March is a traditional profit warnings period. During Q1 2009, we saw a boom of Nordic companies pre-reporting bad financial results, with an overweight of industrial companies as Trelleborg, Stora Enso and Rautaruukki. Compared to 2010, the trend is the opposite with several companies announcing reversed profit warnings i.e. that profits for 2009 will be higher than expected, for example Axis and Alma Media.
That profit warnings can be a nightmare for IROs are confirmed by a survey done by UCLA. Market Reaction to Corporate News and the Influence of the Financial Crisis looked into how nearly 300 000 press releases impacted share price. The results show that profit warnings hit stock price the hardest (CXO Advisory Blog provides a good summary of the most interesting key points).
Are there any short cuts to a successful profit warning? No, even the most transparent and proactive IR Best Practice company will find that task challenging and more or less impossible. I think the following factors are crucial if you want to diminish the risk of losing the markets confidence:
- First of all, the IR team must be briefed and involved in the discussion if the company should announce a profit warning (I know cases when IROs have read about their profit warning in the news!)
- Prepare a very comprehensive FAQ. If you know your investor sentiment, you will have a hint of how they will react.
- Schedule to spend time in a “emergency line” answering questions and providing reassurance to the market.
To quote a senior Swedish IRO;
“It is better to have one BIG BANG and then focusing on rebuilding confidence, than constantly have several small explosions. “