By DAVID BERMAN
Monday, July 16, 2018
Escalating trade wars, rising interest rates, higher commodity prices, record-high stock prices: There is a lot for investors to chew on as the Canadian second-quarter earnings season kicks off this week.
Expectations are relatively upbeat. Analysts expect that companies within the S&P/TSX composite index will report profit growth of more than 10 per cent over last year, led by stellar results from energy producers, miners, consumer stocks and technology.
But an open question is whether earnings will matter if investors focus instead on what executives say about the impact from tariffs and negotiations over the North American free-trade agreement.
"In our opinion, much of the damage has been done," Ian de Verteuil, a strategist at CIBC World Markets, said in a note.
"Even a renegotiated NAFTA will not provide business with confidence that Canada has unfettered, low-risk access to the U.S. market. We still like Canadian energy stocks, and companies with leverage to a robust U.S. market."
Clearly, there's a lot at stake here if the rebound in the Canadian stock market is going to continue. The S&P/TSX Composite Index has risen more than 10 per cent from its lows in February, and has been hitting record highs this month.
Quarterly results this week from a handful of big names, including West Fraser Timber Co. Ltd., Rogers Communications Inc., Canadian Pacific Railway Ltd. and Encana Corp., will set the tone.
And they'll set things up for next week, when Canadian National Railway Co., Barrick Gold Corp., Loblaw Cos. Ltd., Suncor Energy Inc. and Air Canada are scheduled to release their second-quarter results.
According to Thomson Reuters, analysts are currently forecasting that overall TSX profits will rise 10.8 per cent, year-over-year. Admittedly, that marks the slowest growth in at least four quarters, and a noticeable slowdown from profit growth of 15.1 per cent in the first quarter. It is also nearly half the pace of profit growth from companies within the S&P 500, whose profits are expected to increase 20.9 per cent over last year.
Nonetheless, achieving double-digit growth nine years into a bull market is nothing to complain about, and could give investors something to cheer amid simmering concerns over trade tariffs and tighter monetary policy.
Energy will be a key sector to keep an eye on, given that it has a large 20-per-cent weighting within the composite index and has been performing well. The sector has rallied nearly 20 per cent since early April, driven by rising oil prices, even as a power outage at Suncor-controlled Syncrude Canada Ltd. has hampered output.
Thomson Reuters expects that energy firms will report a 17.2-percent increase in their quarterly profits, and this level of optimism can be seen elsewhere, too, marking a sizable shift from just a year ago, when the price of crude oil languished below US$50 a barrel (it's now above US$70 a barrel).
"In our view, energy producers remain in the early stages of a multiyear bull market underpinned by oil supply constraints and limited OPEC usable spare capacity," Greg Pardy, an analyst at RBC Dominion Securities, said in a recent note.
At the end of June, Mr. Pardy raised his target prices and cashflow expectations for 10 Canadian energy companies, including Suncor and Encana. A number of other analysts bumped up their targets last week.
A consensus of analysts, according to Bloomberg, expect Suncor will report a profit of 70 cents a share in the second quarter, or 67 cents after adjustments - up from 12 cents a share last year.
Lumber producer West Fraser Timber has been in the grip of U.S. trade tariffs for more than a year, but its shares have rallied over this period, and are up about 18 per cent this year alone. Tariffs don't hurt when U.S. lumber demand remains strong amid a booming housing market.
Analysts expect West Fraser will report a profit of $3.03 a share, up from $2.23 last year.
A brief labour strike at Canadian Pacific may take a small bite out of the railway's second-quarter profit. RBC Dominion Securities analyst Walter Spracklin trimmed his forecast to $3.10 a share - in line with his peers down from $3.27 previously. But compared with last year, that's up about 12 per cent.