Canadian companies basking in the glow of soaring commodity prices are expected to deliver double-digit profit gains, though many investors enter the earnings season wary about rising costs.
Canada's first-quarter earnings season kicks off in force this week, with soaring bullion, crude oil and copper prices expected to feed through to the bottom line of the market's many resource firms.
But investors will also be scanning earnings statements for signs those rising commodity prices are feeding through to higher costs and eroding margins. Such a trend could further derail a multi-year bull rally that has started to stumble in recent weeks.
Yet some experts have warned many companies are being hit by rising energy and commodity prices and wage pressures that are "going to cause profit margins to weaken unless companies are able to pass on those rising input costs to the consumers."
Blue-chip companies on the Toronto Stock Exchange's S&P/TSX 60 index are expected to report first-quarter earnings growth of 14.4% compared with last year, according to Thomson Reuters StarMine SmartEstimates, with the index trading at just under 11 times forward 12-month earnings.
The materials sector, which includes mining stocks and makes up roughly a quarter the overall TSX index, is projected to have the highest growth rate, coming in at about 56% higher than last year's earnings.
Oil and gas companies, which make up another quarter of the index, are expected to report growth of just under 13%.
Both bullion and U.S. crude prices have skyrocketed roughly 30 percent in the last year, while copper prices have jumped about 20%. Solid Canadian economic growth prospects are also seen supporting results.
Yet the boom has also increased demand for labour and equipment used to produce those commodities, which could boost expenses. And the situation could be even tougher for the companies purchasing those commodities.
Tim Hortons recently hiked the price of its coffee and baked goods as commodity costs have risen. George Weston, the company behind Weston Foods and grocer Loblaw, also boosted prices to cover rising costs.
Earnings growth for consumer staples companies is projected at just over 6%.
Consumer discretionary companies meanwhile, could also feel the pinch of higher costs, as consumers cut back on spending.
Some companies have softened their outlook, indicating hurdles ahead. Telecom companies, like Rogers Communications for example, are facing cut-throat competition from upstarts like Wind Mobile and Public Mobile who offer low-cost wireless alternatives.
Some of these concerns have weighed on the Toronto Stock Exchange's S&P/TSX composite index which finished 0.16% lower at 13,799.12 on Friday. It had touched 14,270.53 earlier this month, its highest level since late 2008. It has since stumbled roughly 3%
