Results reality may be even harsher: Expectations for the autumn reporting season have been moving sharply downwards. But they may still be on the high side, reports Clare Dobie

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The Independent Online
THE NEXT few weeks, when hundreds of companies report their results, will prove a severe test of confidence.

Expectations for the autumn reporting season have come down a long way since the start of the year. But the fear is that they may still be too high.

Last week's results, which opened the season, gave some reassurance as Rolls- Royce, T&N, Burmah Castrol and Reckitt & Colman all did better than forecast.

But once the flow turns into a flood - this week sees 80 companies reporting - the picture could quickly change, especially once the property, construction and housebuilding sectors get under way.

As recession has dragged on and on, the City has belatedly tried to bring its forecasts into line with harsh reality. It may yet have more catching up to do.

Some forecasts have been cut dramatically. Take British Aerospace, Britain's largest exporter.

At the end of last year, the stockbroker Smith New Court expected it to make profits of pounds 220m before tax this year. Now the same firm expects it to report a loss of pounds 130m.

Other downgradings have been less extreme, but taken together they show how the City has reduced its expectations in recent months.

The groups affected cover a wide range of activities. Fisons, the drugs company, has seen County NatWest's forecasts come down from pounds 219m to pounds 125m since February.

As recently as February, Yamaichi, a Japanese stockbroker, expected Williams Holdings, which makes a range of do-it-yourself and industrial goods, to make pounds 194m this year. After last week's half-year figures most firms expect it to make make pounds 160m in the full year.

Even consumer companies such as Forte have suffered. Nikko, a Japanese house, has cut its forecasts for the year ending in January 1993 from pounds 155m in February to pounds 93m in July.

The cumulative impact of these changes is significant. UBS Phillips & Drew has cut its aggregate forecast for earnings increases from 13 to 5 per cent.

Not all firms have made such big changes. BZW's company analysts, for example, are still forecasting an increase of 13 per cent, even after downgrading 75 stocks in July alone.

Given static volumes, it is remarkable that companies can increase profits at all, even in aggregate.

Three things make this possible - huge redundancy programmes, the resilience of drugs producers and utilities such as the water companies to recession, and lower interest charges.

Some companies have made huge numbers of people redundant. BP, which is losing 11,500 jobs this year, is by no means unique, though it may have been late to wake up to the need to take this action.

Job losses on this scale give rise to huge savings, especially where companies have previously set aside sums to cover redundancy payments.

Unilever provided pounds 305m for 'Europeanisation' two years ago. As part of this process it will shed 5,000 to 6,000 jobs, saving pounds 80m a year in labour costs. Thanks to the early provision this will flow through to profits.

Often companies make provisions when they make acquisitions. For example, BTR set aside a huge sum - more than one year's profits - when it took over Hawker Siddeley last year. This provision will cover redundancy costs and other items, allowing BTR's profits to benefit from the resultant savings.

Companies will be reporting not only profits, but also dividends. A number of companies, especially in construction, will have trouble paying one at all, and there are question marks over several others.

Take Hillsdown Holdings, the food company, which both County NatWest and BZW expect to increase its dividends this year.

The 12.6 per cent yield on the shares - 98p on Friday - suggests that investors fear a cut. They will read the interim statement on Wednesday for clues about the total payout.

Other high yielders include P&O, also due to report interims this week. Its shares yield 11.4 per cent, which again suggests that investors regard the payout as being at risk.

Many companies can only maintain their dividend by dipping into reserves. Examples include T&N, which reported last week, Lucas and Burton. Their earnings are expected to be less than the cost of their dividend.

It is this difficulty that has prompted most analysts to forecast no dividend growth this year overall. They also expect only a small increase thereafter as companies make rebuilding earnings their priority.

As well as the figures, companies will also be making comments on current trading and prospects. Recent statements from companies suggest that most have felt no upturn in their markets, though few have reported a deterioration.

If there are more hopeful comments - perhaps from companies with US businesses, though the benefit may be lost through the weak dollar - investors may be tempted to buy shares in general and also to readjust their portfolios.

In recent months they have tended to favour shares in robust sectors such as water and drugs. If companies start talking about recovery they may well prefer to buy cyclical stocks such as retail chains.

But few are betting on it, yet.

--------------------------------------------------------------------- Best and worst sectors in past three months --------------------------------------------------------------------- Percentage change relative to FT All-Share index --------------------------------------------------------------------- Water +19.9 Contracting -39.2 Electricity +19.1 Insurance brokers -32.5 Electronics +15.6 Building materials -24.1 Telephone networks +11.3 Hotels & leisure -18.3 Health & household +5.9 Motors -16.3 ---------------------------------------------------------------------

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