The EY Profit Warnings Report never makes very happy reading, but last week’s publication of its reflections on first quarter results in the UK was particularly gloomy. There were 73 profit warnings in the UK in the first three months of 2018. That’s about the same level as this time last year. However, it was in the consumer sector - and in particular, general retailers - that the most damage was seen. A troubling 41% of general retailers issued profit warnings. Travel and leisure was similarly hit, recording its highest level of warnings since the financial crisis.
The reasons are well-rehearsed; consumers tightening their belts as price inflation outstrips wage growth; cost pressures, driven by a rising minimum wage and rising business rates; over-capacity in some areas of the market; on-line competition – and the painful transition for some to a more online model which has to compete with the behemoth that is Amazon; and finally, the poison in this particular cocktail, a little too much leverage – with unpalatable consequences when some of the other ingredients are taken into account.
Is the concept of profit warnings a reflection of poor performance by companies, or is it a reflection of poor analysis?
Of course, the concept of profit warnings is an interesting one – is it a reflection of poor performance by companies, or is it a reflection of poor analysis and thus an incorrect setting of expectations by analysts? Either way, warnings are generally expensive.
However, it is interesting that over the past couple of weeks – from Majestic Wine to AB Foods and from Greene King to Next - we have continued to see results and statements referring to all the aforementioned problems, yet their share prices have risen. Perhaps we are at last getting to a point in the UK where the ubiquitous doom and gloom is now in the price.
But on the other side of the pond the opposite may be happening. This week, Caterpillar reported profits well ahead of expectations. However, after opening higher, its shares ended the day down almost 10%. Analysts may be fearing that we have seen the best from Caterpillar and its peers – with the old maxim “better to travel hopefully than to arrive” used frequently by our American cousins. In the technology sector, Google’s shares followed a similar pattern. A strong earnings release was initially taken well, but its shares finished lower over the day.
All of the above may be just straws in the wind that will pass and be of little broader import. But for this month anyway, investors appear to have tired of the bad times in the UK and of the good times in the US. Given the almost 15% outperformance of the S&P since the start of last year, these different forms of weariness may have quite significant implications. We will see what the rest of the earnings season brings.