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Beginner's Guide to Earnings Calls(1)

Beginner's Guide to Earnings Calls(1) - We are currently in...

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We are currently in the belly of the beast of earnings season. The earnings call is the quarterly judgment day for all publicly owned companies. Except for the occasional analyst meeting or press release regarding monthly sales, the earnings call is the only opportunity to get a peek into a company's performance and future expectations. Personally, I have covered nearly 600 earnings calls for TheStreet.com's Street Insight. At Seton Hall University, 10% of each student's grade in my undergraduate class is derived from his or her analysis of an earnings call. This is such an important element of the investment process that I thought that I would share some of my knowledge and experience with you in this edition of "The Finance Professor." Step by Step There are several phases to covering an earnings call. Here are the primary steps in the process: * Previewing the call. * Reading the earnings release. * Listening to the call. * Analyzing the call. Step 1. Preview the Call This is where you do the preparatory research in advance of the earnings call. Just as study is important to school exam preparation, we need to do some homework before the earnings report is released and the call is conducted. Here is the homework: * Go back in time: Start with the prior quarter's earnings call. You can listen to an archive of the call (online) or obtain a printed transcript (for a fee). Then, query that stock on the TheStreet.com, and read analysts' reports or other commentary to ascertain how the company performed in the quarter, as well as the guidance provided for the most recent quarter. As an example, read my recent Street Insight coverage of the earnings call of the casual-dining chain Brinker International (EAT - Cramer's Take - Stockpickr - Rating). (The EAT earnings call analysis was first published on Street Insight and was republished as a bonus for TheStreet.com readers. Street Insight provides a constant flow of earnings coverage. To learn more about Street Insight, click here.) * Note the benchmarks and metrics: This is the most important part of the preview phase. You need to ascertain Wall Street analysts' consensus and range of estimates for EPS (earnings per share) and revenue. See how these consensus estimates have changed over the period of time since the last earnings release. Also, obtain the expectations for company-specific or industry-specific metrics such as same-store sale comparisons ("comps" in Wall Street vernacular), gross margins, unit sales, traffic acquisition costs and other metrics. Integrate into this analysis any preannouncements (good or bad) or intraquarter press releases, business updates, sales
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statements, new product releases, management changes, regulatory or legal investigations and other corporate developments or initiatives.
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