Falling profit warnings are as much a measure of fear as confidence
By Daniel Hunter
UK profit warnings fell 18% in the second quarter of 2012 but the drop was as much to do with reduced expectations, falling input prices and companies battening down the hatches, as it was improving trading conditions.
According to Ernst & Young’s latest Profit Warnings report, UK quoted companies - Main Market and AIM listed - issued 60 warnings in Q2 2012 just below the 64 issued in the same quarter of 2011 and 13 fewer than the previous quarter of this year.
Those companies issuing a high number of warnings are those facing strongest headwinds of falling demand, tightening finance and the quickening technological changes that are revolutionising the way companies relate to their customers.
The FTSE sectors with the greatest number of companies warning were Construction & Materials (7), General Retailers (5), Media (5) Software & Computer Services (5) and Support Services (5).
“Part of the fall in warnings is undoubtedly due to a slight improvement in trading conditions, alongside hopes for an Olympic boost, and, crucially, falling input prices," Alan Hudson, head of Ernst & Young’s UK & Ireland restructuring practice, said.
"However, many companies have also battened down the hatches and cut costs to meet targets, while recent peaks in profit warnings and increased Eurozone turbulence have also drastically reduced expectations in many sectors.
“Even if the UK economy moves back into the black this summer, the recovery still lacks the traction it needs to build sustainable momentum. There is only so much fat that companies can trim and only so long they can tread water with little or no investment — investment that both they and the UK economy desperately need.”
Most FTSE sectors saw a year-on-year drop in profit warnings in Q2 2012. The main exceptions to this downward trend were those sectors with companies affected by the most... continued on page two >