Earnings season is almost here. To help you get ready, my " Beginner's Guide to Earnings Call" walks you through a step-by-step approach for how to listen to and analyze a public company's quarterly earnings report. Then " Five Missteps to Avoid in Earnings Season" shows you how to avoid the biggest investor blunders when listening to earnings conference calls (widely referred to as simply conference calls).
Now, in this installment of The Finance Professor, let's focus on some recent conference calls and provide insight and commentary into the earnings results, the actual calls and the subsequent reaction. In the process, you will get a sense of how to distinguish between good, bad and misunderstood conference calls.
Bad: Merrill Lynch, Third Quarter of 2007
Oct. 24, 2007: In anticipation of the release of its quarterly results,
( MER) was expected to take a large
writedown related to its
credit markets portfolio. Expectations were for Merrill to take a $4.5 billion hit. Instead,
Merrill took a $7.9 billion writedown.
When the news first broke, the stock actually did not look too bad. However, things got worse from that point on. Prior to the morning conference call, Merrill received a downgrade from its
ratings agencies, and the stock began to crumble. Then the conference call began.
From the outset of the call, Stan O'Neal, Merrill's chief executive officer (at the time), took the microphone. (This was a departure from Merrill's normal procedure, which usually has its calls conducted by the company's chief financial officer.) Immediately, danger signs flashed that matters at Merrill were worse than imagined. O'Neal tried to use the forum atmosphere of the conference call as an opportunity to convey a mea culpa. However, what unfolded on the call was O'Neal's disclosure that Merrill had taken too much subprime
risk and that its
risk management systems failed.
This was perhaps one of the worst conference calls that I have ever heard.
Merrill dropped nearly 6% that day, and except for some brief countertrend
rallies, Merrill has been in a downtrend ever since. The postscript to this conference call was the firing of O'Neal and his subsequent replacement by John Thain.
You can listen to an archive of the call on Merrill's Web site --
click here (registration required).
Misunderstood: Costco, First Quarter of 2008
Dec. 13, 2007:
had a very good run going into its quarterly earnings report, with the stock breaking out to an all-time high. This was going against the grain of other
retailers, which were feeling the impact of extended warm weather conditions and a slowing consumer who was being set back by higher energy costs.
Despite those conditions, Costco was reporting strong same-store sales month after month (see "
A Checklist for Profiting from Retail and Restaurant Stocks"). This resulted in
analysts raising their
consensus estimates for several weeks prior to the earnings release.
As it turned out, Costco reported its quarterly results, and they were right in line with the latest round of marked-up analysts' estimates. This was an excellent quarter for Costco. However, the stock sank like a brick in David Letterman's "Will It Float?" segment.
Why did this occur?
To the uninitiated, it looked like some
profit-taking. Yet the 7% premarket
selloff was more than just profit-taking. It was an implosion. But what caused it?
To begin with, Costco made its new highs and broke out
technically in the days leading up to its earnings release. This attracted
momentum investors to the stock.
However, momentum investors will flee at the first sign of trouble. All that's usually needed is a little push. Thanks to the ever-pervasive
hedge fund community, Costco got that push. Rumors of disappointing
gross margins were being spread rapidly. But this negativity did not align with reality. All that a Costco investor needed to have was some patience to wait a few hours to listen to
management on the conference call.
On the Dec. 13 call, Costco management provided a detailed analysis of gross margins by product, department and reporting periods. Looking forward, the company provided a positive outlook (or "guidance") for future gross margin growth.
However, Costco's naysayers shot first and asked questions later (i.e., they sold immediately). And that was a mistake. Costco closed at $70.19 the day
the earnings release, traded as low as $65.10 early
the day of
the earnings release, and closed at $68.54 that day. Subsequent to that day, shares of Costco have traded higher. (See No. 1 in "
Five Missteps to Avoid During Season.")
You can listen to an archive of this call on
Good: Apple, Research In Motion and Dick's Sporting Goods
It's hard to say which one of last quarter's good conference calls can be regarded as the best (because there are several really good ones). However, three calls do stand out in my mind:
Research In Motion
( RIMM) and
Dick's Sporting Goods
. All of these companies' quarterly reports and earnings conference calls delivered affirmation to the
Here a few characteristics that each of these calls shared:
- Reported better-than-expected results for the most recent quarter.
- Provided robust guidance for the upcoming quarter.
- Quelled any concerns regarding issues that may have lingered with the naysayers, particularly that these companies would be adversely affected by a slowing consumer or economy.
- Demonstrated opportunities for continued future growth.
- Caught the short-sellers off guard, with stocks spiking significantly the day after the earnings announcements.
When I summarized the Dick's Sporting Goods' conference call on
, I wrote:
If you want to see what a model growth retailer looks like, take a look at Dick's Sporting Goods. The company is growing in the right geographies and through strategic acquisitions like Galyan's and Golf Galaxy. Heavier reliance on private-label sales helps to increase margins. The company is one of the best, if not the best at managing inventories. I have written about the company on this site for years, and I have to reiterate my opinion that Dick's is a great growth vehicle in retail. On top of that, it is less vulnerable to a consumer pullback than a general merchandiser. Even during the deep dark years of the Jimmy Carter recession, kids played sports, and sports fans still hung on to their Pittsburgh Steelers and Boston Celtics.
To listen to an archive of Dick's Sporting Goods' Nov. 20, 2007, call,
click here (registration required).
To listen to an archive of Research In Motion's Dec. 20, 2007, call,
click here (registration required).
To listen to an archive of Apple's Oct. 22, 2007 call,
Good conference calls such as these do exactly what's expected: they report a solid quarter and have a good "story" to tell for future growth. As an investor, you cannot ask for anything more.
Sharpen Your Listening Skills
You can listen to a wide-range of earnings conference calls via
TheStreet.com Earnings Release
At the time of publication, Rothbort was long COST, AAPL, RIMM and DKS, and was stock and calls for MER, although positions can change at any time. Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities. Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University. For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.