Time is ripe to give profit warnings

New York: There's never an ideal time for a company to warn it might miss its financial forecasts, but now is as good as it gets.

The current gargantuan financial crisis provides convenient, and timely, cover for companies to issue profit disappointments: who can be blamed for blowing the numbers when the system devolves into chaos? That's why observers say investors should prepare for a fresh crop of profit warnings over the coming weeks.

"I would expect company managements would use this camouflage of the financial crisis as the rationale for marking down expectations," said Ned Riley, chief executive of Riley Asset Management.

What's more, the upheaval of the markets, the political bickering and the shakeout of the banking sector so dominate today's headlines that a regular old profit warning loses some of its noteworthiness.

"Why not take the hit now? We've seen it before. CFOs think, 'Get it out of the way and move on. Stocks are down. The market will understand,'" said Neil Hennessy, chief investment officer of Hennessy Funds.

At the moment, analysts expect third-quarter earnings for companies in the benchmark Standard & Poor's 500 index to drop 2.3 per cent, according to Thomson Reuters research. That's down from forecasts in July that earnings would rise 12.6 per cent. If current forecasts hold true, and earnings do drop, it would mark the fifth straight quarter in which profits fell -- the longest such stretch since 2001-02.

If anything, however, third-quarter forecasts will likely come down further in the weeks ahead, given indications that the economy has worsened, investors and analysts said.

So far, General Electric Co. has issued the most eye-popping warning, saying last week that turmoil in credit markets could cut its profit as much as 12 per cent this year.

Other companies may be well-advised to use General Electric when talking about their own disappointments, Riley said.

"I would suggest they would use GE as an example. 'Look, GE is slowing down with so many lines of business, how could we be immune to this kind of prospect,'" Riley said.

But an earnings warning right now - while the markets are in turmoil - isn't without risk.

Sharp pressure

Any hint of trouble can put sharp pressure on a stock price these days. Just ask Apple Inc, whose shares tumbled 16 per cent on Monday after two brokerages cut their prices targets and earnings forecasts. Trip Chowdhry, an analyst with Global Equities Research, said that's one reason it's hard to predict whether struggling companies will disclose their troubles in a preannouncement or wait until they formally release results.

"There is no rule that you have to come and warn. Many companies will miss forecasts for the third quarter, but they may not warn in advance of announcing," he said.

Chowdhry, a technology analyst, figures third-quarter results will fall short of Wall Street forecasts at Microsoft Corp, Google Inc, Yahoo Inc and Sun Microsystems Inc.

Thomson Reuters third-quarter numbers show energy companies posting the biggest profit increases, up 53 per cent; followed by technology, up 8 per cent; and healthcare, up 6 per cent.

Not surprisingly, financials are the biggest area of worry, with forecasts calling for the sector to post a 58 per cent drop in earnings.