The Day Ahead: Pile On Those Earnings Calls

 | Jul 29, 2013 | 8:00 AM EDT  | Comments
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How many earnings-call transcripts did you review this past weekend? I'll bet the answer is a big, fat zero -- and that angers me greatly for two reasons.

First, even if you despise SEC filings in favor of analyzing colored lines on a dark background, remember that each line on that chart represents a story being told on the future of a company. In order to find that story and get positioned correctly ahead of it, you must consume a couple of those transcripts.

Second: Let's say, for argument's sake, that you view fundamental analysis as the holy grail of investment approaches. All that fancy Excel modeling could be an epic waste of time if an executive drops a juicy nugget on sales trends during an earnings call that you opted to skip.

Get with the program, or risk being passed by in terms of portfolio performance. It's as simple as that.

As for myself, I read 22 earnings-call transcripts in total this weekend, with the goal of punishing my brain. I didn't really discriminate as far as which calls I checked out -- they ranged from Louis Vuitton and Stanley Black & Decker (SWK) to Under Armour (UA) and Snap-On (SNA). As I was digesting those, I secured post-earnings calls with Family Dollar (FDO), Starbucks (SBUX) and eBay (EBAY) for this week -- because losing is not an option for me, especially after I missed something on Cheesecake Factory (CAKE) and blew a trade on that stock.

Following are high-level takeaways from my efforts.

Income statement dissection -- just do it. Mr. Market seems to be overly focused on sales and absolute dollar growth in gross profit, as opposed to the question of whether operating margins are expanding through organic growth and pricing power.

In the industrial patch, I saw countless companies that beat second-quarter targets by a few cents due to sales fueled by increased promotions. The byproduct, however, was the hammering of margins on earnings before interest and taxes -- and it was covered up further by cash allocation to share repurchases. The takeaway: Businesses are not generating super-quality growth. Instead, this growth borders on operational magic that may not be sustainable longer-term.

You didn't know this, but I did. The consensus is betting that China's recent growth-spurring actions will cause the third quarter to mark the country's bottom in gross domestic product expansion.

Hold your horses, cowboy. Nike (NKE) and VF Corp (VFC) are among those complaining about excess inventories in China that could take three quarters to work off via discounting. On Louis Vuitton's call, management pointed out that cognac inventory has risen to unplanned levels. According to the company, cognac is now undergoing a de-stocking cycle in China, and the rest of its Asia business will not offset it (it didn't offset in the first half of the year).

Fun Stats to Know

• For Louis Vuitton, U.S. sales achieved a mid-single-digit percentage increase. Asia was flat, and Japan and Europe about notched double-digit sales climbs. By the way, the company noted a slowdown in tourist sales in Japan, which makes me hesitant on Coach (COH) into earnings this week.

• Stanley Black & Decker logged a 40% surge in its U.S. oil-and-gas onshore business after many quarters of sluggishness. I think the division is good for 20% to 30% worth of sales gains for at least the next two quarters. There are others pockets of growth in industrial land not tied to autos -- such as natural gas, for instance.

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