Any way you slice it, profit growth and positive earnings surprises were disappointing among TSX stocks in the second quarter.
Sales and earnings growth were negative overall. Less than half of companies reported better-than-expected sales and earnings results. This earnings season was worse than the previous quarter in terms of sales growth, particularly for financial stocks. And sectors generally didn't have much reaction to the results; rather, stock rallies or dips were confined to the individual companies reporting the results.
A close examination of the second-quarter illustrates why the S&P/TSX composite index has delivered lacklustre year-to-date returns.
Top Line Growth
Sales growth was spotty across many sectors and rather difficult to find. Sales, on average, declined 15 per cent year-over-year, according to Bloomberg. Double-digit sales declines were seen in the financials and energy sectors.
Within the energy sector, it was a broad-based disappointment – although that was not unexpected. Inter Pipeline and TransCanada bucked this trend and delivered year-over-year growth, and each stock rallied after reporting quarterly financial results. Within the financials sector, approximately 60 per cent of companies reported positive sales growth. However, many companies reported single-digit growth, and many of those reporting negative growth saw sizeable double-digit year-over-year declines.
On the positive side, the health-care sector delivered strong sales growth driven by solid gains from Valeant Pharmaceuticals. Valeant reported revenues growth of 34 per cent year-over-year. Of that, same-store sales organic growth was 19 per cent. Concordia Healthcare reported revenue growth of 198 per cent, rising to $77.5-million (U.S.) from $26.1-million in the previous year. Leadership was also evident in the telecom sector, with Telus, Rogers and BCE all reporting top-line growth.
Bottom Line Growth
Earnings, on average, declined 31 per cent year-over-year. The energy and materials sectors experienced the largest slowdown in growth. But energy companies in the oil and gas storage and transportation sub-sector did deliver earnings growth. Inter Pipeline's funds from operations per share increased over 30 per cent year-over-year to 54 cents. TransCanada's earnings per share expanded 19 per cent to 56 cents from 47 cents. In the Materials sectors, Agrium reported solid earnings growth, but the stock price declined over two per cent in the day after earnings, as management narrowed its 2015 earnings per share guidance to $7 to $7.50 (U.S.), from $7.00 to $8.25 (U.S.) The revised outlook overshadowed the positive earnings growth, as well as earnings that beat analysts' estimates.
To find earnings growth, investors needed to look at consumer stocks, health-care stocks, telecom stocks, technology stocks and industrials stocks, and avoid resource stocks.
Top Line Surprises
While growth is important to see, a positive earnings surprise is generally the key catalyst for a stock. Only 39 per cent of companies reported positive sales surprises. Furthermore, sales surprises were generally low or negative across all the sectors. Again, companies reporting top line results significantly above the consensus forecasts were hard to find. For instance, in the telecom sector, Rogers reported a positive sales surprise. However, Telus and BCE reported results relatively in-line with expectations.
Bottom Line Surprises
Less than half of companies in the index reported positive earnings surprises. Overall, selective consumer, health care, telecom and industrials stocks delivered positive earnings surprises. Resource stocks continued to disappoint, as too did several utilities stocks as ATCO, TransAlta, and Capital Power.
The Bottom Line
This earnings season season didn't provide much reason for investors to be optimistic. Now that the second-quarter results are largely behind us, investors' focus will shift to economic drivers and to Sept. 17, when the U.S. Federal Reserve announces its policy decision.