It's the Tone That Makes the Music

 | Jul 23, 2014 | 6:30 AM EDT  | Comments
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Does tone matter? Should we care about inflection and word choice on conference calls?

You bet we should. Here's why.

When Honeywell (HON) and Domino's (DPZ) reported their quarters on Friday and today, both stocks flew higher on their better-than-expected numbers and good commentary. Both CEOs, Dave Cote and Pat Doyle, played it straight, giving you the highlights and then telling you their stories. In each case, the confidence they had about the future ran throughout the call. Most important, they gave you very little reason to sell because, alas, there weren't really any reasons to sell.

But go back a previous quarter. In each case both men spent an inordinate amount of time talking about the negatives -- or at least, as I would describe it, telling you things they might be worried about or weren't happy with.

In both cases the reaction was instantaneous. The caveats struck home and caused sellers to come in, sellers whom I think felt less positive about the story going out than they did going in.

Now if you go back and read the transcripts of those last quarters, here's what you will discover: they are entirely consistent with what was reported this quarter. For example, I thought that on the last quarter Domino's really pressed the issue of higher cheese prices. Given that it's a franchise model, frankly, I thought it was an over-the-top negative discussion. I like Domino's because it is a franchise power house that's not dependent on raw cost variables like cheese.

But people really got freaked out and sold, and sold Domino's hard. There was a lot of chatter that this great story was at last over and had run its course.

This time, though, raw costs weren't emphasized at all, except to talk about some supply chain issues. You really had to be a negativist to take action on that. Plus, Doyle was uniformly upbeat and totally into telling a positive story. There was no puffery, no exaggeration. The facts spoke for themselves. The relevant facts. And that's what mattered. So the stock soared three points.

In the previous Honeywell call, back in April, Dave Cote told a good call but he wrapped it all up in a statement saying that "we are cautiously optimistic." It seemed out of place to me.  The whole story was terrific. Why not just say "we are optimistic"? Without a caveat. No wonder the stock fell from $93.90 when the call began to $92.20 when Cote wrapped up.

Now, go over this call. The caveats are gone. The headwinds people are always so worried about? Cote said "they are nearly behind us." This time, instead of being cautious, Cote said "we remain confident in our outlook." It made all the difference in the world. The stock opened up and then never looked back. 

Confidence vs. caution. Inflation headwinds vs. typical supply chain management. Just subtly different ways, but ways that are more accurate in telling the story, which was good, both in the April quarter and in this.

After the downturn we have been through, no one can blame a CEO for being cautious or negative or even pessimistic at one point or another. However, if the story is good, just tell the story. Don't stress a negative. Don't worry about jinxing yourself by not expressing caution.

A good quarter's a good quarter. Don't hide it under a blanket of worry and don't accentuate a negative that isn't going to really impact the story. That's the lesson of two  excellent back-to-back quarters at both Honeywell and Domino's, but only one of each shone through.

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