By DAVID BERMAN
Monday, October 22, 2018
Analysts are expecting double-digit profit growth as Canadian companies prepare to report their third-quarter financial results over the next two weeks. Will strong corporate earnings help soothe a stock market rattled by trade tariffs and rising borrowing costs?
U.S. and Canadian stocks have been unusually volatile this month. The Dow Jones Industrial Average has moved more than 100 points for nine of the past 15 trading days, including an 830-point slide on Oct. 10.
Canada's S&P/TSX Composite Index is also turbulent. The index has fallen a total of 735 points since the end of September, leaving it down 4.5 per cent for the year.
The volatility comes as China and the United States continue to squabble over trade, raising concerns about the global economy.
"If global supply chains are disrupted, we would also expect higher inflation and even higher interest rates," Ian de Verteuil, an analyst at CIBC World Markets, said in a note.
Indeed, U.S. bond yields are near sevenyear highs. Investors are also looking with some apprehension at rising Italian bond yields, which are signalling concerns about government debt, and the foreign policy crisis that is developing between the United States and Saudi Arabia.
The hope is that strong corporate profits will help calm the stock market.
In the United States, companies have been reporting stellar third-quarter profits so far. According to I/B/E/S data from Refinitiv, the S&P 500 is on track to show profit growth of 22 per cent over last year; more than 78 per cent of companies have beaten analysts' expectations.
Now, TSX heavyweights such as Canadian National Railway Co., Barrick Gold Corp., Shopify Inc., Enbridge Inc., Fortis Inc., Air Canada and Suncor Inc. are set to report their quarterly results, giving investors a sense of whether Canadian corporate profits will measure up.
Canadian results aren't being juiced by recent U.S. tax cuts, so expectations are more muted. Nonetheless, Refinitiv estimates companies in the S&P/TSX Composite Index will report earnings growth of 10.4 per cent, year-over-year.
Analysts are particularly upbeat about energy stocks. Earnings growth is pegged at 21.4 per cent, year-overyear, which is the strongest estimate for any sector in the TSX.
The optimism comes at a difficult time for the sector, though. Export bottlenecks owing to tight pipeline capacity has been hammering the price of Western Canadian Select crude (WCS), a Canadian benchmark, which has weighed on energy stocks.
But some analysts believe large, diversified companies can ride out the challenging environment, which makes Suncor a key company to watch when it reports its results on Oct. 31. According to Bloomberg, analysts expect Suncor will report a 77-per-cent improvement in its year-over-year adjusted earnings.
"Given the company's status as a toptier operator, and most profitable Canadian refiner, we are perplexed as to the company's relative underperformance as of late and believe that current equity price levels present a strong entry point for investors," Nicholas Lupick, an analyst at AltaCorp Capital Inc., said in a note.
The outlook for industrials is not as bright. Over all, analysts expect the sector will see a 3.5-per-cent decline in earnings.
Analysts estimate Air Canada will report a profit of $2.13 a share, down from $3.34 a share last year, according to Bloomberg.
Investors, however, should keep in mind that the airline has exceeded analysts' estimates for nine straight quarters.
And analysts expect Air Canada should be able to overcome rising jet fuel prices thanks to high demand for tickets.
"We are seeing preliminary data pointing to strong traffic growth this quarter," Walter Spracklin, an analyst at RBC Dominion Securities Inc., said in a note. "We remain confident in Air Canada's ability to pass on higher fuel prices."
The railways are also benefiting from strong demand and pricing power. Canadian Pacific Railway Ltd. reported a 42-per-cent increase in its quarterly profit, per share, when it released its results last week, essentially shrugging off recent trade tensions between the United States and Canada.
CN will report its third-quarter results on Oct. 23. Analysts expect to see the railway report a profit of $1.47 a share, after adjustments, up 12 per cent from last year, according to Bloomberg - although what the railway says about expansion may be just as important as the bottom line.
"CN's progress on its infrastructure projects will be a key item to monitor in its third quarter results. Additional capacity is needed to grow volumes and ensure adequate network resiliency to avoid service issues this winter," Benoit Poirier, an analyst at Desjardins Securities, said in a note.