UK: No need to shout about it - When should a company issue a profits warning?

UK: No need to shout about it - When should a company issue a profits warning? - The air in the City was blue recently when Premier Farnell released a warning that profits for the year to January would be 'up to 8% below forecasts'. Bluer than usual, as

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Last Updated: 31 Aug 2010

The air in the City was blue recently when Premier Farnell released a warning that profits for the year to January would be 'up to 8% below forecasts'. Bluer than usual, as Premier then subjected its broker, BZW, to a public lashing, claiming the warning was unnecessary. Premier's boss, Howard Poulson, noted that one week earlier BZW had advised a warning was not justified. Then a BZW analyst took a contrary view and the ferocity of the ensuing squabble was arguably as damaging to the share price (which fell 30%) as the news itself. Given the scope for such disagreements, are there any good rules of thumb for deciding when one should issue a profits warning?

For David Sainsbury profits warnings have come with humiliating, though necessary, regularity. The necessity for other companies can be debatable and in many cases, guides for action are rough. 'I'd say the band was 10% to 20% (below forecasts),' says David Hickey at Guinness Mahon. 'North of 20, you almost certainly must issue a warning. South of 10, an announcement would be unusual.' Hickey says he would certainly look at the convergence of brokers' estimates and whether the house broker was high or low, when the analysts' forecasts were last updated and whether the market had moved on. 'But if in doubt,' Hickey says, 'then announce. If the shortfall has generated serious discussion at board level, that in itself suggests the market should be told.'

Panmure Gordon recently had the awkward task of issuing two profits warnings on behalf of Pace Micro Technology, 1996's hottest new issue. Panmure takes each case 'on its merits. This is not the territory for rules of thumb,' says director Keith Anderson, but he warns against alarming the market without real cause. That could mean, for instance, balancing what may simply be an innocent order delay with the time left in which the order must come through. He asks, 'Who wants an unnecessary 30% share price cut, which you're never going to make up even when the order is booked?'

Royal & Sun Alliance recently reported operating profits of £706 million compared with forecasts ranging from £795 million to £935 million. The cause was a £176 million reserve taken against US environmental and asbestos claims. A spokesman says: 'We didn't give a warning because the decision, like many reserving decisions, wasn't taken until the board was agreeing the results announcement itself.' He also points out that the market is used to insurers changing their reserving. 'If we had taken the decision earlier, we might have announced it. But the range of forecasts was enormous.

If there was a definitive market view, the decision would be easy. But that's rare.' When profit forecasts are widespread, it seems, falling profits may perhaps be a lesser ill than warnings thereof.

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