According to a CIBC World Markets Inc. report released Friday, rising profit margins should help Canadian companies to continue to deliver healthy earnings.
The report noted that profit margins for corporate Canada as a whole have been rising since the early 1990s due to a number of favourable trends.
Avery Shenfeld, CIBC’s chief economist, said “Falling interest rates and record-low debt-to-equity ratios have shaved interest costs, while industrialization in emerging markets has led to sustained traction in commodity prices. That has helped to boost operating leverage despite the drag from a stronger loonie and intensified competition in some key sectors.
“The recovery in margins since the last recession has tracked changes in the profit share of GDP. That ratio is closer to past peaks in the U.S. than Canada, suggesting Canadian firms may have a bit more room to grow profits from here.”
In terms of earnings per revenue dollar, the report notes that the best TSX sectors to invest in are mining, real estate investment trusts, wireless telecommunications and health care. Except for health care, numbers for all these sectors have been rising.
Regarding the strong Canadian dollar and its implications in the global market, Shenfeld said the negative effects on manufacturing would continue but that industries such as telecommunications may benefit from cost savings on imports.
“Although we expect the Canadian dollar to ease from its recent highs, a trading level of US$1.02 six months out would still leave the currency 12% above where it stood against the greenback just over a year ago,” said Shenfeld.
The report added that rising retail fuel prices are further squeezing the purchasing power of Canadian consumers already grappling with high debt loads. Spending on gasoline is relatively insensitive to price changes, but rising fuel prices will likely lead to spending cutbacks in other areas.
Shenfeld concluded, “All told, expectations for healthy earnings ahead don't seem out of line.”