Scotia Capital’s recently released Beat the Street report for Q2 2011, penned by associate strategist Hugo Ste-Marie, is calling for less than stellar earnings reports for both the S&P 500 and TSX.
The report suggests the S&P 500 is facing a number of challenges in Q2, singling out three main headwinds pushing against the likelihood that earnings will beat consensus expectations: the negative impact of Japan’s natural disaster on the global supply chain, an increase in earnings warnings—78 negative preannouncements versus 38 positive—and a leveling off of profit margins.
“Amongst the positive tailwinds, top-line growth continues to support earnings growth, and U.S. dollar weakness is friendly to S&P 500 earnings….Earnings growth should continue in Q3, but S&P 500 Q2 EPS could ‘only’ meet Street expectations” of US$23.99, which translates into a 6.2% sequential improvement and a 15% year-over-year increase, the report says.
North of the border, the TSX’s largest earnings contributors will likely report earnings below the consensus forecast, with the result that overall TSX Q2 could fall short of street expectations of $266, a 10% quarter-over-quarter increase and a 46% year-over-year gain.
Here’s how it lines up for the key sectors:
Bottom-up consensus forecasts see Energy EPS at $40 in Q2. “Our regression is pointing toward EPS in the $43 range in Q2, which is 9% above consensus. However, the negative impacts stemming from fires in northern Alberta are not taken into account in our regression model. Nevertheless, we would expect a relatively solid quarter due to elevated energy prices so far in Q2,” the report suggests.
The consensus expectation on gold is well off the mark, according to the report. “Bottom-up forecasts are calling for EPS of $45 in Q2, which is 10% above our EPS model forecast …. Our model derives an EPS value of $40 using an average gold price of US$1,508/oz in Q2. Although gold is rising, energy prices are going up faster, which could put pressure on margins. Hence, we see some potential downside surprises for TSX Gold earnings in Q2.”
The consensus forecast of $236 per share for the metals and mining sector is also far off the mark, the report says. “We believe the Street is once again overestimating the sector’s earnings power. In Q1, consensus was looking for EPS of $206, but actual EPS came in at $147. We believe it will be hard to meet consensus in Q2, as copper prices are lower than in Q1, while energy prices are higher. Copper prices average US$4.16 in Q2 versus US$4.38 in Q1. Based on actual copper prices, our model is pointing toward EPS of $160. ”
The report suggests another misfire for the Street on financials, with a consensus estimate of $34 in Q2. Scotia Capital expects only $31 per share, 9% below consensus.