Profit Warnings
Profit warnings are an adjustment to the publicly available expected results of a listed company. Profit warnings are therefore closely tied to a company’s earnings guidance or outlook whereby the company’s management informs investors and analysts about the expected continuation of its business and the expected earnings development of the company for the coming quarter or year.
Legal requirements regarding profit warnings
Investors and analysts use the company’s earnings outlook to make investment decisions, adjust recommendations and calculate the expected earnings per share.
The manner in which the company provides their outlook and gives guidance varies from qualitative statements to quantitative guidance. If, at any moment in the quarter, a company realises that it is unable to meet its earlier disclosed guidance, it is required by law to issue a profit warning.
Dutch financial market authority AFM considers an adjustment to earnings estimates to be price-sensitive and therefore requires companies to inform investors about this as soon as possible.
Usual timing of profit warnings
Typically, profit warnings come a few weeks before a new earnings release. This gives investors and analysts the time to adjust their expectations, but also allows companies the time to be certain enough of their new estimates.
If a company fails to issue a profit warning, the weaker-than-estimated earnings will come as a surprise and the share price reaction will be more severe. Such a situation will also call for regulatory interference, as the AFM should then investigate why a company did not consider it necessary to issue a profit warning.
Investors, meanwhile, will wonder the same thing and may decide to take a company to court over this.
Profit windfalls
Where profit warnings usually have an adverse impact on a company’s stock price, the opposite is true for profit windfalls.
Companies that expect to beat their own or analyst expectations often remain silent about this until the earnings release. Whenthe company's results prove to be considerably above market expectations, the resulting spike in share price is not only good for investors on that particular day, but usually echoes through in the following weeks as well.
However, when the regulations are interpreted more strictly, a company should also report a positive profit outlook adjustment, and issue a press release ahead of the earnings release.