Corporate recovery taking hold

By Steven Lamb | January 25, 2010 | Last updated on January 25, 2010
4 min read

Canadian companies are positioning themselves to take advantage of a global economic recovery in the second half of 2010, according to a survey of more than 200 senior financial executives.

The survey, conducted by FEI Canada’s Canadian Financial Executives Research Foundation (CFERF), found that widespread job cuts have been completed and access to capital is improving once more, fueling hopes for sustainable economic growth.

“Financial executives are bullish about their individual company performance throughout 2010,” said Michael Conway, chief executive and national president, FEI Canada. “Overall expectations for revenues and profit growth are positive, and companies will continue to focus on cost control, revenue growth and market and product expansion to help improve their bottom line.”

The majority of companies that participated in the survey said they expected revenue growth throughout 2010. Rising revenues could help boost employment, as 30% said they may increase staff levels, compared to just 13% who expect to downsize operations.

“Decisions made now are critical to the success of any organization,” said Eric Rawlinson, partner, Ernst & Young, which sponsored the survey. “Building on what we’ve learned from the crisis — and updating strategies accordingly — could mark the dividing line between businesses that thrive in the upturn, and those that falter.”

Roughly half of survey respondents said they would be keeping a close eye on costs, and 81% said overall spending is expected to be less than that seen in 2008. There are some key areas that could see increased spending, however: new products and market expansion, technology and R&D, building cash positions, acquisitions and shareholder payouts.

“Survey respondents said that growing revenue, improving customer service and increasing the efficiency of their supply chain top the list of corporate objectives,” said Ramona Dzinkowski, executive director, CFERF.

The majority of companies said that they expect to maintain capital adequacy, with 68% saying they do not expect they will need to refinance in 2010. Three quarters expect they will have sufficient capital to meet shareholder expectations.

One third of companies said they were on the hunt for a strategic acquisitions this year, with 19% of those targeting their direct competitors, while 42% were planning to acquire complementary companies

Of course, not all priorities are as sexy as M&A; 70% of public company CFOs said they would be focusing on implementing International Financial Reporting Standards (IFRS), which become mandatory in 2011.

Earnings rising With Canada’s economic recession apparently over, investors are turning their focus to a recovery in corporate earnings, which are already on the rise, according to CIBC World Markets.

Final earnings reports for 2009 will probably show profits increased 43% in the fourth quarter among members of the S&P/TSX Composite Index. Even with that huge quarterly increase, earnings will drop 26% for the year as a whole.

“The gain for the TSX looks like a tough wall to climb, but will in fact benefit hugely from an easy comparison with a year earlier, when both the Canadian and global economies sank into recession, dragging commodity prices and profits down” says Peter Buchanan, senior economist in CIBC’s latest TSX Earnings Watch. “In sequential terms, TSX earnings will have to rise by only five to six per cent from the previous quarter to meet expectations.”

The insurance and mining sectors should lead the pack, which shouldn’t be too surprising; insurers were among the hardest hit in the financial crisis and the demand for commodities fell off a cliff in the recession.

“Insurers lost over $1 billion in the year-earlier quarter as a result of adjustments on segregated funds and some of their other assets and liabilities. That sector is expected to see a well-over $3 billion positive swing in profitability,” Buchanan writes. “The diversified mining group, meanwhile, is expected to see a $1.5 billion improvement on a year earlier, aided by the strong metals-led rally in commodity prices.”

He says analyst estimates suggest they two sectors will account for three quarters of the total year-over-year earnings increase.

Healthcare, information technology and utilities stocks are also expected to report strong earnings growth, while the chemicals component of the materials sector will drag.

While profitability is improving, there is some concern that too much of that is coming from cost-cutting, rather than revenue growth. Reducing staff levels, for example, may boost profit in the short term, but it is hardly a replicable gain. Organic revenue growth, on the other hand, suggests longer-term profitability.

“While a seemingly high 43% rise in earnings this quarter should be attainable, TSX Composite members could face greater pressure validating expectations for a 26% rise in 2010,” Buchanan says. “Although such increases have occurred after past recessions, that has generally been in the context of stronger economic recoveries than we expect this time, given the drag from a scaling back of fiscal stimulus programs in both Canada and the U.S.”


Steven Lamb