Christopher Niesche: Unpalletable news from Brambles

The Trump presidency has already brought bad news for at least one Australian company, with pallets supplier Brambles issuing a profit downgrade on the day of the inauguration.

Brambles supplies wooden pallets that retailers and wholesalers stack goods on so they can be moved around by forklifts and so is very reliant on the strength of retail sales, particularly in the US, its largest market.

In the weeks before Christmas, Brambles found that retailers were reducing the amount of stock they were ordering and holding, and hence needed fewer pallets. As a result, the company faced higher transport costs because of an increase in the number of pallets being returned. And because Brambles routinely repairs pallets when they are returned, its repair costs also skyrocketed.

Brambles said on Monday it expected constant currency revenue growth of approximately 5 per cent in the six months to December, and constant-currency underlying profit growth of approximately 3 per cent. Previously the company was expecting revenue growth of 7 to 9 per cent and underlying profit growth between 9 to 11 per cent.

Supplying and moving pallets around the world might not sound like much of a business, but Brambles, with brands including CHEP and IFCO, has 550 million pallets, crates and containers in 60 different countries and earned an operating profit of US$915 million last year.

The Brambles profit decline came out of the blue.

The fall wiped A$3.1 billion off the value of the pallets company after sending its shares down nearly 16 per cent. This in turn helped sour the mood of the Australian sharemarket overall, and it fell to a one-month low.

The company itself was also taken by surprise, with chief executive Tom Gorman saying he was "embarrassed" at the downgrade. Gorman is retiring next month, and this is the first time in his seven years running the company that he hasn't met a profit forecast.

Gorman didn't want to lay the blame at the feet of the Trump Administration, saying instead it would take some time to fully understand the impact of the "radical shift" in policies from the Obama Administration to the Trump Administration.

Nonetheless, others have, and it's not hard to imagine that Trump's ascendancy has induced some caution among businesses and consumers.

Certainly US retail sales weren't very good over Christmas, with Macy's, Toys 'R' Us and JC Penny all reporting poor sales.

It shows how Trump's presidency has increased uncertainty for those Australian businesses which are exposed to the world's biggest economy. Predicting which of his promises Trump might keep and the resulting impact on the US economy will keep investors on their toes.

In the meantime, Brambles shareholders will have to assess whether the retail sales drop is a blip or the start of a longer trend.

It's a question many others will be asking as well.

Who to blame for earnings downgrades

When companies report earnings downgrades, many of them blame some external factor that's beyond their control for the bad news: summer was unusually cool; competitors were discounting aggressively; the price of raw materials has gone up.

Sometimes, of course, these are legitimate reasons for a company to warn that its profits will be lower than investors had been expecting. Sometimes, however, it's hard not to suspect that management is trying to escape blame for their own poor performance, particularly if the company is a repeat offender.

But recent research by University of NSW academic Wei Chen found that when companies try to manage investor reaction and shield themselves from blame for a poorer than expected performance by blaming external factors, it can often backfire.

Investors take a dimmer view of earnings downgrades blamed on external factors over downgrades which companies say were caused by an internal factor, such as difficulties in integrating an acquisition or a flawed marketing plan.

"Our results indicate that when management guidance news is negative, investors make lower earnings estimates when external attributions are provided than when internal attributions are provided," Chen wrote.

It comes down to managers' credibility and investors' confidence in whether or not they will be able to fix the problem, she says.

Basically, if management say the cause of an earnings downgrade is something within the company, then it follows that they might be able to do something to fix it. However, if the problem is external, then there's nothing much that management can do about it so investors can't have much confidence it will be fixed.

The research should give some chief executives something to think about next time they have to front up with an earnings downgrade.

It's hard for market watchers not to roll their eyes sometimes when repeat offenders report yet another earnings downgrade, and blame everyone and everything but themselves.

It's good to know that investors see through this and that the executives aren't doing themselves any good.

- NZ Herald

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