GKN falls into the FTSE 100 profit gap (and it may not be the last firm to do so either)

“A profit warning means that GKN is the worst performer in the FTSE 100 today and although the impact of a pair of legal claims upon profits were hard to spot, the company’s accounts had given a few clues that it had very little margin for error if underlying trading took any sort of turn for the worse,” says AJ Bell Investment Director Russ Mould.

“It is interesting to see GKN refer to a disappointment relative to its expectations for “management profit”, which came to £678 million at the pre-tax level last year. This is because the gap between profits as reported on a statutory basis and management’s underlying, adjusted version of them had grown rapidly over the last three years.

“While one interpretation of this profits gap at GKN would be that the company was simply being more transparent, giving shareholders greater clarity on how its actual operations were doing, another could be that management was having to work ever harder to reach analysts’ and its own expectations, by taking an ever-greater number of charges and provisions which were then presented as “exceptional” to put a gloss on the stated figures.”


Source: Company accounts

The situation at GKN is part of a wider trend identified by research published in August which showed the profit gap for the FTSE 100 as a whole is at its highest level since the financial crisis.

Russ Mould, continues:

“This reminds investors to watch out for frequent “exceptional” items (an oxymoron if ever there was one) and growing gap between stated and adjusted earnings.

“The gap grew quickly just before Tesco’s profit and accounting woes tripped up the shares in 2012-13 and stocks where the difference between adjusted and stated profits at the operating level has begun to creep higher of late include AstraZeneca, Babcock, BT, GlaxoSmithKline, Imperial Brands, ITV, Marks & Spencer and Shire, as well as GKN.

“In some cases acquisitions (and associated integration costs) explain the disparity but frequent deals can be a red flag in themselves and good reason to at least pay a lower multiple until the purchases prove themselves or even avoid the stock altogether.”

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