These are the 3 things we listen for in a company's earnings call with investors

Published Fri, May 27 202211:42 AM EDT

Regular investors can't beat Wall Street at the data game. The pros spend billions of dollars on technology to quickly scrape numbers, crunch them and create fancy algorithms to help guide their investing decisions. But there is one often overlooked piece of financial information that can level the playing field: the earnings conference call. Every quarter, management teams walk through their earnings reports with analysts and investors on an interactive call, typically on the same day those reports are released. Anyone can listen — home gamer and professional alike — to these discussions that can't be easily mined by the machines. They are also one of the best ways for investors to understand what drove a company's financials and where the business goes from here. That may sound like a lot to get from an hour-long call with management. But interpreting a team's statements and narrative can really help inform your actions. Is the stock reaction to the quarterly results warranted? Do you buy the dip? Sell the rip? Stay the course? Commentary from one company can even provide key insights to apply across other holdings, because the capital expenditures (capex) of the former are the revenue of the latter. For example, remarks on cloud investments from Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOGL) might provide sales information that could help in our analyses and outlooks for chipmakers like Nvidia (NVDA), Advanced Micro Devices (AMD) and Marvell Technology (MRVL). By the same token, commentary from chipmakers like Nvidia, Advanced Micro Devices and Marvell Technology can provide insights into the capital equipment makers like Applied Materials or Lam Research , neither of which are Club holdings, but are links in the supply chain. Put another way, we can slowly work our way up supply chains to better understand the broader dynamics of various industries, thereby enhancing our ability to predict what may be happening under the surface and possibly get ahead of the herd. 1. Focus on forward guidance Remember that investing is very much a "what will you do for me next?" business. That means that as soon as the prior quarter's results hit the tape, the focus shifts to the next release. This is why we focus so intensely on forward guidance, because a strong forecast can overshadow an earnings miss just as easily as a weak forecast can wipe out an earnings beat. After all, by the time the quarterly results are out, we are already one to two months into the next quarter. As we've seen the last couple of years, a whole lot can change between the end of a quarter and the performance update during the post-earnings conference call. During this current earnings season, a slew of macroeconomic reports, a shift in monetary policy by the Federal Reserve, China's ongoing Covid lockdowns and Russia's war in Ukraine weighed on companies and changed their outlooks. This real-time commentary from corporate leaders simply isn't available anywhere else. Consider Club holding Microsoft: The company doesn't provide any guidance in the earnings press release and instead waits until the end of management's prepared remarks on the call to inform investors of their most up-to-date forecasts. As a result, we often see the initial market reaction to Microsoft's earnings change during the call. Investors are lacking information when they only respond to the press release. Even when companies provide some guidance in the press release, they generally do not include the assumptions that went into that guidance, and these assumptions are important to determining if the forecasts are conservative or aggressive. Case in point: Linde (LIN), the industrial gas and engineering company and Club holding. In the company's first-quarter release in late April, management provided forward guidance for both the second quarter and the full year. Some assumptions on foreign exchange and the impact of the war in Ukraine were included. But if you skipped the conference call, you missed a key piece of information — that at the midpoint, the guidance assumes no economic growth. While management added that such a disclosure does not represent an economic forecast, knowing that it is the underlying assumption then allows us to insert our own economic views and factor in any subsequent data points that may be released and better gauge what the actual results may be down the line. You would only have learned that this was the setup had you listened to the call. Skip it and you would have taken the guidance at face value and left a possible information edge on the table. 2. Look at all revenue streams Another thing we always want to listen for is commentary on the mix — or the different streams of revenue and how each is performing. You'll often hear about the mix as a tailwind (good) or headwind (bad) to profit margins. Certain goods and services are more profitable than others. The make up of the mix will therefore impact profit margins. For example, both Target and Club holding Walmart (WMT) beat sales estimates for the most recent quarter, but the mix of sales resulted in far lower-than-expected earnings. Walmart, for example, saw a shift toward lower margin grocery sales and a reduction in the share of sales coming from higher-margin general merchandise. More low-margin sales and fewer high-margin sales compounded the increased fuel and logistics costs — and of course, resulted in lower profitability overall. The other problem that results from management improperly forecasting the mix is that they can be left with excess inventory that must then be marked down in order to be sold — a factor that impacts subsequent periods as well. After all, you aren't going to be able to sell that summer fashion collection at full price when autumn comes around. 3. Test remarks against your thesis Sometimes you simply need to listen to the call to determine if what management is saying broadly supports your investment thesis or pokes holes in it. Oftentimes that comes down to your own personal interpretation. Let's consider the most recent call from Disney (DIS). This is an interesting one because while everyone heard the same call, the takeaways varied greatly. Shares initially popped on the release, only to sell off as the conference call got underway. While we can't be certain, we believe the weakness was likely the result of CFO Christine McCarthy tempering comments related to the growth of Disney+ subscribers in the second half of the year. Specifically, McCarthy commented, "at Disney+, while we still expect higher net adds in the second half of the year versus the first half, it's worth mentioning that we did have a stronger-than-expected first half of the year." How one interprets that remark informs your thesis. In our view, the sellers decided that comment meant that the second half won't be up as much as previously thought. And if you relied on other analysts or market observers for that information — or took your cue from the price action — you might be left thinking the same: things were as good as investors had hoped but Disney+ isn't seeing the momentum management expected. Had you listened to the call in its entirety, you would have heard an analyst question the team on this comment and McCarthy clarify that it's not the absolute number of second half additions that were being revised, it was simply the difference between the first half and second half. That means second-half additions were not being revised lower, first-half additions simply came in stronger than expected. And management still expects an increase in subs in the second half to exceed the first half. It was an important clarification. And as an investor, we were now equipped to make our own interpretation. We decided shares were being punished for Disney+ doing better than expected, a dynamic that did not make sense to us and therefore gave us cause to step in and buy shares as they dipped lower. Time will tell if we were right, but we trust our read on management's commentary. If you've been with the Club for any length of time, you already know how seriously we take the earnings call. It's not the most exciting event in the world and takes up some time; an hour or so for every stock in your portfolio. But listen up: It's one of the most important pieces of due diligence you can do. (Jim Cramer's Charitable Trust is long MSFT, AMZN, GOOGL, NVDA, MRVL, LIN, WMT and DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Traders on the floor of the NYSE, May 11, 2022.

Source: NYSE