Canadian forecasts overdone: analysts

Firms may be in OK shape

Analysts have slashed their earnings outlooks for Canadian companies by the biggest margin since the recession, but some market watchers think the pessimism is overdone.

S&P/TSX forward earnings estimates have dropped by more than 16 per cent in the past three months, making it the biggest revision outside of a recession for Canadian stocks, note analysts at National Bank Financial.

“The profit downgrades may have been too aggressive,” said Stefane Marion and Matthieu Arseneau, economists at National Bank Financial, in a note to clients. “The analysts see energy earnings falling as much as in the global credit crisis of 2008-09, and little or no acceleration in other sectors’ earnings growth. We think this view is pessimistic.”

The biggest cuts have been in the energy and materials sectors, with analysts lowering their earnings outlooks for oil and gas companies by 67.1 per cent. That should come as no surprise given that oil prices have fallen by more than 50 per cent since last summer.

The cuts may seem gloomy, but market watchers note that lower earnings forecasts by analysts can be a potentially bullish development for investors.

Barry Schwartz, chief investment officer at Baskin Wealth Management in Toronto, said all the recent cuts leave the door open to earnings surprises this year.

“Investors will be surprised if we get better-thanexpected earnings growth because of the pessimism, so you can’t discount that,” he said.

At the same time, there are signs that Canadian companies may not be hurting as much as analysts are expecting.

Weak energy prices are the biggest culprit behind the lower earnings outlook, but Marion and Arseneau said the potential still exists for oil prices to rebound quicker than expected this year.

“On the energy front, an improving global economy will go far to support higher oil prices, the more so if U.S. dollar appreciation ebbs,” they said.

The two economists also note that the operating profits of companies outside the energy and financial sector have been surging in recent months.

Statistics Canada data show operating profits for companies outside those two sectors rose to a new record in the fourth quarter, with 12 of 16 industry groups showing gains. The National Bank economists expect those companies will continue to benefit from a number of favourable conditions this year.

“For sectors exposed to the U.S. economy, the current combination of a weak Canadian dollar and strong U.S. consumer confidence is the most favourable in two decades,” they said.