure the company's having attracting new employees or retaining existing ones.

If the business reports a problem with either of these two areas, trouble may be on the horizon. High employee turnover is bad for the growth of any company, and a firm that has trouble finding and recruiting qualified employees may also face a difficult future.

Don't ever plan to buy or sell stock based only on what you hear during analyst calls. Use the calls as one more way to gather information about a stock.

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