CN RailAndrew Vaughan
Today's top stories from Report on Business:
CN sees better times
Canadian National Railway Co. posted a 21-per-cent boost in first-quarter profit this evening, and raised its outlook for the year. The company, seen as a barometer of the broader economy, said it earned $511-million or $1.08 a share as revenue jumped 6 per cent to almost $2-billion. Its profit compared to $424-million or 90 cents a share a year earlier. Operating income, the railway said, increased 25 per cent in the quarter to $603-million.
"CN's favourable first-quarter results and assumption of a strong economic recovery going forward have led the company to revise its 2010 earnings esimate upward, even though CN faces the prospect of a higher than anticipated Canadian dollar," the company said in a statement.
U.S. earnings point to rebound
Earnings today from two major U.S. companies - Caterpillar Inc. and Whirpool Corp. - also add weight to data showing the economy rebounding. Caterpillar said orders have jumped markedly, it boosted its outlook for the year and unveiled plans to boost production. "Economic conditions are definitely improving, partciuarly in the world's developing economies," said chief executive Jim Owens.
Whirlpool, the biggest appliance manufacturer in the world, also boosted its projection as its first-quarter profit more than doubled.
Related: Signs of U.S. recovery are mounting
Should analysts be more upbeat?
Investors in Canadian stocks are beginning to reap the rewards of the earnings recovery.
As shareholders prepare for the first truly hectic week of the quarterly reporting season in Canada, CIBC World Markets notes that estimates point to a 45-per-cent gain among TSX companies, given stronger economic growth, firmer resource prices and the fact that earnings are coming off weak levels of a year ago. That would mark the fastest year-over-year rise since the first quarter of 2003.
"Although two sectors - materials and financials - will account for three quarters of the year-to-year increase in dollar earnings, nine of 10 sectors should show improvement," CIBC's Peter Buchanan and Meny Grauman said in a research note. "Nearly a fifth of all dividend announcements since the start of the year have provided enriched payouts compared to 11 per cent in the fourth quarter, and share buybacks are also rising - both signs that shareholders are starting to benefit from the earnings recovery."
Mr. Buchanan and Mr. Grauman also pointed out that the better-than-expected results among S&P 500 companies hasn't bolstered the confidence of some analysts watching Canadian earnings. "Although TSX [first-quarter]earnings are expected to be the strongest in seven years, recently as many analysts have cut their estimates as have raised them," they said. "All this suggests that current [earnings-per-share]projections for the TSX composite are on the conservative side, leaving some potential for upside surprises as we head into a heavy week for earnings announcements."
Related: Dollar's rise a good thing for TSX earnings
Besides CN, several major companies report this week, including Husky Energy Inc., TransAlta Corp., Barrick Gold Corp., Canadian Pacific Railway Ltd., CGI Group Inc., Jean Coutu Group Inc., Rogers Communications Inc., Shoppers Drug Mart Corp., Cenovus Energy Inc., Imperial Oil Ltd., Potash Corp. of Saskatchewan and TransCanada Corp.
UBS Securities Canada projects a sharp jump in first-quarter profit from CN today and expects "management optimism regarding the improving outlook and rebound in volumes will be somewhat tempered by the unfavourable impact of the strengthening [Canadian dollar]and continued long-term economic uncertainty."
It will be interesting to see whether Shoppers Drug Mart, which reports Wednesday, will give any update on the impact of Ontario's proposed drug reforms. It has already said it is scaling back the number of its 24-hour and open-til-midnight stores, closing some pharmacy sections early and cutting back on some free services. Drug stores across the province estimate the reforms will cost $1-billion in revenue next year.
One of the more interesting reports may come Thursday from Potash Corp., which last month raised its first-quarter profit projection to between $1.30 (U.S.) and $1.50 a share, a sharp jump from its previous estimate of 70 cents to $1.
Related: Potash Corp.'s Bill Doyle dims hopes for new mines
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Greece crisis deepens
The pressure on Greece and the 16-nation euro currency union heightened today despite the government's decision last week to ask the EU and the International Monetary Fund for a bailout that could run to €45-billion. The euro sank again and the yield on Greece's 10-year government bonds surged to well above 9 per cent, driving government borrowing costs to obscene levels for a country drowning in debt and looking to borrow even more. Fears over Greece also spread to other debt-burdened countries such as Portugal, Spain and Ireland.
Markets are still waiting for a timeline on aid to Greece, fearing help may not come in time to head off a credit default. Investors are closely watching Germany, which is heading into regional elections as sentiment runs high against a bailout for Greece. German Chancellor Angela Merkel said today Germany would kick in aid but it must agree to a new round of austerity cuts.
Greece's Finance Minister George Papanconstantinou reminded investors today that his government must raise about €9-billion by May 19, but current rates "are completely prohibitive for a debt sale on the markets."
"It is extraordinary that a euro zone member country finds itself a mere three weeks away from a potential default, with a clear possibility that uncertainty will only be resolved at the last minute," UniCredit MIB chief economist Marco Annunziata told the Reuters news agency.
Added Scotia Capital currency strategist Camilla Sutton: "The Greek crisis is being played out in many ways, but there are two notably important market reactions for [foreign exchange]players. The first is that contagion fears are pushing up credit risk for the weaker members and therefore driving yields higher ... The second important reaction is that there is fear that current issues will dampen growth and inflation and will therefore result with looser monetary policy for longer, combined with a surge of risk aversion-driven cash seeking 'safer' bond markets than the weaker EU members. Accordingly, there is downward pressure on bond yields in Germany, France, Norway, Switzerland, Sweden, Finland and Denmark."
Related: Tough talk fuels doubts over Greek rescue plan
Audio: Eric Reguly on what the party's over for Greece
Mortgage rates rising again
Mortgage rates are increasing again. Royal Bank of Canada today hiked rates for the third time in recent weeks, bringing the level on a five-year closed mortgage to 6.25 per cent, up from 6.10 per cent. Banks can adjust the rate they charge, so customers could still pay a lower rate than that posted. Read the story
Luxury home sales rebound
Sales of luxury homes in Canada have rebounded to record heights, driven by the economic recovery, immigration and foreign investment, a new study says. Prices have also surged as sales rose, the first-quarter study by ReMax Canada said. "With the exception of Toronto, buyers could be relatively particular and take their time in making decisions as balanced conditions characterized markets across the board," the company said. "Given adequate supply, prices are likely to hold steady or experience modest increases in the majority of markets in 2010." Read the story
Ottawa releases new forecasts
New private forecasts released by the Finance Department today project the economy will grow faster than expected this year before growth slows going forward. The forecasts of 15 economists also indicate Canada's unemployment rate will continue to decline, coming in far short of the gloomy projects of 10 per cent among some observers several months ago.
The new forecasts call for growth of 3.1 per cent this year and next, tapering off to 2.9 per in 2012 and 2.8 per cent in 2013. Unemployment, though, is forecast to fall to 8.1 per cent this year, 7.7 per cent next year and 7.3 per cent in 2012. Read the story
U.S. releases details of Citigroup sale
The U.S. government's first sale of its Citigroup Inc. stock will amount to 1.5 billion shares, or 20 per cent of the stake it holds. "Treasury will begin selling its common shares in the market in an orderly fashion under a pre-arranged written trading plan with Morgan Stanley," the U.S. Treasury Department said in a statement today.
The U.S. government is set to earn a bundle on the stock it acquired during the bailout period at the height of the crisis. It acquired the shares, which closed Friday at $4.86 (U.S.), at $3.25 each.
Markets eye key economic readings
Markets get a fresh look this week at how North America's economy is rebounding from the recession. The U.S. government provides the first look at first-quarter economic growth Friday morning, at the same time Statistics Canada reports on growth for the month of February.
Economists don't believe gross domestic product in the U.S. expanded at the rapid 5.6-per-cent pace of the fourth quarter, but still project a solid reading in the range of 3.5 per cent, annualized. "The data will reinforce what has been a V-shaped bounce in activity across broad swaths of the economy, including employment," said Eric Green, Toronto-Dominion Bank's chief U.S. strategist. "The bigger question is what will sustain growth over subsequent quarters."
In Canada, Friday's reading should show how the Vancouver Olympics added some bounce, and flavour, to the economy in February. "The Olympic Games likely added substantially to some specific services, notably the arts, entertainment and recreation category," said BMO Nesbitt Burns deputy chief economist Douglas Porter. "The Calgary Olympics in 1988 saw a 13-per-cent spike in this sector (which accounts for nearly 1 per cent of output, and a similar move would alone add roughly 0.1 percentage points to GDP. Moreover, the accommodation and restaurant sector also likely saw a big boost - putting it in a nutshell, the bars were packed, especially on hockey days."
The report should mark the sixth month of economic expansion in a row.
Fed, Bank of Canada take centre stage
The two reports come after this week's policy meeting of the Federal Reserve. The U.S. central bank, which announces its decision Wednesday afternoon, is not expected to budge from a record low benchmark interest rate near zero. The Wall Street Journal reported last week, however, that the Fed will discuss how to dispose of more than $1-trillion (U.S.) in mortgage-backed securities it acquired during the crisis, without disrupting financial markets.
Bank of Canada Governor Mark Carney is also front and centre this week, testifying before the Commons finance committee tomorrow and the Senate banking committee Thursday.
Related: All eyes on Fed's rate decision
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Hertz strikes deal for rival Dollar Thrifty
Shares of Hertz Global Holdings Inc. surged today after the rental company boosted its profit and revenue outlook for the year and unveiled a deal to acquire rival Dollar Thrifty Automotive Group Inc. for almost $1.2-billion (U.S.). The deal, $41 a share in cash and stock, would make Hertz the market leader, Reuters said.
From today's Report on Business
Flaherty renews insurance battle with banks
Ottawa tells energy firms to start powering down coal-red plants