And the danger signs are already flashing. According to accountants EY, there were more September profit warnings this year than at any time since 2008, among them Unilever, hurt by an emerging markets slump, and Ladbrokes where online difficulties persist. William Hill, Chemring, Carpetright and more than a dozen others have all warned and tumbled here since, and on the Continent brewer Heineken, German airline Lufthansa, French food giant Danone and video games publisher Ubisoft have, too. And after thumbing through the history books, Charles Stanley thinks this reporting season “is more concerning than investors think.” Earnings revisions has been “less negative” this time, which, reckons the broker, “leaves individual stocks extremely vulnerable to marked share price downside were results not to match expectations.” According to consensus forecasts, half the industry sectors are tipped to generate double-digit earnings growth over the next year. “Too optimistic,” says CS.
We’re inclined to agree. As EY points out, cost cutting and operational improvements have been key drivers of earnings over the past two years, but there’s “less fat to trim” now, so the emphasis must inevitably shift to economic growth. “Any doubts as to the path of that growth will quickly reflect in forecasts,” warns EY. Data from Thomson Financial Datastream reveals analysts have already slashed forecasts for European earnings per share growth to a pathetic 0.2 per cent from a hugely optimistic 9.9 per cent at the beginning of the year.
Profit warnings pick up
| Company | Ticker | Warning date | Explanation |
| MS International | MSI | 1 Oct | Defence orders delayed |
| William Hill | WMH | 3 Oct | Unfavourable football results; quiet July for betting shops |
| Carpetright | CPR | 4 Oct | UK volatile; weak Dutch economy |
| Tricorn | TCN | 4 Oct | Soft UK revenues; investment in both the US and China |
| Cranswick | CWK | 7 Oct | Record high pig prices; pastry facility start-up costs |
| Grafenia | GRA | 8 Oct | August sales volumes disappoint; costs of establishing new product |
| Image Scan | IGE | 10 Oct | Uneven phasing of orders |
| Chemring | CHG | 11 Oct | US government shut down; production issues; weak dollar |
| Michael Page | MPI | 14 Oct | Challenging markets |
| Chamberlin | CMH | 15 Oct | Slowdown at Leicester and Scunthorpe foundries |
| SDL | SDL | 15 Oct | Orders delayed; new clients slow to scale up volumes; technology bookings weak |
| Anite | AIE | 16 Oct | Q2 pick-up slower than expected; possible contracts delayed |
| Datatec | DTC | 16 Oct | Problems with new software hits volumes at core US unit Westcon |
| Rank | RNK | 17 Oct | Hot weather in July |
| Amiad Water Systems | AFS | 18 Oct | Project delays; slowdown in the US and India |
| Interbulk | INB | 21 Oct | Weak European polymer industry |
| De La Rue | DLAR | 23 Oct | Overcapacity in banknote paper market; losses at Cash Processing Solutions |
| Zotefoams | ZTF | 23 Oct | Big European customers destocking |
Source: Investors Chronicle
Yet even those stocks facing less ambitious assumptions have undergone such substantial re-ratings that value is becoming much harder to find. And it is aggressive multiple expansion rather than earnings growth which Charles Stanley argues has driven equity markets. Indeed, profit forecasts in Europe have been falling steadily since July 2011, it says, yet the forward PE ratio has been rising for more than two years. Already at 12.8 times earnings, the MSCI Europe index is fast approaching its historic average of 13.9 where it hasn’t been for nearly a decade. With profit growth poised to replace multiple expansion as the main driver of share prices, it is vital investors hone their stock-picking skills, for as Goldman Sachs warns, it is at times like these that gains for equity investors are much harder won.
Of course, rising earnings multiples make finding value in equities progressively harder. They ratchet up the degree of punishment meted out for earnings slip-ups, too. But it doesn’t pay for investors to focus only on forward earnings multiples. They are after all open to subjective interpretation which can yield vastly different conclusions. As long as companies deliver what they’ve promised, both UK and European equities stand a better chance of extending gains through the statistically strong fourth quarter. Make hay before the Federal Reserve resurrects the taper debate early next year.
European warnings
| Company | Ticker | Warning date | Explanation |
| Schindler | SW: SCHN | 15 Oct | Cost of overseas expansion; cost-cutting delayed; substantial pricing pressure |
| Ubisoft | FR: UBI | 15 Oct | Game releases delayed |
| Danone | FR: BN | 16 Oct | Recall of infant formula products in Asia |
| Lufthansa | GER: LHA | 22 Oct | Higher restructuring costs; weaker pricing at cargo operations; currency headwinds |
| Heineken | AMS: HEIA | 23 Oct | Weakness in Central & Eastern Europe; delayed economic recovery; strong euro |
| Dassault Systemes | FR: DSY | 24 Oct | Customers taking longer to make investment decisions |
