There's a song dating from the early-1980s recession that goes:
It takes money, to make money It takes money, to make money Go down to the bank, get on your knees, Excuse me banker, I'm beggin' you please…
It's a refrain that rings true for dozens of cash-thin Canadian companies that found themselves on their knees in the wake of the Great Global Credit Freeze. As Corporate Canada began clearing away the debris from the worst economic storms since the 1930s, refinancing became an albatross for many companies. Access to low-cost capital in the credit markets dried up; lenders imposed tougher conditions; and ambitious resource projects ended up on the shelf.
Those carrying little or no debt on their books weathered the rough seas remarkably well. For some-the big banks and insurers, Research In Motion, major telecom providers and a smattering of energy, industrial and retail companies-it was a case of: "Recession? What recession?"
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Others, however, suffered mightily from their lack of financial depth. Especially hard-hit were the many junior resource companies that plunged to the lower rungs in our latest ranking of Canada's 1,000 largest publicly traded companies.
The 1,000 managed to rack up only $55.7 billion in combined total earnings in 2009, a decline of 28.8% from the previous year, which itself was one of tough sledding as asset bubbles collapsed around the world. A closer look at sectors reveals that when it comes to the publicly listed component of Corporate Canada, the trend toward a narrowing, two-sector economy-financial services and resources-continues unabated. Banks accounted for 27% of total profit, and insurers another 12%. Oil and gas chipped in nearly 13%-a dramatic decline from 2008, when energy prices reached stratospheric levels (at least in the first half of the year) and these energy producers' share of the profit pie totalled just under 36%.
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The aggregate profit figures can be misleading, mind you. "There's a lot of cyclical rebound in particular industries that are not necessarily reflective of the underlying profitability of the corporate sector [as a whole]" says Montreal investment author Tony Boeckh, a 40-year market veteran.
And things could get worse in a hurry. Canada is bound to feel the pinch as the world wrestles with the latest fallout from Europe, where fiscal woes and soaring debts are prompting aggressive belt-tightening in the United Kingdom and across a large swath of the 16-country Euro zone. Then there is the growing inevitability that U.S. policy makers will soon be embracing austerity themselves, shutting off the spending taps. But worst of all from a Canadian perspective, a slowdown looms in China, where officials are fretting aloud about new asset bubbles and dangerous domestic price inflation. Any government-orchestrated downward shift would play havoc with Canadian earnings, because rapid Chinese expansion has played a crucial role in driving up demand-and prices-of energy, metals and most other resources. If China retrenches and the U.S. recovery sputters, Canadian profits are likely to prove weaker than most analysts estimate all the way through 2011.
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"Unfortunately, what had been a huge tailwind-a major bounce in commodity prices from their extreme lows last year-has suddenly pulled a U-turn because of concerns over the European outlook; but also because of a very different environment in China, where officials have gone from pushing the accelerator to the floor to now reaching for the brakes," says Doug Porter, deputy chief economist at BMO Capital Markets. "The [profit]outlook has been muddied, to say the least."
Yet until about mid-April, Canada's recovery appeared sturdier than even the most bullish of optimists had dared hope. "It's almost like the recession never happened for the housing sector and consumer spending. Both are effectively back to pre-recession levels," Porter says.
But then a little sovereign debt problem in Greece, some hand-wringing in China and a bout of sabre-rattling from a truculent North Korean government reminded the markets just how fragile the global rebound could turn out to be-and what impact a flatlining world economy might have on a country that depends increasingly on resource exports to replace a dwindling manufacturing base.
"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.
That energy and mining companies were facing treacherous terrain last year is clear from the presence of just two players, EnCana Corp. and Teck Resources, among the 10 biggest earners. EnCana slipped from first to fifth, as earnings plunged 69%. But it stands as the only Top 10 returnee of the six oil and gas producers that reached those lofty heights the previous year. Canadian Natural Resources slid to 12th from second; Imperial Oil fell nine places to 13th; Husky Energy descended the ladder to 17th from sixth; and Talisman Energy plummeted 37 rungs to 45th, thanks to an 88% decline in earnings. Petro-Canada (No. 10 a year ago) disappeared because of a takeover, joining 105 other companies that left the list for one reason or another. Petrocan's buyer, Suncor Energy, occupies 22nd place on the list, down from 11th.
Teck rode the metals rebound and a cleaned-up balance sheet to seventh spot, with a 178% jump in profit. A year earlier, Teck stood 44th. But Potash Corp. of Saskatchewan dove 17 places to 24th, and gold powerhouse Barrick Gold plunged all the way to the bottom, 1,000th out of 1,000, after finishing 36th the year before. Which can happen to any company whose earnings, at least on paper, sink by 644%. This one-time event stems from a multibillion-dollar accounting charge related to the unwinding of its costly hedging program. A hedge-free Barrick will be able to take full advantage of gold prices that have surged in response to new investor fears of just about everything else. The company has already reported a record first quarter for this year.
But the bottom 50 is laced with other resource players that lack Barrick's considerable financial muscle. The Biggest Losers club includes the likes of Penn West Energy Trust, which plummeted to 969th from 27th; Ultra Petroleum at No. 993 (down from 56); Harvest Operations at 996 (from 84th); Equinox Minerals at 981 (89); and Just Energy Income Fund, 997 (106).
Some of the juniors were dependent on new financing that failed to materialize. "They're all part and parcel of the same problem," Arthur Heinmaa declares. "When you've got a company that's burning money, you're basically on the clock. You've got to produce. And if there's any problem at all, there's no staying power."
Or as another song (this one from those astute economic analysts at Monty Python LLC) so deftly encapsulates corporate life in these tumultuous times:
There is nothing quite as wonderful as money. There is nothing quite as beautiful as cash. Some people say it's folly, But I'd rather have the lolly. With money you can make a splash.