Every three months, there’s a ritual in the markets. Earnings season. The vast majority of companies report their earnings for the prior quarter within a 4–6-week span. A flurry of company specific news. Bigger companies’ earnings will move the market as a whole, or at least subsectors of it. This is our almost real-time insight into how the last three months went and how the next three look. In a world where information is everything, this is the real informational gold mine.

As with every ritual, earnings season comes with its own unique practices. Prime among them is the earnings call. A conference call where a management team recites most of the things they put in their written press release, make a few points of emphasis, and then take questions from analysts.

While rituals come with their tropes and their dull parts, or the things that make you laugh – like the analysts trying to put management in a good mood by saying ‘Great quarter, guys’ before asking a question – the calls themselves can be a valuable way to hear (or better yet read) the company’s story, but also to hear what investors are concerned about and how management responds to those concerns. It’s rare that management will speak openly in a free-form conversation. Earnings calls are not that, but they’re as close as it gets, and they are valuable.

Let’s discuss how to use earnings call transcripts to elevate your investing research. It is a nice complement to reading the 10-Ks and 10-Qs, and to reviewing earnings reports and presentations.

Reading, not hearing

While you can find a company’s earnings call on their website, I never listen to calls. It takes longer, they’re hard to control, and what little you gain in hearing the management’s tone or clearing up foggy words is lost in the time spent.

I prefer to read earnings call transcripts. This allows for me to read it thoroughly or scan to whatever is most relevant. Sometimes I just want the Q&A; other times it’s best to just see what the company’s guidance is. Whatever, we have more control reading than listening to a call.

Where to find earnings transcripts

Some companies will offer earnings transcripts on their investor relations website or even in their filings. Most, in my experience, do not.

Instead, you have to search among a number of options, most paid in some form or another. Among sites oriented to individual investors:

• Quartr is an app dedicated to earnings calls, and while it provides you the calls to listen to for free, you have to pay $240/year for access to transcripts.
• Seeking Alpha includes transcripts in their premium product, which is also $240/year.
• Alpha Street offers transcripts for free. I can’t tell how wide their coverage is, and I don’t know whether they plan to charge in the future.
• Motley Fool offers some transcripts for free – again, I don’t know how wide their coverage is.

Earnings transcripts are a useful tool. They are not in and of themselves a must-have. As you get more of a handle on your investing, though, I think you’ll find they’re worth seeking out.

How to use earnings transcripts

Once you have a transcript in front of you, here’s what you can expect:

The opening script

The beginning (after the formalities) will feature someone from the company, usually the CEO, describing the quarter that was and updating on the state of the business. Some companies will proceed more or less directly from what they had in their press release. Others will spend more time giving examples to illustrate the management team’s story. Some will be more buttoned down, and others more excitable.

The most typical script has the CEO give the state of the business. Then the CFO – chief financial officer – will go over the details of the numbers, including the outlook for the next quarter or rest of the year.

As you read these, you want to compare and contrast the story management is telling from quarter to quarter. Are they maintaining a thread between the quarters? Does there appear to be progress? Are setbacks handled with accountability?

You will also get some tone or sense of how a management team feels about a given quarter, and something of the character of a management team. This can help you understand the company better.

The opening script will be management’s ‘last’ chance to explain the quarter, so they’re likely to give you their best effort.

The Q&A

Beyond the little quirks of “great quarter” and how the analysts and management engage, the Q&A section has a lot to offer and to weed through.

The analysts on calls are sell-side analysts – analysts at investment banks who provide research to the investment banks clients on these companies. They are somewhat in cahoots with management. They talk to the management team regularly, they aim to align their models with management, and they are as much looking to convey what a company is trying to do as to analyze it independently. You are not looking to sell-side analysts for bold calls or a divergent view, normally. They’re as much translators as anything else, middle men and women between management teams and professional investors.

A lot of their questions are nitpicky questions. “How should I model gross margin in light of the cotton headwind”, that sort of thing. It’s very short-term oriented and not super useful.

But over time, the questions you see from analysts, whether in hindsight or as you own a stock, will help shine a light on what investors care about for this stock. The analysts are professionals spending most of their time on not just the company in question but that companies’ peers. They will stitch together a lot of the story. It’s possible that reflected investor focus is too near-sighted. That they are missing the forest for the trees. The questions will accumulate, though, and help you understand what seems to move the stock in the short to medium term.

Entertainment Value

The last thing to watch for in the Q&A is the occasional outburst. If an investor gets on the call – which, usually, is open to anybody to dial in – they may have more interesting questions because they have skin in the game. They may also get mad at management about performance or evasive answers. And some CEOs will bring the heat as well. Lourenco Goncalves, CEO of Cleveland Cliffs, once called analysts “a disaster, an embarrassment to your parents” for their misunderstanding of the business. Mike Mayo, a renowned bank analyst, has been known to get into it with bank CEOs on calls.

Entertainment, but also this will highlight some interesting issues or pressure points. Just like we may wait on Mr. Market to go to extremes to make purchases, seeing people at extremes can highlight problems or opportunities, in a company or an industry.

Between the lines

When researching a new stock, you should be open-minded but skeptical at all times. Each piece of information is something to weigh, to put in context, and then to analyze. Is this getting better? Will it matter to the stock? Do I believe management’s input? And so on.

The transcript is another place to exercise your skeptical eye and take in information. The format is a little freer, and there’s more space for a management team to develop an approach on an earnings call. Even though the back-and-forth is somewhat canned, it can open a different angle on the company than just the filings or earnings reports will do.

Transcripts also have the advantage of being a little easier to scroll through and scan than some of the other materials we’ve talked about.

I think transcripts are a must for understanding a company’s business model, measuring up a management team, getting more information on the financials, and piecing together what a buy case might be. Be on the lookout for them, or even book some time to listen to them if that’s what you like. But keep these calls on your mind, and learn how to use earnings call transcripts to your benefit.

We’ll have one more video on useful public filings to watch for that I haven’t covered yet, and then one video on materials you can find that don’t come directly from the company.