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Stuck in Conference-Call Hell

Jeff Bronchick

Like nearly every sell-side analyst or buy-side money manager, I'm currently hunkered down in a veritable blizzard of conference calls. That means 5 a.m. calls standing in my kitchen, wearing a bathrobe; 6 a.m. calls on a cellular phone on the way to work; and then most of the week spent on replays, Webcasts, etc.

Question No. 1: Should I be? Is there any value in hearing the same prepared story at the same time as everyone else?

Sure, retail-investor access is one of Securities and Exchange Commission Chairman Arthur Levitt's latest jihads, and for a reason: There is no excuse why any investor shouldn't be entitled to listen in on conference calls via the Web. It's cheap and it satisfies the basic "fair playing field" issues the SEC is trying to address. It's also good for individual investors to hear what really goes on, which usually involves way too much management sugar-coating of the numbers, while Wall Street analysts play the fawning sycophants, lobbing softball questions in an attempt to show off in front of their institutional clients.

That said, why should I have a phone glued to my ear for the better part of two weeks listening to quarterly results -- especially when I emphasize week after week in this space the need to focus on longer-term investing?

Good question, since I rarely act on any information I've received in a call. To TSC's chagrin, I have to say I would be delighted if companies had to report only twice a year, and opened for trading, say, once a month. This would give all of us time to think, a condition under which we all should make fewer and better long-term investment decisions. My personal view is that if I can't survive one quarter of earnings results, I shouldn't own the stock. If I'm worried about the upcoming quarter's results, either I haven't done enough homework on the company, or the valuation is rich enough to make a misstep punishing.

But there is always another hand. I don't spend 300 days a year having lunch with CEOs, so I think there's some value in the better conference calls, in that you learn management's style and patter. Sometimes it's insightful, sometimes not. But this is often a business of 100 looks and one swing, and if you're not in place to look for the pitch when it comes, well ... (we all know where this metaphor is going).

A few years ago, Chris Galvin, CEO at Motorola (MOT Quote), wasn't even on the conference calls, even as the stock was cratering and they were blowing it in every line of business they owned. We were looking to buy the stock in the mid-40s (in the face of a lot of disdain -- by both TSC subscribers and my fellow columnists), but we didn't step up to the plate until Galvin got on the call. To us, that was the one tile missing in the mosaic that prevented us from buying the stock: Management was finally serious and sensitive about shareholder misery.

Another benefit of sewing an earphone to your head for a few weeks each quarter: Hearing other peoples' questions.

I own a wonderfully mundane little company called Idex (IEX Quote), which has put together a terrific 10-year track record in businesses no one talks about at cocktail parties. The CEO just retired and the board brought in a heavyweight from GE (GE Quote). In most cases, you would think this would be an up-tick. Several questioners on the call, however, actually speculated as to whether the GE "style" was compatible with the "Idex way" and whether there was a risk the GE guy would screw things up. That's an interesting anecdote about both management and the company's culture that is tough to pick up on simply by reading an annual report.

This brings up another benefit of sewing an earphone to your head for a few weeks each quarter: Hearing other peoples' questions. Those who think they know it all are destined for some inevitable near-term pain. Good investors, on the other hand, want to be surrounded by sharp, agile minds that put them on the defensive, and to continue questioning if their perception of the facts has some modest basis in reality. I'll admit, most of the questions on conference calls are terribly mundane. But there are those rare queries that can change your whole outlook on a company, and a few of the good ones can make an investor's entire year -- or years.

Spend or Die

Which brings me to my up-close and personal rant. I'm getting a little sick of hearing that a company's earnings are up "15.7% if you exclude Internet investments, one-time charges, investments in start-up businesses, spending on 'The Yak-Yak Productivity Initiative,' reengineering costs, the effects of foreign exchange, stock-compensation expenses due to a rising stock price, acquisition-related write-offs, in-process R&D write-offs and the effects of an accelerated depreciation schedule."

This line of thinking should be beaten like a gong, stuffed in a bottle and thrown into the Pacific. How is new business and growth generated? By hoping, praying and looking through Cracker Jack boxes for the prize? No. The fact remains that it usually involves R&D spending, new-product development, marketing/sales/promotional spending, infrastructure and capacity building and human bodies. In short, all things that cost real money.

And to quote Warren Buffett (whom I now rechristen the Great One since I have a fat profit in Berkshire Hathaway (BRK.A Quote) -- and look for a very long winded multipart recap of the annual Capitalist Camp next week as your intrepid columnist makes his first trip to Omaha), if these expenditures aren't expenses, then what are they? It's not playing by the rules if you count only the revenue from new businesses or products without counting the attendant costs to get them there.

But who seems to care as long as it means beating estimates by a penny?