Earnings: Decoding the Conference Call

The quarterly telephone chats with corporate brass could hold valuable clues for investors this earnings season—if you know what to listen for

by Ben Steverman

Four times a year, investors get a chance to hear executives talk about their businesses in their own words.

Savvy investors can analyze not just the information imparted in earnings conference calls, but also the tone of CEOs and CFOs. Do they sound nervous, or hopeful? Confident, or uncertain?

As second-quarter earnings season begins, BusinessWeek asked fund managers what they're listening for over the next several weeks. Here are tips, some general and some specific to particular companies or industries, for interpreting this round of earnings calls. (Investors can listen to conference calls via the Internet or by dialing in over the phone. Call information is often provided in the "investor relations" sections of corporate Web sites.)

1. Financial-sector CEOs: How much clarity on losses?

The financial crisis has dragged on for almost a year, partly because of a lack of certainty about the losses in store for big commercial and investment banks. JPMorgan Chase (JPM) and Merrill Lynch (MER) report on July 17, with Citigroup (C) following on July 18 and Bank of America (BAC) on July 21.

Wall Street is expecting another brutal quarter for the financial sector from toxic debt and bad loans. But several fund managers say they're hoping to learn how much longer those losses will continue. Georges Yared of Yared Investment Research says the market is looking for clarity: "Are you finished with this mess?" he asks.

Matt Kaufler of Touchstone Value Opportunities Fund (CCEVX) will listen carefully for clues to whether credit quality is deteriorating. "To what extent [are] credit-quality concerns spreading above and beyond residential mortgages into other debt?" he asks.

2. Retail: Looking for signs about the rest of the year.

It's widely assumed that high gas prices are hurting retailers and other consumer discretionary firms. But much of consumer spending comes in the second half of the year, so investors will listen closely for clues about future spending.

Kaufler says the important information won't be in the second-quarter results, which are assumed to be bad, but in "what sort of tone management sets for the rest of the year." For example, he wonders what traffic patterns companies are seeing in their stores.

Many retailers, including Wal-Mart (WMT), the Gap (GPS), and Target (TGT), don't report results until August.

3. Focusing on the long term

These may be tough times, but Scott Armiger of Christiana Bank & Trust Company wants to hear executives thinking long term, planning three to five years ahead, when the slowdown presumably will be over.

For example, he says, perhaps they could be borrowing money now at low interest rates to prepare for future acquisitions. And with stocks in a bear market, "this is a great time to be picking up shares" through stock buyback programs, he adds.