Profit warnings stabilise but the economy hasn’t turned the corner yet

PROFIT warnings in Yorkshire and the North East stabilised in the second quarter of 2009, according to research by Ernst & Young.

A total of 10 profit warnings were issued across the regions in the three months to June down from 19 in quarter one – the highest number of warnings the region had issued in the last nine years.

The number of profit warnings issued in quarter two is closer to the region’s four-year average of 11 profit warnings.

Hunter Kelly, restructuring partner at Ernst & Young in Leeds, said: “This drop may add to the increasing number of commentators stating that we are nearing the bottom of the cycle.

“However, the picture is more complex than the numbers suggest. Three successive quarters of negative growth have diminished market expectations and naturally, this will reduce the number of profit warnings without necessarily being indicative of an upturn.”

He continued: “There is still a bumpy, slow recovery ahead and Yorkshire companies need to remain cautious.”

The region followed the national downward trend with UK quoted companies issuing 63 profit warnings in the second quarter of 2009; a year-on-year drop of 36%.

The average fall in share price on the day of warning was just 12.6% compared with 18.3% in the previous quarter with the market apparently pricing in some downgrades.

Around 70% of UK companies that issued a profit warning blamed falling sales and one in five companies blamed price pressures.

The UK economy contracted at its fastest rate for 50 years in the first quarter of 2009 and turning the decline in to ‘V-shaped’ growth will be exceptionally difficult according to Mr Kelly.

“The peak for insolvencies in the 1990s recession followed many quarters after the economic nadir,” he added.

“As a consequence, both companies and the banks will be looking to preserve capital, coupled with increasing job worries, means that all purse strings will remain tightly closed. While some supply chain restocking has helped, following some over corrections in the previous quarter, this does not mean that we have turned the corner.”

The worst hit sectors in Yorkshire and the North East were support services and general financial both with two warnings.

Other sectors to warn in the region were construction and materials (1), electronic and electrical equipment (1), food producers (1), industrial engineering (1), oil equipment, services and distribution (1), and general retailers (1).

Market expectations have been depressed both by the recession and the high levels of profit warnings in previous sectors, which has subdued market expectations.

As a result profit warnings are unlikely to move rapidly upwards, even if the economy continues to contract, so long as the pace of decline slows or the economy stabilises.

Mr Kelly said: “Whatever companies decide on public guidance, it still does not remove their obligation to report material events that may impact profit as soon as possible to the market.”