EY study calls for companies to reconsider investor communications as ‘new realities’ offset improving outlook
Profit warnings in the UK hit a six-year high in 2014, despite an improving economy, as a sudden increase in market volatility and an uncertain outlook wreaked havoc on many companies’ business plans, according to a study by EY.
The unexpected figures illustrate a need for companies to increase their resilience and reconsider how they communicate with investors as the world settles into ‘new realities’ in the post-2008 crisis era, the firm says.
The number of profit warnings last year rose to 299, easily exceeding the 255 warnings issued in 2013, EY says. About half of the companies in the FTSE automobiles & parts sector issued profit warnings, along with half of the FTSE mobile telecommunications sector and 30 percent of general industrials.
Overall, about 20 percent of the warnings cited contract delays or cancellations, with a peak in the fourth quarter when 27 percent of profit warnings were blamed on contract issues, reflecting heightened unpredictability in the UK and global economy, EY says. Thirty-nine percent of companies issuing profit warnings cited falling sales while 21 percent blamed pricing and competition.
‘The six-year high in the number of profit warnings appears incongruous given that UK and global economic outlooks still signal growth, but increasing political, policy and pricing uncertainties conspired to hit confidence at the end of 2014,’ says Alan Hudson, EY’s head of restructuring for UK and Ireland, in a press release.
‘Many of these pressures represent new realities, rather than a passing phase. To avoid being at the mercy of events – and to improve investor communications – companies need to take the initiative, build operational and capital resilience and adapt their forecasting and planning capabilities to the post-crisis economy.’
EY’s study also shows the median share price decline experienced on the day a company announced a profit warning was 13 percent in the fourth quarter of last year, an increase from 10 percent a year earlier and the highest since the first quarter of 2012.
