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 of the business operation. Internally, we informally declare the “end-of-earnings season” when the results of the Canadian banks are published. This quarter ended today with the completion of earnings call for the Royal Bank of Canada (TSX:RY). 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.
- 4% of US companies have reported, as we have previously noted in our mid-season update, the results continued to be very strong. Aggregate sales were broad and grew 11.0% over the past three months. The only sector which showed any weakness was Real Estate. Consumer discretionary and Information Technology both had great 20% quarter on quarter sales growth. While one might expect a recovery for consumer products as it would be coming off of a low base, the information technology results are spectacular considering the amount that we have collectively spent on technology on a growing basis over the past year. Even more traditional sectors like materials, communications, utilities and financials have shown substantial strength over the past quarter.
- The large banks in Canada had another great quarter from an operating and credit perspective. Both Toronto Dominion (TSX:TD) and RY had been conservative in taking credit reserves at the start of the pandemic and were able to release a significant portion of those reserves. Even with that, operating rates before provisions for all Canadian banks were very strong. They all posted better results than markets expected.
“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, the sales growth for all industries is impressive. The next real question will be if the strength can continue in the face of potentially increasing administered rates and a reduction of central bank liquidity.
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 Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High 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 Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.