3.4 Dealing with Profit Warnings, Profit Collapses and Profit Hikes
What has to be done when there is growing evidence that the company’s own projections will be missed in the forthcoming annual or interim financial statements (profit warning) or, if projections of this kind have not been communicated, will turn out to be significantly weaker or significantly stronger than the last period for comparison (profit collapses/hikes)?
The short answer: Publish an ad hoc announcement as quickly as possible (i.e. as soon as the issuer becomes aware of the problem) that transparently presents the expected scope and the reasons for the worse or better results.
The longer answer: «It is better to be roughly right than precisely wrong.» This dictum of the economist John Maynard Keynes can also be applied to simple profit warnings. A couple of recommendations:
- It is better to communicate an estimate as quickly as possible than practically definitive figures weeks later and shortly before the results are presented
- In case of uncertain forecasts, communicate ranges, e.g. revenue or EBIT of CHF x-y million.
- If the reasons for the poorer results are not a one-off but structural in nature, it can be helpful to communicate, in addition to the guidance, a plan and the most important measures for tackling the new market situation
- This should be followed by a status report on this bundle of measures at the forthcoming results deadline
- Do not make the upcoming result look better than it is by reaching into a bag of tricks and pulling out spontaneous sales campaigns and short-term cost-cutting programs. That only puts the vast majority of problems off to a later date
- The aim must be for the management to maintain as much confidence as possible with no-nonsense communication and not for the share price to undergo as little correction as possible
Be Careful When Everything Is Running Smoothly
As studies show, investors and analysts generally estimate the growth prospects of companies with a good track record on the high side. This leads to the share price of a company of this kind frequently experiencing a particularly hefty correction in the event of a profit warning, less on account of the one-off failure to meet expectations and more because of the adjustment of the medium-term growth fore- casts that were basically too optimistic. There is a lesson to be drawn from this for managers and IR specialists: If there are indications of an (at best industry-wide) overvaluation, resist the temptation «to ride the wave». Rather, the enthusiasm of the investors should be subtly and gradually curbed.