* Q1 earnings of blue-chip stocks seen rising 14.4 pct
* Materials earnings expected to grow 56 pct
* Investors cautious on rising input costs
By Solarina Ho
TORONTO, April 17 Canadian companies basking in
the glow of soaring commodity prices are expected to deliver
double-digit profit gains, though many investors enter the
earnings season wary about rising costs.
Canada's first-quarter earnings season kicks off in force
this week, with soaring bullion, crude oil and copper prices
expected to feed through to the bottom line of the market's
many resource firms.
But investors will also be scanning earnings statements for
signs those rising commodity prices are feeding through to
higher costs and eroding margins. Such a trend could further
derail a multi-year bull rally that has started to stumble in
"The Canadian markets show pretty good sequential growth in
earnings and certain good year-over-year growth. I'm not
expecting any missteps," said Barry Schwartz, a portfolio
manager at Baskin Financial Services.
Yet Schwartz warned many companies are being hit by rising
energy and commodity prices and wage pressures that are "going
to cause profit margins to weaken unless companies are able to
pass on those rising input costs to the consumers."
Blue-chip companies on the Toronto Stock Exchange's S&P/TSX
60 index .TSE60 are expected to report first-quarter earnings
growth of 14.4 percent compared with last year, according to
Thomson Reuters StarMine SmartEstimates, with the index trading
at just under 11 times forward 12-month earnings.
The materials sector, which includes mining stocks and
makes up roughly a quarter the overall TSX index, is projected
to have the highest growth rate, coming in at about 56 percent
higher than last year's earnings.
Oil and gas companies, which make up another quarter of the
index, are expected to report growth of just under 13 percent.
Both bullion and U.S. crude prices have skyrocketed roughly
30 percent in the last year, while copper prices have jumped
about 20 percent. Solid Canadian economic growth prospects are
also seen supporting results. [ID:nSLAEFE7SU]
CONSUMER STOCKS FACE PRESSURE
Yet the boom has also increased demand for labor and
equipment used to produce those commodities, which could boost
expenses. And the situation could be even tougher for the
companies purchasing those commodities.
"If there are companies showing that margins are
compressing because they can't pass along these higher input
costs ... there's going to be some caution and there could be
downward revisions," said Anil Tahiliani, a portfolio manager
at McLean & Partners Wealth Management.
Tim Hortons THI.TO recently hiked the price of its coffee
and baked goods as commodity costs have risen. George Weston
(WN.TO), the company behind Weston Foods and grocer Loblaw
(L.TO), also boosted prices to cover rising costs.
Earnings growth for consumer staples companies is projected
at just over 6 percent.
Consumer discretionary companies meanwhile, could also feel
the pinch of higher costs, as consumers cut back on spending.
Some companies have softened their outlook, indicating
hurdles ahead. Telecom companies, like Rogers Communications
(RCIb.TO) for example, are facing cut-throat competition from
upstarts like Wind Mobile and Public Mobile who offer low-cost
wireless alternatives. [ID:nSGE71F06W]
Some of these concerns have weighed on the Toronto Stock
Exchange's S&P/TSX composite index .GSPTSE, which finished
0.16 percent lower at 13,799.12 on Friday. It had touched
14,270.53 earlier this month, its highest level since late
2008. It has since stumbled roughly 3 percent.
"We had a huge run, and after a huge run, you have to
expect profit-taking and a pullback," said Odlum Brown's Murray
Leith, a director of research.
While he expects the recovery to continue, he does think
the stock market gains of recent years are unlikely to be
repeated. The composite jumped nearly 31 percent in 2009 and
14.4 percent last year.
A Reuters poll conducted last month showed analysts expect
the index to end 2011 at 14,500, suggesting a gain of 8 percent
this year. [ID:nN22164709] EQUITYPOLL1
Ron Meisels, a technical analyst and president of Phases &
Cycles in Montreal, said there's a chance the TSX could correct
to around the 13,250 level. That said, he noted that the
index's 200-day moving average is still rising and points to
money flowing into the market.
"It suggests we're still healthy, we're still in a bull
market ... Once this correction is over -- or during this
correction -- people should look for buying opportunities,"
"People should continue to look for strong stocks in the
energy and materials and gold sectors."
(Editing by Jeffrey Hodgson and Rob Wilson)