Rosy profit picture in store for Canadian stocks: CIBC World Markets
TORONTO, May 23 /CNW/ - CIBC (CM: TSX; NYSE) - Earnings among TSX composite firms appear poised to smash earlier projections with resource stocks leading the charge, notes a new CIBC World Markets report. "A weaker U.S. economy and drag from the financial sector should help limit TSX earnings growth to a 10 per cent pace in the second quarter. However, that loss of momentum is likely to prove temporary," says Peter Buchanan, senior economist and strategist, in the latest TSX Earnings Watch report. "Traction in the TSX heavily weighted energy and resources sectors, along with a gradually improving economy stateside should see earnings growth snap back solidly to a near-30 per cent pace in the second half of the year." Mr. Buchanan says upgraded profit expectations suggest that Canadian equities, particularly recent winners like energy and material stocks, are likely to remain prime candidates for portfolio exposure over the next 12-18 months. "Analysts have been lifting their expectations for earnings growth north of the border, almost as aggressively as they have been wielding the knife stateside," adds Mr. Buchanan. "We now expect 2008 TSX earnings to rise by nearly 21 per cent to an index adjusted 988 in 2008" with a further advance of around 12 per cent to 1,107 in 2009. The projection exceeds 2007's 12 per cent increase and the 10 per cent rise anticipated at last count for the S&P 500 in 2008. The average annual rise in TSX profits over the course of the last 25 years is seven percent. Mr. Buchanan's forecast also notes that profit margins among TSX Composite firms "appear to be holding up quite well despite pressure from sources like the high dollar - better in fact than margins south of the border." The half-decade long rally and the market's current climb may invite comparisons with the dot.com rally, but Mr. Buchanan cautions against it. "The gains of (the dot.com) era were driven by 'concept' companies, whose financial allure far surpassed their ability to deliver. The market's recent run-up has, in contrast, been earnings-driven. While multiples have risen in step with stock prices, they are still not at overvalued levels. At just under 16, the TSX present forward multiple is still slightly on the cheap side, and nearly a third below its late 1990s' peak. "We remain equally dubious of the mantra that recent resource price gains are largely driven by speculative pressures, and are consequently unsustainable. The nearly US$4 trillion per year global oil market's vast size-almost twenty times the value of global commodity index investment - is of itself an obstacle to market-moving speculation. Inventories for oil and other commodities are also not ballooning, as might be expected if speculators were truly keeping prices radically above costs." Mr. Buchanan says strong growth ahead is being signaled on several fronts. These include the following:- Record highs on the CRB index of commodities indicate that overseas economies so far are weathering the housing-centric US slowdown better than many observers had expected. This bodes well for the TSX which has a nearly 50% resource cap weighting. - China's recent earthquake could lift commodity consumption in coming quarters, as the focus shifts to metal-intensive reconstruction. Petroleum consumption there should also rise in place of quake idled hydro and coal-fired plants. - Each dollar per barrel increase in the price of oil lifts earnings in the TSX oil and gas group by some $700-$800 million, or around three per cent, allowing for the longstanding correlation between oil and natural gas prices. - Rising global fertilizer demand, related to the global food crisis has lifted new potash contract prices to the US$1,000 per tonne level. Metallurgical coal prices have also risen sharply."Outpacing present consensus expectations, we expect those forces along with near-record prices for metals like copper to lift earnings in the energy sector by nearly 60 per cent and those in the mining and chemical dominated materials group, by over 80 per cent in 2008," says Mr. Buchanan. "Earnings in both the TSX energy and materials groups should also surpass trends stateside in 2008. TSX oil patch earnings are more levered to strong oil and gas prices, less to unfavourable gasoline margins, than the major US integrateds. TSX agricultural chemical firms are also less vulnerable to weaker growth than the S&P 500's heavily weighted stable of industrial chemical producers." He says earnings in the technology sector are also likely to show resilience, rising by 80% in 2008, although valuations there already price in a high level of growth. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/tsxewmay08.pdf CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.
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For further information: Peter Buchanan, Senior Economist, CIBC World Markets at (416) 594-7354; or Tom Wallis, Communications and Public Affairs at (416) 980-4048, email@example.com