This is the next in the series of profit warning analysis from my set of data. Today we are looking at profit warnings by company size. The first part of the summary deals with what we have seen so far.
Also in that articles are some of the limitations with the analysis so far. To be short, not all profit warnings are covered, so this is by no means a comprehensive set. The time frame is also limited as we have started only in the past year. Companies that have issued multiple profit warnings, for example Thomas Cook, Superdry have only one entry as the analysis tends to be on a similar theme and the share price is already being tracked from the first profit warning.
For the price changes, the average first hour price is used in calculations. Using the absolute low is perhaps more theoretical and we believe the average price represents a realistic price that one would be able to buy in at following a profit warning.
Hopefully over time, we will build a bigger data set and expand the list of variables where possible.
Highest and Lowest Market Capitalisations, Distributions
The largest market value of a company we covered that issued a profit warning was TUI Group (£6350m, price at profit warning date). The lowest was Frontier Smart Technologies (£4m). It is certainly possible that there were lower market caps out there, as there are thousands of companies and some announcements may have been missed.
The distributions are quite interesting. The median total of market cap is £72m, and the average is £353m. We could expect warnings to be skewed towards the smaller size of company:
What is notable is the small amount of profit warnings issued by larger companies, just 6 over £1bn. A profit warning usually takes down the price sharply, so there are a number of bigger companies who were over £1bn prior to the warning that dropped under this threshold after, such as Ted Baker. But it could be the case that smaller companies are more prone. More than half of all the warnings we covered involved companies of £100m or under.
Performance of companies that warned grouped by size:
It should be said that limited conclusions can be drawn from this, as many of this cohort are still fresh. In addition, the small numbers of some segments can skew data. At current time of writing, the average share price of a profit warning company bought by an investor on the morning of the warning is down -9.02%.
Companies of £1bn+ market cap fared worst, at -21.92% collectively. However, there were just six of them and the group was overall dragged down by very bad performers Royal Mail and Aston Martin. These have declined even further since initially warning.
Companies between £251m and £1001m market cap also fared worse than average at -14.90% from 23 companies. At this level, both very big results are possible. We saw one wipeout (Thomas Cook), and one that had doubled (CVS Group).
Companies between £101m and £250m market cap were fewer at 16 entries. This size group was also well punished, at -19.51%. No wipeouts, but some very bad performers, including QUIZ and Xaar, which both lost most of their value in the period. There were very few big winners, Lookers putting on 61% was about as good as it got.
Companies between £51m and £100m market cap was also negative at -3.87% although this is clearly better than average. From 18 companies, the data was heavily skewed by a massive winner, Ten Lifestyle which put on 283%. This more than outweighed the one near wipeout Flybe which lost 95%.
Companies of £50m market cap and under were by far the most common seen, with 37 entries. Yet this was the most successful performer, with a -2.48% return. There are numerous big winners here (WYG, KCOM, Frontier Smart, Footasylum) although all of these gained not through normal trading but by being taken over or merging with other companies at a significant premium. The results also include one suspended share which could be a wipeout (Goals Soccer Centres) but even if this is a 100% loss the sheer number of companies in this category would mean the impact on results will be small.
Some rough conclusions, which might change by the time this exercise is repeated in a year or so:
- Buying profit warnings would not have made you any money. So far, the basket is down roughly 10%. Assuming that dealing costs cancel out dividends this is worse than FTSE All-Share performance. Additionally many private investor portfolios YTD performance would be positive.
- Share performance after profit warnings is stronger for smaller companies than it is for larger ones. With larger companies a doubling of the market cap seems very unlikely at least on a shorter time period but with smaller ones certainly possible.
- The risk of wipeout is also larger for smaller companies than it is for larger ones. This is no surprise as a profit warning can knock a company down to a very small valuation, for example Carillion.
- Drivers of the superior performance from the smaller companies is heavily derived from takeovers, which de-list the company often at a very significant premium to the current share price.
- Takeovers are not always at a premium, in the case of Bonmarche and Flybe the price was in fact a large discount. The reason for this was the urgent need for cash put them in a bad position.
Some trade ideas therefore are smaller companies (under £50m market cap) whose shares have been hit by a profit warning. These also might make a potential acquisition target who also are financially sound.