FT...forecasts to blame?14 Feb 2014 10:01
UK investors take stock after Rolls-Royce and Tate & Lyle warnings
By Alison Smith, Chief Corporate Correspondent
US defence cuts and price wars in the Chinese sweetener market do not have an obvious link. But, Thursday, they both accounted for double-digit percentage falls in the shares of two FTSE 100 companies: Rolls-Royce and Tate & Lyle.
Disappointing news on profits from these two blue-chip companies has sparked concerns that UK corporate earnings may fall short of expectations even as the economy recovers – and drag the value of the UK’s largest companies
Keith McGregor, a restructuring partner at EY, the professional services firm, says there probably is still growth potential for UK companies but, for Rolls-Royce and Tate & Lyle, US cuts and a slowdown in emerging market growth have countered the more generally benign economic environment.
He sees the issue as one of over-optimistic expectations, rather than an underlying weakness in earnings.
“Forecasts got a bit ahead of themselves, so it’s largely a correction of the rate of growth rather than a reversal,” Mr McGregor argues.
Despite some high-profile profit warnings this year – including one last week from BG Group – EY says the surge witnessed in the last three months of 2013 has not continued. In that period, more FTSE 350 groups issued profit warnings than in any quarter since the depths of the financial crisis in 2008.
But while Mr McGregor notes that the spike in warnings at the end of last year has not been repeated, he says: “The proportion of larger companies issuing warnings is higher than it was this time last year.”
He also points out that currency concerns have become a common theme. “One in six warnings this year makes reference to the strength of sterling,” he observes.
For investors, however, the question is how far corporate valuations will be affected if earnings forecasts are revised downwards.
In the case of both Tate & Lyle and Rolls-Royce, the new estimates are for performance in line with the previous year – rather than a clear drop in profit. Even so, investors have reacted severely.
Sign In
Follow the stocks
