Published April 27, 2009

Profit warnings: too little, too late

By JOYCE HOOI

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'WHAT is it good for? Absolutely nothin'!' When Edwin Starr sang this line in 1970, he was referring to the Vietnam War. But these days, investors and analysts are saying the same of profit warnings.

The wave of profit warnings this quarter have virtually been indistinguishable one from another, with every one of them making the beleaguered economy the whipping boy for poor bottom lines.

'Profit warnings are not supposed to contain forward-looking statements. And everyone is saying the same thing this time around. So they have more or less become carbon copies of each other,' said an analyst with a local firm who declined to be named.

It is little wonder then that profit warnings - typically vague and lagging indicators to begin with - have rendered both the words 'warning' and 'guidance' misnomers in this economic climate.

This then begs the question why firms release profit warnings in the first place, notwithstanding the mandatory requirement by the Singapore Exchange (SGX) to do so when new developments suggest that performance will not match earlier projections.

In theory, profit warnings protect both the firm and the investor.

'If a firm gave forward-looking statements regarding their earnings outlook earlier, giving a profit warning would help mitigate potential legal liabilities. Investors may also deem profit warnings to be good corporate governance as this will lessen the possibility of insiders taking advantage and dumping the stocks before the release of poor earnings,' said James Koh, an investment analyst with Kim Eng Research.

In practice, however, analysts point out that the information asymmetry that the profit warning is supposed to mitigate remains, with companies' stock prices dipping even before the profit warning is released.

'The profit warning is more of a formality. Some investors would already have spoken to management at meetings about the outlook and by the time the profit warning comes out, it would already have been factored into the price,' an analyst told BT.

While a profit warning's failure to warn might be harmless enough in good times, its use in this downturn might be abused as firms with bad bottom lines conveniently blame the economy, some by default and some by design.

'Some firms may be taking advantage of the downturn to cite it for their poor showings. For example, they may have factored in dubious earnings on loose credit terms in the earlier years which they will now write off as receivables impairment,' said Mr Koh.

There are, however, situations in which profit warnings do come as news to analysts and investors.

'For some firms, it can be quite hard to get guidance from management, and some analysts could be fumbling about for information. So the profit warning is the first sign of trouble for the entire quarter,' said an analyst.

Ironically, with such firms where profit warnings are most helpful, investors would have done better to steer clear of them in the first place.