"This is going to be the most non-linear economic recovery in history," declares Benjamin Tal, senior economist at CIBC World Markets. "We're basically at the ninth inning of the strong part of this recovery. So we see corporate earnings slowing down notably…especially when it comes to commodities, where we don't see any upside, potentially, in the near future."
Considering the damage already wrought by the financial meltdown and ensuing economic slump, Canadian companies performed creditably last year, thanks in no small measure to aggressive cost-cutting, which helped shore up bottom lines. But it's worth noting that more than half the firms in our Top 1000-503, to be exact-stumbled into a pool of red ink, a dozen more than in 2008.
Along with a slew of resource companies, leading loss-makers included such starry names as Magna International, which plunged 839 places to No. 994; Astral Media, which fell all the way to No. 972 from 95; Cogeco Cable (at 986 from 118); and Corus Entertainment (928th, from 119th).
"The last couple of years, the less levered the company, the better," Arthur Heinmaa, managing partner with Toron Investment Management, says in explaining a key element in the profit picture. "Anybody facing big debt rollovers has a question mark over their profit outlook, unlike years gone by, when they got the benefit of the doubt." Prior to the recession, companies that borrowed as much money as they could relative to the invested capital on their balance sheets won big-the leverage magnified their profits. But over the past couple of years, the process has worked in reverse-all that debt magnified their losses, and their lenders turned off the taps. Running out of capital, Heinmaa observes wryly, "is a formidable barrier to making money."
That has rarely been a problem for Canada's big financial institutions. Spared the worst excesses of greed, arrogance, quant mania and regulatory blindness that inflicted so much damage on bank and insurance coffers in the U.S. and Europe, the major Canadian players have unwittingly become the poster child for responsible financial management. Along the way, they have reaped the full benefits of practically free money from the friendly folks at the Bank of Canada, healthy balance sheets, the surprisingly resilient Canadian housing market and higher consumer spending-and borrowing. All of this stands in sharp contrast to the contraction south of the border.
So it should come as no surprise that the financial heavyweights tightened their hold on the top of our 1000 list. Banks grabbed the first three places, led by the traditional head of the class, Royal Bank of Canada, which climbed back from third place a year earlier, despite a 15% drop in profit. Bank of Nova Scotia vaulted into second from ninth, with a 13% gain, and Toronto-Dominion Bank edged up to third from fifth, although earnings declined 19%. Even the two laggards among the Big Five chalked up impressive gains, thanks to their membership in the cozy oligopoly that dominates the domestic market. Bank of Montreal moved up to eighth from 13th, and CIBC, having weathered $10 billion in charges owing to investment banking missteps, posted the biggest turnaround of any company on the list, jumping 977 rungs to 21st. No wonder our overpraised industry stewards have become the toast of the financial world.
But the banks, too, face choppy waters ahead. "We see a decisive slowing in global sales volumes, coupled with the lagged effects from the supercharged Canadian dollar. And the Bank of Canada flattening the yield curve and lower home prices will crimp banking sector earnings," says David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, who has remained stubbornly bearish in his profit outlook.