Don't shoot the messenger on downgrades

The media have been roundly criticised for perpetuating negative sentiment in the market - talking up the bad news and eroding business and consumer confidence.

While there is probably an element of truth to the claim, the continuing string of profit downgrades does not bode well for corporate Australia this year.

This two-month period leading to the June 30 end of the financial year is affectionately known as the confession season - the time when companies need to fess up if their earnings are not going to hit the guidance marks the management has given.

The continuous disclosure rules are sufficiently strict these days that come audited full-year disclosure announcements in July-August, the market should not be blindsided by profit shocks.

There is no good way to announce bad news but mitigating the negative response is possible if companies are upfront and provide a maximum of detail about the reasons and what they are doing to remedy the problems.

Over the past couple of weeks we have seen some less than impressive attempts by companies to get the message out in a less than frank (or even sneaky) way.

Newcrest's alleged selective analysts briefing(s) in the week leading up to a negative production and earnings announcement is very old-style.

You see a lot less of this behaviour today, particularly among larger companies, and the circumstances surrounding who knew what and when is now in the regulator's sights.

Hot on the heels came the Lend Lease earnings update - now referred to as the Claytons downgrade (the earnings downgrade you are having but not calling a downgrade).

The market saw through this and meted out the punishment appropriately.

Fairfax and New Newscorp demonstrated two different styles in market briefings a few weeks back. Fairfax was highly open and detailed about the pressure it was experiencing on the newspaper sales. New News said very little about its prospects other than to ensure investors

that it could re-invent the business model.

Goodman Fielder - a chronic disappointment - updated the market on Tuesday with a mixture of good and bad news.

The bad news was that the earnings in the full year will be below last year, but the second half will be 15 to 20 per cent stronger than the first half.

The worrying part of the Goodman Fielder announcement was the unexplained death of Fijian chickens - but the market was happy that the baking division was starting to make more dough from its dough and had signed a contract to supply Coles.

On balance, the news was greeted positively by the market and the company's share price improved even though the announcement was a downgrade and the company reiterated that trading conditions were challenging.

Indeed, the industry range of profit downgrades over the past couple of months suggests that these tough economic conditions are widespread - rather than just being a media

beat-up.

Almost all sectors are feeling the effects of the difficult economic conditions and the ripples from the fading of the capital expenditure and employment boom from the mining industry.

The first casualties of the softening economy and weak consumer confidence were retailers and other discretionary-spending areas.

Even one of the stellar, reliable growth stocks, Coca-Cola Amatil, had to downgrade its earnings in May.

The relatively high dollar has also been playing havoc with the Australian manufacturing sector for a few years.

But in the 2013 year, investors will see the extent to which the negativity has cascaded into mining services, mining, construction, airlines, and some sections of telecommunications.