Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, February 24, 2010

Well done investor relations! Profit warnings down.

As the next results season gets under way, an interesting study on the number of profit warnings in 2009 has been published by EY. The result suggests that companies – and their investor relations team – have done well in managing market expectations, but how long before the sell side starts factoring in more aggressive targets?

According to the research, listed companies issued 282 warnings in 2009. This figure represented a six-year low and a 37 per cent decline on 2008. Very unusually, there was not a single profit warning in the general retail sector in the final three months of the year. EY comments that this comes from a mixture of fiscal stimulus, cost cutting and a recovering economy which helped many companies to exceed earnings forecasts in the second half of 2009, which in turn kept profit warnings low in most sectors.

This trend also underlines the role played by IR in managing the expectations. Companies seem to be re-examining their approach to earnings guidance and are following a safety-first approach in the guidance they gave to the market. Many believe that it is preferable to set realistic expectations than to be overly aggressive and let people down, preferring guidance to be beaten on the upside.

And the fall in warnings has reinforced one of the golden rules of investor relations: that of avoiding negative surprises. Creating context has never been more important.

However 2010 is likely to be a different proposition; companies will have a tougher time in terms of managing expectations, as analysts build in more aggressive targets.


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