Earnings Calls Unmasked: How to Decipher CEO Speak And Boost Your Returns
Why Communication Style Can Predict Stock Performance
As an investor, you are always on the lookout for information that can give you an edge. You might analyze valuation metrics, future business potential, and management quality to assess the health of a company. However, have you ever considered assessing the quality of a company's leadership through their communication?
Many investors don't even bother to read through shareholder letters and earnings call transcripts, and those who do often don't read between the lines. In this article, I'm going to explain why it's crucial to interpret CEO communication and how you can do it.
If you've ever tried to read a shareholder letter, you know it can be challenging to extract meaningful insights. Many letters are filled with jargon and platitudes that don't offer much value to investors. However, if you're having trouble understanding what a CEO is saying, that's a sign that something may be amiss. Poor communication can indicate that a CEO doesn't understand the business or is trying to hide something. If you can't make sense of their communication, why would you trust their accounting numbers, let alone their leadership?
By learning to read between the lines of CEO communication, you can better understand a company's underlying motivations. If a CEO is primarily focused on promoting the company rather than educating investors about the business, you can expect to see more fluff than facts. The ratio of facts to fluff is an important indicator of a company's financial integrity and commitment to increasing shareholder value.
Spotting problems in management communication is not as difficult as it may sound. You need to look for clues. For example, does management use vague language or rely on buzzwords? Do they gloss over negative news or spin it in a positive light? Are they transparent about the company's challenges and how they plan to address them? These are all important indicators of good/bad communication style and their commitment to transparency.
Enough theory, let’s take a look at some examples. (Those companies are just random picks after a quick search but will find similarities in the communication style with other well-managed or poorly-managed companies.)
The first example will be the latest earnings call from Carlisle Companies Incorporated CSL 0.00%↑. They are an American diversified company that designs, manufactures, and markets a wide range of products that serve a broad range of niche markets to customers worldwide including commercial roofing, energy, agriculture, lawn and garden, mining and construction equipment, aerospace and electronics, dining and food delivery, and healthcare.
Here are some excerpts from their latest earnings call conference:
“A significant portion of our success has been driven by the multiyear process of reshaping our portfolio to pivot from a diversified industrial products company to a higher returning building products portfolio of businesses.”
Good, the management has a clear strategy for reshaping the business that has been in the process for some years and is showing results.
The pillars of Vision 2025 remain core to our strategy going forward. These include: first, drive mid-single-digit organic revenue growth. In the fourth quarter, we delivered 6.6% organic revenue growth, which helped drive organic growth of 29% for the full year 2022. Notably, all four segments contributed to this growth. Second, utilize the Carlisle Operating System, or COS, to drive continuous improvement. We use COS to consistently drive efficiencies and enhance operating leverage. For the full year 2022, adjusted EBITDA margin expanded nicely and COS contributed to that. We continue to target COS savings of 1% to 2% of annual sales. Third, build scale with synergistic accretive acquisitions. Under Vision 2025, we have streamlined and optimized our portfolio through acquisitions and divestitures to build scale in our highest returning building products businesses and to broaden our suite of energy-efficient solutions. Through 2022, we have invested over $3 billion in accretive acquisitions. And fourth, a returns-focused capital allocation strategy that includes deploying over $3 billion into capital expenditures, share repurchases and dividends.
This is concise communication. You understand what they’re doing, what their goals are, and how they plan to achieve them. They have a multiyear plan (Vision 2025) and execute it.
Every business experiences challenges from time to time, what you want to know as an investor is: “How does the management handle those challenges and how do they communicate that? Do they play them down to paint a brighter picture? Can they name the problems? Do they understand their industry? What do they say about the competition? What is the overall tone during the earnings call?”
I don’t want you to bore with the whole transcript, you can read it here and see for yourself. The earnings call is as it should be and as you would expect it from a well-managed company - no fluff, naming challenges, showing industry knowledge, etc. And their results back it up.
Now you might ask: “What’s so special about it, isn’t it the way it should be?” Yes, but the majority of public stocks are poorly managed. And you can extrapolate the warning signs from the way the management communicates with shareholders.
This brings us to Acorda Therapeutics Inc. ACOR 0.00%↑ The company develops therapies that improve neurological function in people with Parkinson's disease, multiple sclerosis, and other neurological disorders. Let's take a look at some of the red flags 🚩🚩🚩 from their latest earnings call. You can read the whole transcript here.
Despite an unusually challenging first quarter that severely impacted INBRIJA sales, which we believe was related to the COVID Omicron surge.
Alright, what does the CEO exactly say? Do they believe that the low sales were due to Covid? Do they not know why the sales were affected? Every product can have a bad quarter, but I expect the management to know exactly what caused sales to drop.
Our new brand campaign for INBRIJA is focused on educating health care professionals, people with Parkinson's and their care partners about the emotional impact of OFF periods on the lives of both people with Parkinson's and their care partners…We've increased our digital promotion of this new campaign. And in Q4 relative to Q3 and we saw a 145% increase in returning website visitors and a 104% increase in website visitors taking what we call high-value actions. Such as downloading a brochure or watching a video or registering to get more information…
Now imagine the CEO of McDonald’s MCD 0.00%↑ says something like: "Our same-store sales are dropping and we are burning cash, but we counteract it with a new promotional campaign that's already successful: The clients are entering the stores and taking our new promotional flyers with them."
Would you buy their shares?
As you would expect, this company relies on borrowing money to keep the operation afloat. Here’s what the CEO said regarding the debt problem:
So we obviously have the debt and we need to address it. What we can say, we can't give you specifics at this point but what we can say is that we stay in communication with the great majority of our bondholders, meaning the great majority who own the great majority of debt…We are continuing to evaluate various ways of dealing with the debt hopefully, in collaboration with the bondholders. And when we have a decision or decisions on which way we're going to go with that, we will certainly let everyone know.
Do I need to say more? Those are just a few excerpts from this catastrophic earnings call. No wonder the share price knows just one direction:
If you want to succeed as an investor, you need to go against the herd. This means not only going against the herd when buying stocks but also when it comes to obtaining information. Unfortunately, very few investors take the time to read earnings call transcripts, which can provide valuable insights that can give them an important edge.
By paying attention to tone, word choice, and overall communication style, you can get a sense of how transparent and honest a CEO is.
But don't stop there.
If you want to take it a step further and build a long-term investment strategy, it's crucial to keep track of each annual letter and earnings call to see which companies keep their promises and can earn your trust. By doing so, you can identify the companies that are worth investing in and those that are not.
Some CEOs’ words and deeds can put profits in your pockets, while the words and deeds of others can destroy value.
It pays to know the difference.
Until the next issue. 👋
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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.