October 22, 2013 / 4:06 PM / 4 years ago

Canadian third-quarter earnings expected to grow, but just barely

TORONTO (Reuters) - Canadian companies will likely see profit increase by only a slim amount this earnings season as the lackluster global economy holds back growth, but stronger gains in revenue could mean a better 2014 is in store.

Materials companies - one of the largest sectors on the country’s main stock index - are expected to perform the worst as the third quarter earnings season gets under way, with miners and other resource companies likely to be hit by weak commodity prices.

More broadly, companies are forecast to feel the effect of the less-than-stellar economic growth in the United States, Canada’s largest trading partner, as well as slower growth in China, a major consumer of commodities.

What that means for equities investors is that without stronger company results to drive shares higher, the Toronto stock market has likely already seen the bulk of its gains for 2013.

“It’s a weak earnings growth environment, period,” said Paul Taylor, investment strategist for BMO Harris Private Banking in Toronto.

The Canadian corporate reporting season, which typically lags its U.S. counterpart, will heat up this week. Releases from some big names in the resource sector include Goldcorp Inc (G.TO), Husky Energy Inc (HSE.TO) and Potash Corp (POT.TO).

Companies due to report on Tuesday include Canadian National Railway Co (CNR.TO), the country’s largest rail carrier, and contract electronics manufacturer Celestica Inc. (CLS.TO)

Analysts expect earnings from companies belonging to the Toronto Stock Exchange’s S&P/TSX composite index .GSPTSE to rise just 2.3 percent in the third quarter from a year earlier, according to Thomson Reuters StarMine SmartEstimates.

South of the border, where major companies have already begun reporting results, earnings for S&P 500 .SPX companies are expected to rise by 4.8 percent, according to the StarMine blended estimate, which includes companies that have already released results.

The TSX materials sector - which accounts for more than 10 percent of the index and includes gold and base metal miners - is forecast to be the Toronto Stock Exchange’s worst performer with a 32.1 percent decline in earnings.

The sector .GSPTTMT is down nearly 30 percent for the year so far, while gold miners .SPTTGD have lost more than 40 percent of their value and the base metal mining subindex .GSPTTMN has dropped about 20 percent.

The drag on overall earnings from the materials sector is expected to be partially offset by a more than 13 percent increase in earnings from energy companies. Rounding out the three most influential sectors on the stock market, financial companies’ earnings are seen gaining by 8.7 percent.

Between them, resource, energy and financial companies account for more than 70 percent of the value of the stock exchange.

REVVING UP REVENUE

In recent years, earnings seasons have been characterized by strong profit and weak revenue growth as companies boosted the bottom line through cost-cutting and other measures.

With revenue forecast to outpace earnings in the third quarter, that pattern could be changing, though the pace of growth is far from robust. Revenue is seen rising nearly 5 percent from last year, according to StarMine.

That revenue growth suggests companies are still increasing their core businesses, which bodes well for the earnings outlook further out.

“As we move forward, it’s going to be less about expense maneuvering and far more about what companies can do to drive overall sales growth,” said Craig Fehr, Canadian market strategist at Edward Jones in St. Louis, Missouri.

“The revenue growth we’re likely to get this quarter is still disappointing on a broader measure, but when you compare it to what we’ve seen in recent quarters, we’re likely to see a little bit of an upturn, which should be viewed as a positive.”

Fehr expects 2014 to look better, with earnings growth in the 4 to 7 percent range. An expected rebound in the resource sector should help, as the companies will have easier comparables to beat.

With the TSX composite index up more than 6 percent so far this year, few analysts expect it to gain much more. Indeed, a poll conducted earlier in the month found analysts expect the index to end the year at the 13,000 mark, which the TSX recently surpassed. <EPOLL/CA>

“We’re probably around where we end up for the end of the year,” said Taylor, the investment strategist for BMO Harris Private Banking. He expects the index to be up in the range of 13,500 to 14,000 around this time next year.

Editing by Jeffrey Hodgson and Matthew Lewis

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