Friday, July 16, 2010

Completing Your Diligent Research

The importance of listening to the quarterly conference calls of the companies in which one is interested cannot be stressed enough. While press releases that accompany quarterly results do provide critical financial data, the qualitative commentary and outlook provided in these releases is less than adequate for a full understanding of the company's position.

In the conference calls, on the other hand, management's intentions for the company's cash balance will often be made clear, the company's revenue situation with respect to the current quarter (that is, the quarter following the one for which results are released) is often discussed, and other material facts related to the company are often disclosed. Often, none of these items are discussed in the company's press release or its written quarterly report.

As an example of how such items can increase one's understanding of a company, consider Nu Horizons' (NUHC) conference call last week. Nu Horizons is a company we have previously discussed as a potential value investment due to its large discount to its net current assets.

On the conference call, management was asked about the large discount and whether a share buyback would be done in an effort to reduce the discount. Management's answers suggest management intends to use its cash balance (and then some, using a line of credit) to invest in growing the business and not buying back shares, due to the opportunities it sees in its distribution markets. This isn't necessarily a bad use of cash, but for the value investor who sees this as a risky use of his funds, the message is clear: stay away.

The company also revealed that its distribution contract with Sun Microsystems (representing approximately 5% of Nu Horizons' revenue) will not be renewed due to Oracle's acquisition of Sun. To me, this information appears material, but for whatever reason it was not disclosed in the quarterly report, only in the conference call.

Finally, with the information management provided on the call along with the answers it gave to shareholders who prodded for more info, shareholders could actually piece together the company's profit outlook for the current quarter, even though management does not give quarterly guidance. Management discussed a revenue level that would be required to break-even in the quarter, and from bookings over the quarter, shareholders are able to estimate what the revenue number will be in the current quarter. The numbers suggest a modest profit for Nu Horizons, which is not a very common position for a company trading at a discount to its net current assets.

The more the investor knows about management's intentions and the current state of the business, the better the decision the investor can make. Listening to quarterly conference calls is a key component for the investor to fully understand where the business is going.

Disclosure: Author has a long position in shares of NUHC


Paul said...


In the post you say "This isn't necessarily a bad use of cash, but for the value investor who sees this as a risky use of his funds, the message is clear: stay away." However, you're still positive on the business?

Anonymous said...

I really hope Nu Horizons can pull a rabbit out of the hat and not end up losing lots of money. Losing 35% of their sales (Xilinx and Sun) and having to deal with expensive ABL financing now may be the beginning of the end.

lets hope not.

Saj Karsan said...

Hi Paul,

I thought your question deserved its own post, so I've summarized my thoughts on the subject here: