Q2 Earnings Season Complete

Michael Rudd, CFA | President, CEO and Portfolio Manager

As regular readers of the Investment Outlook know, our writing follows the calendar of quarterly earnings reports. The companies that we invest in report financial data and management commentary on a regular basis, which is colloquially called “earnings season”. This is an important part of our investment process because we are able to check-in on the progress of the companies that we own, as well as management’s expectations for the future of their business operations. Internally, we informally declare the “end-of-earnings season” when the results of the Canadian banks are published. The quarter “ended” this week with bank earnings. Regular readers will recognize the aggregate sales data for North American companies noted in Figure 1. We have mentioned before that we prefer to review aggregate sales data as it is harder to manipulate than earnings. For a large group of companies, we feel this is a better way to take the temperature of how the North American economy is performing. We also focus on “all listed companies” in North America, rather than a widely used index, like the S&P 5oo for example, because we find the large global companies in those types of indices can skew a significant portion of what would be “Main Street”. This could cause us to draw incorrect conclusions from the data.

  • So far, 95% of 3,118 of companies have reported their results this quarter and aggregate sales have grown double digit again (15.7%). Energy remains the biggest contributor, which makes sense given the recent price of oil. Sales on a broad base were generally strong with Financials being the only negative performer on the quarter. This now breaks the trend of all sectors posting positive sales growth over the last year.
  • We don’t normally look at surprise data, but this quarter, we have anecdotally noticed that earnings results have tended to beat estimates that have been provided by the stock brokerage firms. This is interesting given the relatively negative view from the financial press. Indeed, on average this quarter, companies beat sales estimates by 3.5% and earnings outperformed by 2.0%. We do note that margins have been compressed due to inflationary impacts but in the end, they have fallen less than expected.

“This means that” the economy continues to post topline sales growth when compared to last year, which is good. We do need to keep in mind that we are still in a recovery period, so we are coming off from a lower base. Another caution is that there is an inflationary component to the numbers, given that prices in general have risen.


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