3 C’s of Earnings Calls
Investors appreciate confidence, clarity, and conviction during earnings calls. While often react swiftly once an earnings announcement is disseminated, sometimes they don’t respond at all, especially in the small cap world.
Language and sentiment analysis on earnings calls isn't new, but its usage is expanding as new vendors leverage AI and LLMs to rank, place, and measure a variety of variables used in modeling. Quants and fundamental investors love it because it goes well beyond traditional financial analysis such as company filings, broker forecasts, and management guidance to obtain deeper and more insightful observations. Growth investors will zero in on a company's financial strength, overall health, and outlook looking for key indicators like projected and historical earnings, sales, margin, and cash flow.
In the first quarter of 2024, the sentiment during S&P 500 earnings calls was notably confident, despite various domestic and global attention challenges. The quarter's Net Positivity score according to S&P’s Global Market Intelligence reached 1.26%, the highest since it began tracking these statistics in 2022, and an increase from last quarter's 1.12% and, the last twelve months' average of 1.14%.
Most sectors showed improvements in their scores with the Communication Services sector again recording the highest scores driven by strong performance. Following closely, the Consumer Discretionary sector showed a notable increase with significant contributions from cult favorite burrito king Chipotle. Without surprise, the Real Estate sector lagged, though it still showed signs of improvement over the previous quarter.
What really caught our attention was the clear change in tone between different parts of the calls. The prepared remarks, known as the Presenter Speech, had a notably higher Net Positivity score compared to the more spontaneous Q&A section, which scored lower This suggests that executives tend to use more upbeat language when they can plan their words in advance than in live question-and-answer sessions.
This difference was particularly noticeable across sectors, with significant disparities in those that have fallen out of favor. For instance, in the Real Estate sector, executives struggled to maintain their optimistic composure during the Q&A when faced with tough questions indicating deeper concerns about the sector's long-term outlook. In contrast, the Consumer Discretionary sector maintained an encouraging tone even during the Q&A, suggesting a much more confident outlook despite inflationary pressures and continued rising costs.
Brutal honesty on earnings calls is always appreciated, especially during the Q&A though it comes with its own set of risks. When Apple allegedly terminated Project Titan in February—a decade-long $10 billion venture into an autonomous EV—it was a bold decision that ultimately garnered significant respect among investors. The announcement reported by Bloomberg nudged the stock upward, essentially conceding to investors that no Western automaker including Tesla could catch China’s fast-growing BYD. Apple was fully aware of the potential backlash from a media leak nevertheless, they pulled the plug on the project.
In their Q2 earnings call last week Apple CEO Tim Cook didn’t address the failure, saying: “Apple is a company that has never shied away from big challenges. That's because we are grounded by a deep sense of purpose and guided by core belief in the transformative power of innovation. And so, we are optimistic about the future, confident in the long-term, and as excited as we've ever been to deliver for our users like only Apple can.”
A perfect balance of self-awareness and optimism. Investors were pleased. The price edged even higher.
So next time you tune into an earnings call, listen closely: it's not just the numbers that count, but also how creatively executives talk about their company and their future.
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