Rising prices for raw materials including copper and fertilizer will help companies led by Teck Resources Ltd. and Agrium Inc. post the first earnings gain in three quarters as the global economy picked up steam, strategists such as Robert Gorman said.
Companies in the Standard & Poor’s/TSX Composite Index probably increased profits about 2 percent in the fourth quarter of 2012, according to data compiled by Gorman, chief portfolio strategist with TD Waterhouse.
Gorman estimates companies in the Canadian benchmark equity gauge will post total earnings of $210 per share. This would be the first year-over-year increase since the first quarter and the highest fourth-quarter profit since 2010, when companies earned $213.17, according to Gorman.
Raw-material prices have climbed through the last months of 2012 and into 2013 as economic prospects brightened in China, suggesting the world’s second-largest economy is headed for a so-called soft landing, Gorman said.
“The most interesting area is in the resource side,” he said in a phone interview from Toronto. “Over the past quarter we’ve seen some base metals improve modestly and it may represent an inflection point. I suspect better sentiment with respect to global growth has helped us there and looking ahead will continue to as well.”
The Bloomberg Base Metals Spot Price Commodity Index, which captures pricing for metals including aluminum, copper and nickel, has climbed 8 percent since falling to a fourth-quarter low on Nov. 5. The S&P/TSX gained 4 percent in 2012, underperforming every developed market except Spain and Portugal. The index rose 14.65 points or 0.1 percent to 12,830.56 today.
Paul Taylor, chief investment officer with BMO Harris Private Banking, estimates earnings growth of 3 percent to 5 percent, which he considers to be modest. Investors will be especially interested in companies’ guidance for 2013.
“We won’t see big blowout numbers from anywhere,” Taylor said from Toronto. His firm manages about C$18 billion ($17.89 billion) in Canada. “There’s a sense what we saw in the third and fourth quarters was the mid-cycle slowdown.”
The rebound in earnings for the S&P/TSX comes after two quarters of year-over-year profit declines of 6.9 percent and 0.4 percent respectively, Gorman at TD said.
Canadian corporate earnings have lagged the U.S. Of the 155 companies in the S&P 500 that reported as of yesterday, 75 percent beat analysts’ earnings estimates. The S&P 500 has reported 12 straight quarters of increasing year-over-year profits, data collected by Bloomberg show.
China, the world’s largest consumer of copper, reported its economy expanded 7.9 percent in the fourth quarter, snapping seven quarters of slowing growth. The country selected a new president, Xi Jinping, in November.
Since falling to a fourth-quarter low on Nov. 7, the price of copper in New York has gained 6.1 percent through yesterday’s close. China consumed 7.9 million metric tons of refined copper products in 2011, accounting for 40 percent of global demand, and is expected to use 9.7 million metric tons by 2014, according to a report from the U.S. International Trade Commission.
Teck Resources, Canada’s largest diversified miner, produces copper, zinc, molybdenum and metallurgical coal, an ingredient in making steel. Shares of the Vancouver-based company gained 25 percent during the fourth quarter.
“Teck is the classic example on the resource side” of a company that will benefit from Chinese growth, Gorman said.
Teck is scheduled to report earnings on Feb. 7, with an average estimate for adjusted earnings of 48 Canadian cents a share, according to 22 analysts surveyed by Bloomberg.
Agrium, which has the highest revenue within the Bloomberg Industries Fertilizer Index, raised its fourth-quarter earnings guidance on Jan. 24 to “slightly above” $2 a diluted share. The company had previously announced earnings guidance of $1.50 to $1.90. A Bloomberg survey of 23 analysts projects adjusted earnings of $1.82.
Agrium said strong agricultural-chemical sales in the North American fall season and higher long-term crop prices boosted its profit. Shares of the Calgary-based company closed at a record high on Jan. 25 of C$115.36, a gain of 42 percent over the past 12 months.
“We’re looking back at a great fall for chemicals and seeds, and looking forward to hopefully a strong resurgence in fertilizers,” said Jason Miner, a senior chemicals analyst with Bloomberg Industries in Skillman, New Jersey.
The UBS Bloomberg CMCI Agriculture Price Index, which captures a basket of futures contracts for products including wheat, corn and soybeans, rose 1.9 percent in 2012, continuing a long-term trend of gains since 2005, Miner said.
“Inventories are historically tight, and as long as you’re in a tight inventory environment you’ll have a lot of support for grain prices,” Miner said.
Agrium reports on Feb. 22.
Craig Fehr, Canadian market strategist with Edward Jones & Co. in St. Louis, expects slow to no earnings growth for the fourth quarter with results hampered by the energy and materials industries.
“There was a drag on companies in the fourth quarter due to the fiscal cliff,” he said, referring to December Congressional budget talks that narrowly avoided more than $600 billion in automatic tax increases and spending cuts that would have sent the U.S. economy into recession. “One quarter is too short a time period to see a meaningful change. We do expect better earnings in 2013. Global growth will stabilize a bit.”
Earnings among Canadian oil and gas producers have been hampered in 2012, due in part to the price spread between the benchmark, West Texas Intermediate, and Western Canadian Select crude. The discount for Canadian crude widened to a record $42.50 in December as pipeline bottlenecks impeded shipments to the highest-priced markets from Alberta to the U.S.
Profit at Calgary-based Canadian Natural Resources Ltd., the third-largest producer of oil and natural gas in Canada by market value, have missed analysts’ estimates by more than 35 percent in two of the past three quarters. The Calgary-based company is reporting on March 8 and is expected to earn 38 Canadian cents a share, adjusted for certain items, according to the average in a Bloomberg survey of 15 analysts. That compares with 88 cents in the fourth quarter of 2011.
Financial companies, dominated by Canada’s five largest banks, may struggle to match the better-than-projected results of the past few quarters as Canadian consumers begin to pare back from record-high debt levels amid a slowing housing market, Fehr said. The financial industry accounts for 33 percent of the S&P/TSX.
Royal Bank of Canada, the nation’s largest lender, bested expectations in four of the past five quarters and the stock soared 15 percent in 2012. Toronto-Dominion Bank, the second-largest lender, has exceeded analysts’ expectations for six straight quarters and rose 9.8 percent in 2012.
“The appetite for additional mortgages will slow,” Fehr said.
Moody’s Investors Service yesterday cut its credit ratings for six Canadian banks, including TD, Scotiabank, Bank of Montreal and Canadian Imperial Bank of Commerce due to high home prices and consumer debt.
Kien Lim, an associate equity strategist with RBC Dominion Securities in Toronto, said he expects about 46 percent of Canadian companies to beat earnings estimates, which is in line with historic averages going back to 2005, based on RBC data.
BMO’s Taylor expects cyclical stocks such as Westjet Airlines Ltd. to post improving earnings in the fourth quarter.
“Westjet, with the Canadian business and vacation traveler coming back, that’s a good example of a company benefiting from a better mood,” he said. “Confidence was in short supply at the consumer, corporate and investor level from 2010 to 2012. As we turn the corner to 2013 there is certainly more optimism.”