Share prices see mildest reaction to profit warnings since 2005
Profit warnings from UK companies jumped by 30 percent in the fourth quarter of 2013 from the previous three months, according to the EY Profit Warning report.
UK listed companies issued a total of 73 profit warnings in the last quarter of 2013, marking a sharp return to the first three quarters of the year, which saw a dramatic decline in warnings, EY says. For the full year, profit warnings from companies listed on the Alternative Investment Market and the London Stock Exchange fell to a three-year low of 255, down from 287 in 2012.
Support services, the largest FTSE industry group, led profit warnings in 2013 with a total of 14. Profit warnings from FTSE 350 companies jumped to 31 in the fourth quarter, reaching the same number as the end of 2008 at the height of the financial crisis.
‘The 30 percent quarterly rise in UK profit warnings in the final quarter of last year seems incongruous next to improving economic data, but global growth anxieties reduced profit expectations in late summer, with earnings downgrades continuing into the final quarter of 2013,’ says Keith McGregor, EY’s capital transformation leader for Europe, the Middle East, India and Africa, in a media release.
Even amid the sharp jump in profit warnings, share-price reaction remained muted. Share prices fell by 8.4 percent, on the median, on the day of a profit warning – the lowest level since 2005, EY says. The median drop increased as the quarter advanced, however, to 10 percent by the end of the year from 5.6 percent in October.
The number of profit warnings may also indicate an underlying positive trend, at least in part: 10 percent of companies that issued warnings in the fourth quarter cite investment or research and development costs as a major factor. That suggests investment is rising to meet the demands of the recovery and structural change, according to EY.
FTSE general retailers form the sector that suffered the least, with only two profit warnings in the fourth quarter and a total of nine in all of 2013, EY adds. That’s the lowest annual number in at least 14 years.
