Fall in profit warnings suggests fear, not improvement
UK profit warnings among public companies fell 18 percent in the second quarter
The number of companies issuing profit warnings fell in the second quarter but the drop has less to do with improving conditions than worsening expectations, according to a new study published on Monday.
UK profit warnings among public companies fell 18 percent in the second quarter, with 60 issued compared to 64 in the same period in 2011, according to Ernst & Young’s latest profit warnings report. There were also 13 fewer than in the first quarter of this year.
Companies in construction, general retail, media, software and support services were among those issuing a high number of warnings and those also facing the strongest headwinds of falling demand, tightening finance and quickening technological change, EY said.
“Many companies have also battened down the hatches and cut costs to meet targets, while recent peaks in profit warnings and increased euro zone turbulence have also drastically reduced expectations in many sectors,” said Alan Hudson, head of restructuring at EY.
Hudson said there was only “so much fat” companies could trim and only so long they could “tread “tread water with little or no investment”, which both “desperately need”.
Falling input prices and inflation should improve profit margins and take pressure off squeezed consumers, EY said. But the report added that these positives were set against the uncertainty over the ongoing euro zone crisis, fluctuating confidence, stifled credit flows and economic recession in the UK.
“Profit warnings are unlikely to rise significantly, unless there is a further negative jolt to the economic outlook or a further escalation of the euro zone crisis,” said Keith McGregor, head of restructuring for Europe, Middle East and Africa at EY.
But he predicted that the future path was a “slow and difficult recovery”.
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