Servcorp, Fantastic Furniture: Company downgrades roll on

Three more downgrades start the week, following last week’s downgrades from mining servicers.

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Yesterday saw another three companies announce earnings downgrades, which come off the back of last week’s swath of mining servicer confessions. While the downgrade focus for investors to date has been the sell off in resource-exposed sectors, the downgrade by Servcorp (ASX: SRV) and Fantastic Furniture (ASX: FAN) should be a reminder to investors that many other parts of the economy are doing it tough too.

Servcorp is a business that provides serviced and virtual office space to clients globally. Managed by founder Mr Alf Moufarrige, the company boasts office space in 52 cities across 21 countries and revenues approaching $200 million. It’s an impressive story for a company founded in 1978, however the company’s market guidance announcement that newer properties were taking longer to break even than previously expected was a little on the “prettied up” side. The first paragraph admittedly did get to the crux of the matter, albeit in a slightly roundabout fashion:

“Servcorp now expects net profit before tax to exceed $27 million for the full 2013 Financial Year (previous net profit before tax guidance was $33 million)”.

Two paragraphs later though, in bold type no less, management stated:

“We now expect net profit before tax to exceed $14.5 million in the second half of FY 2013, which represents growth of at least 16% compared to the first half of FY 2103.”

This statement almost reads like a profit upgrade! Investors weren’t so easily fooled, with the stock sold off 5.6%.

Fleetwood Corporation (ASX: FWD) which manufactures pre-fabricated accommodation and caravans also released an Investor Update that was light on numbers but was aimed at lowering expectations stating that:

“As a consequence of flat or weaker trading conditions in the group’s principal markets, profitability during the second half of the year has not met expectations.”

Fleetwood highlighted softening conditions in Karratha, WA and Gladstone, QLD which are centres for major mining projects, including Rio Tinto’s (ASX: RIO) iron ore mines and Santos’ (ASX: STO) GLNG project.

The third downgrade on Monday occurred at 6:45 pm when the board of furniture manufacturer and retailer Fantastic Furniture released a Trading Update alerting investors to weaker sales through March, April and May. Earnings are expected to now be in the range of $13.5 million to $15.5 million.

Foolish takeaway

The lead up to the end of the financial year is a time when companies are forced to come clean if market expectations are significantly out of line with what management expects the final results to be. The next few weeks will be critical in helping investors form expectations around the upcoming reporting season.

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