Larry Downing
Everyone has known for some time that fourth-quarter corporate earnings were going to blow the doors off the recession-depressed numbers of a year earlier. The more pressing question has been whether they could live up to the market's sky-high expectations.
And the answer so far - for Canadian stocks at least - has been a disappointing one.
With more than one-quarter of the S&P/TSX composite index having reported, fourth-quarter profits remain on track for a gain of more than 35 per cent from the year-earlier levels, according to data compiled by National Bank Financial.
However, as BMO Nesbitt Burns points out, the Canadian results - unlike their U.S. counterparts - are having considerable trouble meeting the Street's expectations.
BEATING THE STREET - BARELY
BMO economist Robert Kavcic said that 59 per cent of S&P/TSX companies have beaten analysts' consensus fourth-quarter profit estimates - a far cry from the 76 per cent of S&P 500 companies that have beaten. (Historically over the past decade, about two-thirds of actual profits typically beat the consensus, as companies prefer to under-promise and over-deliver.)
Even more worrisome is the fact that on the revenue front - where the Street has been looking for a strong recovery, after cost-cutting drove much of the earlier stages of the earnings turnaround - more than half of the Canadian companies have fallen short of analysts' expectations.
SEEING STARS - AND STRIPES
Despite the relatively weak Canadian numbers, the performance this quarter relative to expectations is actually
better than it has been since the earnings recovery began. It could be that analysts' expectations for Canadian stocks have been coloured by what has been happening in the U.S. - even though the Canadian profit picture has some key differences.
"Canadian profit margins appear to be turning up in Canada, but not nearly to the extent seen in the U.S.," he said.
That's because U.S. businesses were hit much harder by the recession and credit crunch than their Canadian counterparts - and, as a result, cut costs much deeper. Now, all that cost-cutting is super-charging the U.S. rebound.
"The cost-cutting rampage south of the border has been hard to match," he wrote.
Meanwhile, the strong Canadian dollar has hurt Canada's revenue rebound, especially for commodity producers, who make up almost half of the S&P/TSX composite.
"While commodity prices … rose 3.6 per cent [year over year]in the [fourth] quarter, they fell more than 9 per cent when converted to Canadian-dollar terms," Mr. Kavcic said.
David Parkinson