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Slashed profit expectations may set stage for gains

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NEW YORK (Reuters) – There could well be a silver lining in all the caution around the stock market as the earnings season approaches: Shares do way better when profit expectations have fallen, and lately, they’ve been falling like a rock.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., January 10, 2019. REUTERS/Brendan McDermid

By at least one measure, this is the most negative analysts have been ahead of a reporting period in nearly four years. Fourth-quarter reports get rolling next week with results from JPMorgan Chase (JPM.N) and other big banks.

Recent warnings on the quarter from high-profile companies have had investors bracing for more bad news. Earlier this month, Apple’s (AAPL.O) big cut in its revenue forecast added to fears among some market watchers that a possible 2019 earnings recession – defined as at least two straight quarters of profit declines – may be on the horizon.

With the bar low for companies to beat expectations, stocks could extend recent gains following the S&P 500’s .SPX worst December performance since the Great Depression.

“One of the key things the December selloff did was it priced a materially reduced set of earnings expectations for 2019. As a result, investors are going to be somewhat forgiving of companies who either miss estimates or are somewhat tentative in their guidance because they are now expecting that,” said Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley Wealth Management in New York.

“Any companies that talk about 2019 being just as good as 2018 or even sequentially a lot better are going to constitute an upside surprise,” she said.

Case in point: General Motors. GM’s (GM.N) shares soared more than 9 percent on Friday after the company said its earnings would top its earlier forecast.

Coming into that surprise announcement, Wall Street’s estimates for GM’s fourth-quarter profit had fallen by 12 percent since late October and the stock had dropped more than 20 percent over the last year.

While still relatively strong at 14.5 percent, analysts’ estimated profit growth for S&P 500 .SPX companies in the fourth quarter has fallen sharply since the start of October, when they forecast growth of 20.1 percent, according to IBES data from Refinitiv.

For 2019, analysts are expecting profit growth of just 6.4 percent, down from an Oct. 1 estimate of 10.2 percent and a big drop from 2018’s tax cut-fueled gain of more than 20 percent.

(GRAPHIC: Falling S&P 500 profit growth forecasts – tmsnrt.rs/2H80Idq)

According to strategists at Bespoke Investment Group, the bar for this earnings season is “extremely low.”

Heading into the fourth quarter, Bespoke analysts’ earnings revisions for S&P 1500 companies are skewing more negatively ahead of any reporting period since the first quarter of 2015, they wrote in a report on Thursday.

The S&P 500 rallied 2.62 percent in that six-week reporting period, and there have been just four prior earnings seasons since 2009 – when the U.S. bull market began – in which the earnings revisions spread for the S&P 1500 was more negative than it is now, they said.

In each of those periods, the S&P 500 rose for an average gain of 4.33 percent.

“Analyst sentiment doesn’t get much more negative than it is now, so if we start to see companies react positively to results early on, it would set the stage for a positive earnings season,” the Bespoke strategists wrote.

To be sure, the S&P 500 uncharacteristically declined 5.2 percent in the last earnings period despite negative earnings revisions, according to Bespoke’s data.

That “proved to be a major exception” to the trend, they wrote.

Market valuations also have come down substantially. With the S&P 500 now trading near 14.9 times expected earnings, according to Refinitiv data, compared with a multiple of 18 a year ago, market bulls argue that stocks have become undervalued after the recent sharp declines.

Investors also will be listening closely to what executives say about demand in China.

Apple cited slowing iPhone sales in China when it cut its sales forecast for the quarter that ended in December.

Comments about China and its trade conflict with the United States are likely to come up in conference calls and could affect investor sentiment, regardless of the earnings numbers.

“The commentary we’re going to get on China and trade is going to be potentially pretty bad. It’s almost like companies reserving for things that could go wrong in future quarters,” said Jonathan Golub, chief U.S. investment strategist at Credit Suisse.

Some strategists said what could make it a successful earnings season from the market’s standpoint might simply be any signs that 2019 earnings estimates are stabilizing.

“Just showing that these numbers are not falling off a cliff” will be positive, said Keith Lerner, chief market strategist at SunTrust Advisory Services in Atlanta. “That’s what the market was pricing in.”

Reporting by Caroline Valetkevitch; Editing by Dan Grebler

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Canadian Tire and NuPort Robotics to commercialize Canada’s first automated heavy duty trucks

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Canadian Tire Corporation and Toronto based start-up NuPort Robotics, Canada’s first autonomous trucking company, are partnering with the Ontario government to invest $3 million to undertake an automated heavy duty trucking project to test a “first-of-its-kind-in-the-world” technology. 

The breakthrough technology provides a transportation solution for the middle mile, the short-haul shuttle runs that semi-tractor trailers make between distribution centres, warehouses and terminals each day.

It is designed to enable next-generation automated trucks that are more fuel efficient, safer to operate, and provide an enhanced driver experience.

Backed by $1 million in support from the Ontario government through Ontario’s Autonomous Vehicle Innovation Network and matched by $1 million investments from Canadian Tire and NuPort Robotics, respectively, the two-year project is applying proprietary, artificial intelligence technology from NuPort Robotics to retrofit two conventional semi-tractor trailers – which will always be attended by a driver – with high-tech sensors and controls, a touchscreen navigation system, and other advanced features such as obstacle and collision avoidance.

Caroline Mulroney, Minister of Transportation, says: “Ontario is proud to be a global leader in automated and connected vehicle technology and this innovative project is an exciting milestone toward automated vehicle tech in the trucking industry.

“Ontarians rely on goods being delivered by trucks across the province every day and projects like this are demonstrating the ways that automated truck technology could help businesses meet delivery demands more efficiently while supporting a strong supply chain in Ontario.”

Vic Fedeli, Ontario Minister of Economic Development, Job Creation and Trade, says: “This project applies unique and made-in-Ontario Artificial Intelligence technology that offers increased safety and efficiency, with a reduced carbon footprint, to the goods supply chains on which we all rely.

“This is the latest example of how Ontario’s Autonomous Vehicle Innovation Network acts as a catalyst, fostering partnerships between ambitious technology start-ups and industry to develop and commercialize next generation transportation technologies that strengthen our economy and benefit society.”

Raghavender Sahdev, CEO of NuPort Robotics, says: “The trucks are currently transporting goods between a Canadian Tire distribution centre in the Greater Toronto Area and nearby rail terminals within a 12.5 mile radius, and early results are promising.

“The aim of the project is to develop a system that incorporates an autopilot feature for conventional trucks with a driver, leading to the most efficient way to drive and increase safety.

“The sensors work as a ‘safety cocoon’ to cover blind spots and prevent accidents and the end result is peak fuel efficiency, meaning lower carbon emissions, and peak driving performance for an overall more optimal transportation experience.”

NuPort Robotic’s approach to autonomous trucking is unique in the industry because it focuses only on solving the middle mile challenge, using a known set of predetermined trucking routes that are repetitive and high frequency as opposed to general highway driving.

Ultimately, when implemented on fixed routes in the future, Canadian Tire will benefit from faster commercial deployments and improvements in supply chain sustainability.

Gary Fast, vice-president of transportation, Canadian Tire, says: “Canadian Tire embraces innovation and is always testing new technologies to improve our operational efficiency and safety.

“As proud Canadian companies, the safety of all stakeholders, including drivers, employees, customers, and public will be the top priority as we work together towards deployment of this technology.”

Cari Covent, vice president of intelligent automation, Canadian Tire, says: “Over the last three years, Canadian Tire has made a significant effort to solve complex business problems by using the Canadian start-up Artificial Intelligence ecosystem, and NuPort Robotics exemplifies what we look for in a start-up with a focus on innovation, automation and artificial intelligence.”

Sahdev says: “As NuPort Robotics continues to develop new technologies to overcome middle mile supply chain problems and advance autonomous trucking, I am extremely grateful for the support of the Ontario Government through AVIN and the Ontario Centre of Innovation.

“With their continued support, we are striving to position Canada as the leader in autonomous transportation.”

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Constellation Software is money in the bank, this fund manager says

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If you’re looking for a long-term hold in Canadian tech then Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSX:CSU) should definitely be on your radar. So says Jason Del Vicario of Hillside Wealth Management who likes not only Constellation but its recent spin-off Topicus (Topicus Stock Quote, Chart, News, Analysts, Financials TSXV:TOI) which Del Vicario says could do even better than CSU over the next ten years.

Software consolidator Constellation has been running on the same game plan for years, buying small vertical market software companies providing so-called mission critical software solutions globally. Over the years CSU has completed over 500 such acquisitions, buying the top names in their respective niche verticals and then using its clout and breadth to grow the business and expand into new markets. The resulting cash flow is then plowed back into more acquisitions and the cycle repeats.

The strategy has worked wonders for Constellation, which has grown its revenue from $631 million in 2010 to almost $4 billion for 2020 while taking earnings from $4.12 per share in 2010 to $20.59 per share this past year.

Shareholders were given a special treat last month when Constellation spun out recently acquired Topicus, giving CSU owners about 1.9 Topicus shares for every Constellation share as a dividend-in-kind. Constellation bought Netherlands-based software company Total Specific Solutions BV (or TSS) in 2013 and that subsidiary recently acquired Topicus BV, a Dutch information service company focusing on sectors such as healthcare, education and finance.

Topicus was singled out by Constellation founder Mark Leonard for its ability to grow without using outside shareholder funding. Leonard said the spin-out was part of the intention since a purchase agreement was struck last year.

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Nuvei wins price target raise from National Bank

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Strong quarterly results and an even brighter outlook for 2021 are reasons to celebrate for Canadian payments company Nuvei (Nuvei Stock Quote, Chart, News, Analysts, Financials TSX:NVEI), according to National Bank Financial analyst Richard Tse. In an update to clients on Wednesday, Tse left his rating unchanged at “Outperform” while raising his price target from C$85.00 to C$100.00.

Montreal-headquartered Nuvei is a provider of payment technology solutions to merchants and partners around the world, with a platform geared for high-growth mobile commerce and e-commerce markets. Nuvei’s solutions include a fully integrated payments engine with global processing capabilities, a turnkey checkout solution and a suite of data-driven business intelligence and risk management tools and services.

The company released its fourth quarter and full year 2020 financials on Wednesday, showing Q4 revenue of $115.9 million, up 46 per cent year-over-year, and adjusted EBITDA of $51.3 million, up 61 per cent year-over-year. Total dollar value of transactions processed by merchants (‘total volume’) with Nuvei rose by 53 per cent to $13.9 billion. (All figures in US dollars except where noted otherwise.)

The 2020 year featured revenue up 53 per cent to $375.0 million and adjusted EBITDA up 87 per cent to $163.0 million, with total volume rising a full 76 per cent year-over-year to $43.2 billion.

“Our performance continues to be driven by strong momentum in the high-growth verticals we serve, as well as by our customizable, scalable and feature-rich technology platform which provides one of the industry’s most complete payment technology solutions going well beyond merchant acquiring,” said Philip Fayer, chairman and CEO, in a press release.

The company said the fourth quarter represented the strongest growth yet experienced by Nuvei, driven by wallet share expansion from current merchants along with accelerated uptake of new merchants. New e-commerce business almost tripled compared to a year earlier, Nuvei said, while the company expanded its connectivity coverage over the quarter, introduced new product innovations on its platform and continued to execute on M&A.

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