How does a profit warning affect companies?

One word has been repeated frequently in the business press over the past few months. This is the so-called profit warning or profit warning. Precisely the year 2018 has been marked by the abundance of these profit warnings. And it is that, economic events such as the trade war between China and the United States, Brexit , the strong variations in oil prices, the increase in the prices of raw materials or the fluctuation of currencies have caused many companies to have to announce downward revisions to its earnings forecast.

Let’s start by explaining what the profit warning, also known as a profit warning, consists of. A profit warning is a notice of a change in expected profit, which may increase or decrease. It should not be forgotten that a large part of listed companies have the obligation to inform their shareholders of the profit prospects. In general, profit warnings usually bring bad news, as it is common for companies to announce cuts in their profits.

Effects of profit warning

Both small and medium investors and financial intermediaries attach great importance to this type of warning. Proof of this is the impact that profit warnings have on the value of a company’s shares . Depending on whether an increase or decrease in profit is announced, the price of the stock will trade higher or lower.

Undoubtedly, a profit warning is a type of notice that usually falls like a jug of cold water among investors, as it usually leads to a fall in the value of the shares.

It is convenient to analyze how investors act upon the news of a profit warning. Thus, experience has shown that if there is a forecast of diminishing profit, investors will try to sell the shares. On the contrary, if an increase in profit is announced, everyone will want to buy shares in the company in question.

Between companies in the same sector

It is interesting to study the behavior of a profit warning between companies in the same sector. There have been situations in which a profit warning from a specific company has ended up affecting other companies in the same sector. Take for example the case of the marketing and communications company WPP. Well, WPP is an advertising giant and its profit warning negatively affected the share price of companies in the communication sector such as Mediaset and Antena 3.

Why are there so many profit warnings today?

If we look at the global economy’s relationship to corporate earnings warnings, the connection is clear. As we previously explained, the prospects of a slowdown in the global economy, Brexit, the rise of protectionism and the new regulation of polluting emissions for vehicles, among others, have caused a real wave of warnings about profits. All of this has affected companies in the textile sector, the automobile industry, airlines and other consumer sectors. Hence, they have been forced to announce cuts in their earnings forecasts.

That the economic march and political events affect company profits and prices is an undeniable fact. Three events have had a special impact on the numerous profit warnings announced in 2018:

  • The rise of protectionism
  • Strong fluctuations in the price of oil
  • The devaluation of currencies in Latin America

Trade wars

In a world with a globalized economy, the commercial pulse between China and the United States has had a tremendous impact on business activity. The tariffs that the US government of Donald Trump has imposed on steel and aluminum have had harsh consequences on various industrial sectors.

The effect of tariffs has been most noticeable in the automobile industry. Companies like Daimler, BMW, Audi, Porsche and the tire maker Continental have had no choice but to announce cuts in their profit forecasts.

However, the increase in protectionist measures has not been the only factor that has had a negative impact on the fall in the profit of car companies. And the thing is, the fight against emissions has been a revolution in the fight against climate change. At the same time, it has had a detrimental effect on car manufacturers, who have been forced to face higher costs.

Oil prices and currency devaluation

No one can remain oblivious to fluctuations in oil prices. Precisely, the increase in the price of crude oil in 2018 has ended up leading to an increase in transport costs, cutting the margins of many companies in this sector and affecting airlines such as Ryanair and Norwegian in particular.

Nor should we ignore the effects of currency devaluation among the great economic powers of Latin America. Thus, Brazil and Argentina have devalued their respective currencies. This has significantly harmed important distribution groups such as DIA, a fact that we already noted in our article ” the keys to DIA’s collapse on the stock market “.


by Abdullah Sam
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