We are approaching the finish line for this earnings season.
According to a Nov. 11 report from Refinitiv, 72 per cent of the companies in the S&P/TSX Composite Index had released their quarterly earnings results.
In terms of revenue estimates, 56 per cent of companies have reported better-than-expected top line results, while 44 per cent of companies have missed the Street’s forecasts. The sector leaders were Industrials, Energy, and Financials, with 70 per cent, 61 per cent, and 60 per cent, respectively, of companies beating expectations.
In terms of earnings estimates, 61 per cent of companies have released results that topped the Street’s expectations, 31 per cent of companies have missed expectations, and 8 per cent of companies have reported results that were in-line with consensus estimates. The sector leaders were Technology, Health Care, Industrials, and Financials with 75 per cent, 75 per cent, 70 per cent, and 67 per cent, respectively, of companies reporting better-than-expected results on the bottom line.
The solid earnings reports have helped lift the S&P/TSX Composite Index. Month-to-date, the TSX Index has rallied 3.1 per cent with all sectors in the green except for the Energy sector, which is down 1 per cent. The positive price momentum in the Energy sector has paused given its astounding 46 per cent year-to-date gain.
What is impressive is that five sectors have reported price returns exceeding 7 per cent month-to-date, those being Health Care (up 9.4 per cent), Consumer Discretionary (up 8.4 per cent), Information Technology (up 7.8 per cent), Consumer Staples (up 7.2 per cent), and the Materials sector (up 7.1 per cent).
Year-to-date, the S&P/TSX Composite Index is now up a remarkable 24 per cent with the TSX Index hovering near a record high.
In terms of individual stocks, a number of companies saw their share prices spike by 10 per cent or more immediately after the release of their quarterly earnings results including Suncor Energy Inc. (SU-T), Stelco Holdings Inc. (STLC-T), Aritzia Inc. (ATZ-T), New Gold Inc. (NGD-T), Maple Leaf Foods Inc. (MFI-T), and Spin Master Corp. (TOY-T).
While the S&P/TSX Composite Index continues to set new record highs, earnings expectations for 2022 continue to rise. As a result, the valuation of the S&P/TSX Composite Index is not inflated relative to historical levels. Over the past month, 2022 earnings expectations for the S&P/TSX Composite Index have increased 3 per cent. According to Bloomberg, the S&P/TSX Composite Index is currently trading at a price-to-earnings multiple of 15.8 times the 2022 consensus estimate, above its 10-year historical average P/E multiple of 14.3 times but still below its peak multiple of approximately 16.4 times during this time period.
This report includes a link to a list of analysts’ target prices, recommendations, and forecast returns for all securities in the S&P/TSX Composite Index grouped by sector and ranked according to their expected price returns (excluding dividend and distribution income). The posted target price for each security is an average of all available target prices from analysts. A target price typically reflect an expected share or unit price 12 months from now based on an analyst’s financial modelling such as a discounted cash flow model or sum-of-the-parts model. All data is as of Nov. 15.
Once all companies have reported their financial results in the weeks ahead, earnings expectations, multiples, and target prices could be adjusted meaningfully depending on the reported earnings and management’s outlook, if provided.
It’s important to note that high target prices which imply stellar returns that seem unbelievable may be just that - unrealistic. At times, when a stock price falls analysts may maintain their bullish expectations, inflating the forecast return. In addition, an outlier (extreme target price) can skew the average target price, to the upside or downside, particularly when the number of analysts covering a stock is low. Don’t let a huge projected gain lure you into a position – it is critical to look at the company and industry fundamentals.
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