RPT-BAY STREET-Canadian companies feel the world's pain

Mon Jan 21, 2013 7:14am EST

* As on Wall Street, soft Q4 earnings seen for Canada
    * TSX company profits are forecast to rise only 0.3 pct y/y
    * TSX earnings for 2012 seen slipping 1.4 percent
    * Biggest weakness expected in energy, mining stocks
    * Banks also seen losing steam

    By Claire Sibonney
    TORONTO, Jan 20 (Reuters) - Financial results from Canada's
biggest companies are likely to disappoint investors in the
coming weeks with weak global growth and mixed commodity prices
expected to have pummeled the quarterly earnings of oil
companies and miners.
    Energy and materials shares make up about half of the value
of the Toronto Stock Exchange's benchmark S&P/TSX composite
index and include such blue chips as Suncor Energy Inc
, Teck Resources Ltd and Goldcorp Inc.
    All three companies are expected to post year-on-year drops
in fourth-quarter earnings per share when they report in
February.
    Overall, companies in the TSX are expected to report
quarterly earnings growth of only 0.3 percent from a year
earlier, according to Thomson Reuters StarMine SmartEstimates.
Analysts see full-year 2012 earnings dropping 1.4 percent, but
they expect profits to climb around 9 percent next year.
     "This earnings season might be a mild disappointment in
some cases, or a mild disappointment overall," said George
Vasic, chief economist and strategist at UBS Securities Canada.
    Vasic noted that TSX valuations are higher than they were
last year, increasing the risk that stock prices could fall on
negative news. He said investors will be especially sensitive to
earnings outlooks, and that capital spending plans will be
scrutinized.
    In the United States, where the fourth-quarter earnings
season is already well underway, shares of such top financials
as Bank of America and Citigroup have fallen on
disappointing results.
    By the time reporting is done, S&P 500 fourth-quarter
earnings are expected to have increased just 2.5 percent,
according to Thomson Reuters data, but that is still far better
than what is expected from TSX companies.
    Philip Petursson, a managing director of the portfolio
advisory group at Manulife Asset Management, said the market has
already priced some negative news into Canadian share prices.
    Even so, he said, "you can have a couple of shocks that will
take things a little bit lower".
    
    TSX TO LAG S&P 500 ONCE AGAIN?
    With the global economy struggling because of political
gridlock in Washington, Europe's debt crisis, and a slowdown in
Asia toward the end of last year, it's little wonder that
growth-sensitive sectors such as energy and materials were the
worst performers on the Canadian market in 2012.
    Toronto's S&P/TSX composite put in a much weaker performance
last year than the more-diversified S&P 500 index. The TSX was
up 4 percent in 2012, while the S&P gained 13.4 percent.
    Many analysts see the trend extending into 2013. The TSX is
expected to rise about 4.5 percent in 2013, while the S&P is
seen doubling that at 9 percent, according to Reuters polls.
 
 
     Global economic weakness has translated into weak commodity
prices, particularly for energy. As a result, oil and gas
producers are expected to show an earnings decline of 18 percent
in the fourth quarter, according to Thomson Reuters data.
    But Canadian-specific issues are hitting domestic producers
as well. With limited capacity to move Canadian crude oil
abroad, crude pumped out of Alberta and other provinces sells at
a steep discount to international prices, especially for heavier
grades.  
    "Commodity prices and oil we think are going to be more flat
over the next year or so and that's going to be a tremendous
headwind for the energy sector," said Shailesh Kshatriya, senior
investment analyst at Russell Investments Canada.
    
    MINERS DRAG, FINANCIALS UNDERWHELM
    The TSX index's materials sector, home to miners of potash
and industrial and precious metals, is expected to have had
profit growth of just 1.3 percent in the fourth quarter.
    But commodity prices are not entirely to blame for this. The
price of spot gold, which traded around $1,686.10 an
ounce on Friday, is up from a year earlier. Yet shares of
Canadian precious metal miners lost 16 percent last year.
    "As these companies find more gold, it's getting more and
more costly to pull it out and get it out of the ground," said
Allan Small, senior investment adviser at DundeeWealth, noting
that a similar problem for oil companies has caused their stocks
to lag the commodity prices.
    Even shares of Canada's still-healthy banks, which don't
start reporting results until late February, could start to lag
after performing relatively well since the 2008-09 global
recession.
    "We're looking for low single-digit kind of gains for the
reasons that pretty much everybody knows - the slowdown in the
housing market and then the mortgages," said John Kinsey,
portfolio manager at Caldwell Securities. 
    Analysts expect banks' loan losses could increase because
Canadian household debt is near record highs. 
    "The saving grace I guess is the dividends," he added. All
of Canada's six biggest banks trade with dividend yields of more
than 3 percent, a level that is expected to support their stock
prices even if the earnings outlook darkens.
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