PREVIEW-Bleak Canada first-quarter earnings outlook may mask market upside

Fri Apr 19, 2013 3:50pm BST

Quotes

   

* 0.2 percent profit rise seen for TSX composite index companies

* Rogers, CN Rail help kick off earnings season

* Profits at energy companies seen falling more than 7 percent

By John Tilak

TORONTO, April 19 (Reuters) - Corporate Canada looks set to post lackluster first-quarter results, but lowered expectations and a sharp selloff earlier this week may set the stage for near-term share price gains.

Earnings beats and any optimistic outlooks are now more likely to provide a boost when some of the biggest companies start reporting next week.

"It's the magic of low expectations," said CIBC World Markets senior economist Peter Buchanan. "Commodity markets aren't that great, and developments in the domestic economy haven't been wonderful, but the bar (for earnings) is not set very high."

Telecommunications company Rogers Communications Inc and Canadian National Railway, the country's largest rail carrier, will be among the first to kick off the season, reporting their first-quarter reports on Monday.

Analysts expect earnings from companies in the Toronto Stock Exchange's benchmark S&P/TSX composite index to show only a 0.2 percent rise from a year earlier, according to Thomson Reuters StarMine SmartEstimates.

"The forecasts seem to be more dire than the reality," said Serge Pepin, vice president of investment strategy at BMO Asset Management Canada. "We're going into the earnings season with this thought that things won't be as good."

TSX LAGS U.S. RALLY

Results that top the very modest expectations could prove to be a much-needed catalyst for languishing Canadian stocks, market strategists said. The TSX composite is down more than 3 percent so far this year, compared with a gain of more than 8 percent in the Standard & Poor's 500 Index.

Toronto stocks have lagged as earnings expectations have fallen about 5 percent for TSX components in the last three months, compared with a 3 percent decline for S&P 500 companies, data from StarMine showed.

The sector expected to show the biggest earnings decline is energy, which accounts for about 25 percent of the value of the Canadian index. Prices for the country's heavy crude oil slumped in the first three months of this year, and analysts now expect energy companies to report a profit drop of more than 7 percent.

However, Elvis Picardo, strategist and vice president of research at Global Securities in Vancouver, said most investors would pay more attention to companies' outlooks than to first-quarter results.

"That's usually the case, but more so this time," he said.

The most vulnerable segment in this regard may be gold producers, which have had a disastrous run this year. While first-quarter numbers will not reflect a recent dramatic selloff in gold, including a record one-day drop, it could start to show up in projections.

Still, the materials sector, home to gold companies, is trading at a huge discount to historical levels, said Craig Fehr, Canadian market strategist at Edward Jones in St. Louis.

"Valuations are attractive, and they are already pricing in expectations for some earnings disappointment," he said.

Indeed, the TSX composite index as a whole is trading about 13 times one-year forward earnings, according to Thomson Reuters data. That is also below historical levels.

BRIGHT SPOTS

The strongest growth in the quarter is likely to come from the healthcare sector, where earnings are expected to climb 15.5 percent, according to StarMine.

Another bright spot is the industrials space, which includes Canadian Pacific Railway and CN Rail. Analysts expect the sector to record profit growth of about 7 percent.

But the picture is more mixed for financial stocks, which make up almost a third of the index. Earnings are seen rising just 3.5 percent as the Canadian economy slows and housing market cools.

"Financials are not going to provide the same lift that they did in the fourth quarter, but that's more due to the weakness in the nonbanking sectors than in the banks themselves," said CIBC's Buchanan, who sees weakness in real estate investment trusts and insurers.

Longer-term, analysts said the Canadian market's prospects hinged on the global economy, which effectively sets the price for much of the country's resource exports.

But with an unsteady U.S. recovery, as well as mixed signals out of recession-hit Europe and higher-growth China, relief is far from certain.

"The beacon of hope," said Global's Picardo, "is that the global economy does a little better than expected and the TSX will do well." (Editing by Jeffrey Hodgson and Lisa Von Ahn)