Other prognosticators doubt Canada’s corporate hierarchy is facing a radical transformation, or any transformation at all, for that matter. “Outside of a change in foreign ownership policies regarding our resources or regulated industries, I suspect the answer is not a lot [of change],” says Andrew McCreath, president of Forge First Asset Management in Toronto. “We haven’t had a single government that is willing to identify and implement any industrial policy that facilitates a movement away from Canada being a hewer of wood and a drawer of water.”
And for now, there is no doubt that the lions of the old economy are still roaring, even as anemic growth, faltering world commodity prices, a slowdown in China and a deepening slump in Europe take a steep toll.
Analysts underestimated the ability of companies in a wide range of industries to shrug off the radioactive effects of the worldwide mess that began in 2008. But a sputtering global economy finally caught up to a large swath of Corporate Canada last year. Nearly 46% of the companies on our list posted losses, and many others booked reduced profit—dramatically reduced in some key parts of the resource world. The picture was a bit brighter when expanded to cover all private as well as public companies, including those in foreign hands. Their combined profit fell 8% before taxes. “The fact profits declined is not a shock,” says Douglas Porter, chief economist with BMO Capital Markets. “It’s the magnitude of the decline that’s a bit surprising.”
The results highlight a wide divide last year between companies whose strength lies in the domestic economy and the resource producers and other exporters whose fortunes are tied to a revival of global growth. The outlook for this year is slightly better, with oil prices and natural gas prices up from their profit-crushing lows of 2012. But as Porter observes, “the big macro themes are not that dramatically different. The big picture is that since the spring of 2011, commodity prices have gone sideways or down. The broader Canadian commodity price index is still tracking below the levels of a year ago. So I wouldn’t anticipate a big bounce this year.”
Of the 543 resource-related companies on our list, 344 finished the year bathed in red ink. One-third of those embattled loss-makers deal in precious metals for a living.
But perhaps the biggest surprise is that the raft of global and domestic problems hasn’t exacted an even bigger toll. “Corporate profits in general have done fairly well, despite a recovery [in Canada] that hasn’t been that dramatically strong,” says Avery Shenfeld, chief economist with CIBC World Markets. “That’s been true in the U.S. as well. But without a big run-up in commodity prices to help out this year, it’s going to be tough to eke out much in terms of a year-over-year gain.”
Solving the profit puzzle for many companies has involved slashing debt and operating costs, boosting productivity and keeping the cash flowing to the bottom line, even when revenues are stalling or sliding. An overly strong loonie hasn’t helped, although the hit to export earnings has been partly offset by the lower cost of imported technology and machinery. Still, the buffer effect on earnings from a lower Canadian dollar, usually seen whenever commodity prices fall, just hasn’t been there this time around. “The surprise has really been that Canada has not suffered as much as you would have thought from the high Canadian dollar,” Heinmaa says. But the bigger puzzle—one raised last year by then Bank of Canada governor Mark Carney in his attack on “dead money”—is why those companies that have managed to reap impressive profits have been hoarding cash, rather than investing more in future growth. Could it be that executives still vividly recall what happened in 2008 when capital markets and access to short-term funding seized up? Heinmaa thinks so. “It isn’t an issue of [lack of] confidence in the government. It’s a degree of self-insurance.”
The many companies saddled with heavy losses are more concerned with retrenchment than expansion. The biggest losers this time around include some of the starriest names in the Canadian galaxy: once-glittering tech darling Research In Motion, whose closely followed travails caused it to plunge all the way to 994th from 29th; natural gas power Encana, which had the dubious distinction of finishing dead last (lousy prices for your main product and a $2.79-billion U.S. loss will do that to you), after holding down 143rd place the year before; and debt-laden Barrick Gold (don’t mention Chile or gold short-sellers in their presence), which plummeted all the way to 995th from fourth the previous year. Fellow producer Kinross Gold managed the tricky feat of finishing 999th two years in a row. Yellow Media vacated the cellar, but not by much, finishing 997th. On a less gloomy note, it managed to eke out a profit in its most recent quarter, even as revenue declined.