Analysts ignore results
Companies reveal their priorities as they speak
- Companies have cut the time they spend explaining their results. Sell-side analysts are increasingly content to ignore results but look ahead to the future
- We believe this bias is wrong, but it reflects the recent growth-oriented market
Since the early 2000s most large US companies have held quarterly earnings results calls. Recently we discovered some surprising trends in the language used in these meetings as we developed our NLP (Natural Language Processing) stock-picking models. Companies are discussing results less, and future prospects more. We think this is an important reflection of current market psychology.
The purpose of quarterly earnings calls is to provide an efficient way for company management teams to explain financial performance and their forward-looking views to a wide audience of investors and sell-side analysts.
Chart 1: Less management discussion of results: key unadjusted line items
In turn, participants can question management on the results and their future strategy. Transcripts from these meetings allow review by humans and, increasingly, NLP models such as ours. Our analysis reveals that quarterly calls presentations are including less discussion of the standard unadjusted line items in the financial statements (Chart 1). To be fair to the companies, Chart 2 shows that meeting participants are leading this trend: their questions have shown an even faster fall in their focus on results.
Chart 2: Investor questions: sell-side analysts are even less interested in examining results than management
Source: AXA Investment Managers Rosenberg Equities, Factset. The charts in this note show the percentage for each word as a proportion of all words used in US companies’ earnings call transcripts during each year. ‘Other key words’ includes a handful of additional words related to results. The Management Presentation section (Chart 1) includes the company’s prepared remarks, and the Investor Questions section (Chart 2) combines the text from all questions posed to the company during the meeting. Questions are typically dominated by sell-side analysts. Charts based on Rosenberg Equities’ internal universe of US securities during the timeframe shown.
This is not the whole picture, however. The previous charts focus on standard accounts line items (sales, cash flow, earnings and so on) typically corresponding to Generally Accepted Accounting Principles (GAAP). Companies have increasingly chosen to emphasise ‘adjusted’ measures including EBITDA which are not defined in GAAP (Chart 3). This may be a reasonable response to changing accounting standards, but we believe the home-grown nature of these measures risks blurring the focus on the results delivered by the company.
Chart 3: Companies increasingly discuss adjusted measures
Source: AXA Investment Managers Rosenberg Equities, Factset. Management Presentation section of the transcripts. Chart based on Rosenberg Equities’ internal universe of US securities during the timeframe shown.
Expectations have been raised
So if companies are talking less about recent results, where is the emphasis now? Future prospects are vital to investors and US companies are discussing them more. Words including ‘expected’ and ‘forecast’ have become more prominent. We found an interesting increase in companies describing their outlook with growth rate approximations (imagine statements such as ‘we expect high-single digit sales growth next year’). Indeed, ‘high-single digit’ has outstripped ‘low-single digit’ as a forecast range (Chart 4). By expressing expectations as an approximate range, the companies are being vague. To us this trend looks like over-optimism: the macroeconomic cycle has matured over recent years and high-single digit growth, at least on the top line, seems unlikely for most companies.
Chart 4: Management became increasingly (vaguely) bullish
Source: AXA Investment Managers Rosenberg Equities, Factset. Management Presentation section of the transcripts. Chart based on Rosenberg Equities’ internal universe of US securities during the timeframe shown.
Dial in to hear about traction on our runway!
We also spotted a trend for describing the growth outlook through the idiom of a journey towards a destination. The chart below shows ‘traction’, ‘trajectory’, ‘headwind’ and so on. In addition to the words shown on the chart we included ‘turbulence’, ‘runway’, ‘onboarding’ and others. Inevitably, companies like to emphasise the challenges that they face on these journeys: ‘tailwinds’ are still notably absent compared to headwinds, even in the current benign macroeconomic environment.
Chart 5: Destination planning – describing growth as a journey
Source: AXA Investment Managers Rosenberg Equities, Factset. Management Presentation section of the transcripts. ‘Other words’ include ‘onboarding’, ‘roadmap’, ‘turbulence’ and so on. Chart based on Rosenberg Equities’ internal universe of US securities during the timeframe shown.
Mercifully, the word count percentages for these clichés remain quite low, but well over 10 per cent of companies are now (as of November 2018) using some of these words at some point in their presentations. From our perspective, this type of narrative emphasises the growth vision over the growth process. While it makes sense to visualise companies’ long-term opportunities, surely this emphasis on the destination risks indulging these visions without holding companies accountable for their near-term progress?
It's fun to talk about growth stories, but we prefer to hear about performance delivered
Admittedly our analysis isn’t comprehensive or scientific, and clearly it’s not too serious. There are regulatory, cultural and other influences on the changes
that we’ve seen in language over the past 15 years in addition to any changes in companies’ intended message for investors. And we can’t say whether the shift away from discussing results and towards future outlook has been driven by companies themselves or by investors’ and analysts’ demands. But we are confident that the changes reflect a genuine change in overall market psychology.
We believe that it is wrong for investors to permit companies to emphasise vague discussion of their prospects at the expense of serious discussion of the results that they have achieved. At Rosenberg Equities, our investment approach is to judge companies based on their results and to remain generally sceptical about growth ‘stories’. We believe that as economic constraints reassert themselves investors may lose patience with discussing the long-term bullish growth narrative of so many companies. However the language of earnings calls suggests that this point has not yet been reached.
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