Earnings Power
As regular readers of the Pathfinder 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 for the firm. We are currently “mid-earnings-season” and have found the results quite interesting. Readers will recognize the aggregate sales data for North American companies noted in Figure 1. We traditionally use sales growth quarter on quarter as a barometer for general economic performance as earnings can be somewhat manipulated.
- So far, 63% of companies have reported their results this quarter and, as you can see, the results are stunning. We have not seen this much strength in the data before. Aggregate sales were broad and grew 10.5% over the past three months. Indeed, this is the first time that we can remember since we began writing the Outlook that all industry sectors have been positive. Usually there is one or two industries that struggle but not this quarter. Materials, Consumer, Info Technology, Communications, Health and Utilities were all strong.
- While we focus our analysis on actual sales growth, it is worth noting this quarter that results have been so strong that they have taken most investors by surprise. A quick review of “surprise data” (the difference between what stock brokerage analysts predict and the actual results) indicates that in terms of revenue, 67% of companies have performed better than what they had expected. For net income, it was even stronger at 74%. This is significantly higher than other periods where it tends to be more balanced with about 50% of companies beating analysts’ estimates and about 50% in-line or missing. As noted, we do not tend to focus on this data on a regular basis, but it is a good indicator of how strong the economy is rebounding in the current environment.
“This means that” the North American economy is experiencing a substantial rebound, although we should keep in mind that it is coming off a depressed base. We have recently read numerous articles about raw materials, goods and employment shortages in many parts of the economy. This is mostly because managers had misjudged the potential for rebound after the pandemic and had cut back on planning dramatically last spring. The data now shows that this has changed with strong manufacturing and hiring expectations for the coming months.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfinder Real Fund are presented based on the masters series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder North American Equity Portfolio (January 2011), Pathfinder North American High-Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Real Fund (April, 2013), and Pathfinder International Fund (November 2014).
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