Trading statements: What a company doesn’t tell you can be just as important as what it does
Investors welcome and value consistency in disclosure
Trading statements are closely scrutinised by investors who are looking for trends within a business. Information in them often reveal changes in business momentum and can have a big impact on profit forecasts and a company’s share price.
However, there are no hard and fast rules as to how much detail there has to be in a trading statement.
The company's chief obligation is to make sure that there is not a false market in its shares and that material changes to its business and trading are disclosed to investors.
Some companies are fantastic communicators and are very open with investors, especially when they are doing well. When businesses are only performing as expected then some companies often say very little which can be a source of frustration.
What does “in line with expectations” mean?
Quite often a company will release a trading update with just one line such as : “current trading has been in line with expectations.”
How useful is this?
Well, it’s better than saying that they are below expectations, but whose expectations are they? Management or analysts?
It would be very useful for companies to say what profit expectations currently are. Some do this by disclosing the range and consensus of current forecasts as a footnote to their news release.
This is very handy for private investors who do not have access to forecast data but many companies simply do not bother.
Companies may not wish to say too much for competitive reasons, but shareholders deserve to be told how their company is progressing.
For example, it is not just how much money a company is making, but how it is making it. The quality of profits can have a big impact on a company’s valuation and share price performance.
The trading statements of Games Workshop
Games Workshop is a good example of the issues seen in the tone and detail of trading statements.
It is arguably one of the best businesses listed on the London market and has a big following amongst private investors. What I am about to discuss about its trading statements is also applicable to many other companies.
Last week, it released a short trading update while announcing a dividend payment.
If I am a shareholder in this company then I would be reassured that trading is ok. I’d take “in line with expectations” to mean that the company is on track to make £193m of pre-tax profit and around 449p of earnings per share (EPS) for the year to May 2024. The dividend is nice to have as well.
Other investors might have been disappointed that there wasn’t an upgrade to profit forecasts.
Yet, this trading statement says nothing about the nature of current trading.
This is not uncommon for Games Workshop, but if you look at its history of trading statements it does tend to say more in its first quarter and half year updates. To its credit, its half year and full year results statements are very detailed.
The lack of disclosure for its third quarter trading could therefore be seen to be disappointing.
Games Workshop is a company with a market capitalisation of £3.3bn and could follow the example of similarly valued companies such as Spectris (LSE:SXS) by providing more consistent and detailed trading updates.
I’m not talking about anything resembling a quarterly financial report, but a few short paragraphs and the odd table can say enough and be very helpful.
Investor relations has made great progress in recent years and those companies that do it well rightly see it as a worthwhile investment in their business.
What a company doesn’t say
The danger with one line trading updates is that it can raise suspicions amongst investors that business momentum is slowing. Only “in-line” for a company that has been doing well and is highly valued by the stock market tends to lead to a share price that doesn’t go up much for a while.
When it comes to Games Workshop, there are specific issues that its investors want to know about. Its second quarter showed a sharp slow down in the revenue growth of its core miniatures business and a drop in its profits.
Whether that trend has continued is something that shareholders need to know about, but it can be swept under the carpet if royalty profits have offset this and overall profits are in line with expectations.
Some might say that this is over-analysis, but the value of profits and growth rates from different sources is arguably different and has a big say on the direction of the share price going forwards.
Maybe everything is fine, but if it is, why not come out and say why it is. In the long run, investors are likely to put more of their money behind companies that are consistent and transparent than those that are less so.