Under UK rules, issuers of securities on regulated London markets must disclose certain key pieces of information to ensure transparency for investors. For most investors, companies’ half- and full-year results are among the most important information to analyse. Some larger companies also report earnings quarterly.
It is also quite common for companies to issue unscheduled trading updates, which may include profit warnings, acquisitions, management updates, or share dealing by directors.
On days when we have company releases, equity markets usually become a tale of individual shares. On 26 September we had such a day as four FTSE 100 heavyweights issued profit warnings. Let us now take a closer look to see what these trading updates may mean for shareholders.
Slew of profit alarms
According to the online “Profit Warnings Console” provided by the multinational professional services firm Ernst & Young, so far in 2019, there have been over 150 profit warnings issued by companies in all FTSE indices.
Last week warnings came on the same day from four blue-chip companies — British Airways owner International Airlines Consolidated Group (IAG), cruise operator Carnival, tobacco giant Imperial Brands, and education publisher Pearson.
In its trading update, IAG management blamed various factors including high fuel prices, recent pilot strikes, volatility in exchange rates, and weaker booking trends. Its full-year profits are now expected to be 6% lower than last year. Investors were especially spooked by this news, as earlier in the week tour operator Thomas Cook had failed.
Carnival also cautioned that higher fuel prices would likely dent earnings. Management noted that “Since June, both booking volumes and prices for the first half of next year have been running lower than the prior year”.
British tobacco group Imperial Brands warned about a hit to revenue due to regulatory crackdowns on vaping markets in the US. Shares are down about 40% from their 52-week high.
Finally, Pearson now forecasts weaker-than-expected earnings as revenue in its US Higher Education Courseware business would be lower. Management blamed the trend of students shifting away from print products.
What could investors do?
As expected, when these profit warnings were released, the markets saw the respective share prices fall fast. Some investors tend to react to such updates first and ask questions later.
In general, share prices are based on investors’ expectations of a company’s future profits. Even good businesses issue warnings every once in a while, as many investors have experienced.
However, I would be concerned if a company issued a series of profit warnings. Could it, for example, be a sign that its business model is broken?
At The Motley Fool, we believe in saving and investing for the long term. Having a disciplined focus enables investors to patiently get through the weekly noise of the markets while they relax with the knowledge that their portfolio stocks have the quality to weather short-term adverse developments. These investors do not need to constantly make plans for selling their shares in the short run.
We also emphasise the importance of doing due diligence on companies, not only before buying into the shares but also at regular intervals. Then it becomes relatively easier to ensure that a given share is still suitable for a portfolio.
Those investors who are new to investing or do not feel fully comfortable with analysing shares may also consider buying into a FTSE 100 tracker fund.
