Market Buzz – Distinction Group “Cleans-up” in Q1
Toronto’s main stock index gained ground for its fifth consecutive day this Friday, rising within a stone’s throw of a 19-month high as strong economic data and a weaker U.S. dollar boosted demand for resource stocks.
Overall, the Toronto Stock Exchange’s S&P/TSX composite index ended the session up 78.77 points, or 0.65 per cent, at 12,239.64. The index has rose every day this week, led by rebounding commodity prices as well as strong U.S. earnings, posting a 1.4 per cent gain over the period. Metal prices climbed, particularly gold, giving the materials sector a 1.04 percent gain. All ten TSX subgroups finished the session stronger.
Having said this, analysts will be keeping a close eye on the strength of first-quarter corporate earnings for a clue as to the market’s near-term direction. The Q1 2010 season kicks off in earnest next week.
The forward looking PE is shrinking as earnings have been and continue to recover in recent quarters, but we caution the quarterly numbers we are seeing at present in some segments. Particularly, in the case of the Q4 2009 results we just saw and the Q1 2010 results we are beginning to see. The numbers are coming off depressed levels when much of the world thought we were heading towards financial Armageddon. So, the year-over-year comparisons will look favourable, but are a bit misleading. In many cases, given the solid rally, much of the turnaround is already baked into the markets, broadly speaking.
Switching gears to our Canadian Small-Cap Universe (www.keystocks.com), we witnessed Distinction Group Inc. (GD:TSX) get a jump on the first quarter earnings season by posted a solid set of Q1 results.
Distinction Group is a Canadian leader in the janitorial, restoration, and mechanical maintenance service market. The company serves a diversified group of clients in various sectors such as office buildings, commercial buildings, industrial facilities, airports, infrastructure/utility providers, retail stores, shopping centers, and institutional/health establishments. Distinction Group is headquartered in Lachine, Quebec and has 17 offices with approximately 8,800 employees across Canada.
For the first quarter ended February 28, 2010, revenues increased 6.4 per cent to $64.23 million from $60.37 million in the same period of 2009. EBITDA grew by 16.3 per cent to $3.7 million in 2010 from $3.1 million in 2009. The company’s first quarter net earnings stood at $1.7 million, or $0.056 per share fully diluted, in 2010 compared to $1.5 million, or $0.048 per share fully diluted, in 2009.
Next week, we look forward to several sets of results and updated reports for our premium clients.
Looniversity –Return on Equity (ROE) – Why and How?
Return on equity encompasses the three main “levers” by which management can poke and prod the corporation – profitability, asset management, and financial leverage. By perceiving return on equity as a composite that represents the executive team’s ability to balance these three pillars of corporate management, investors can not only get an excellent sense of whether they will receive a decent return on equity, but also assess management’s ability to get the job done.
Return on equity is calculated by taking a year’s worth of earnings and dividing them by the average shareholder’s equity for that year:
One year’s earnings
ROE = ————————-
One of the quickest ways to gauge whether a company is an asset creator or a cash consumer is to look at the return on equity that it generates. By relating the earnings generated to the shareholder’s equity, an investor can quickly see how much cash is created from the existing assets. If the return on equity is 21 per cent, for instance, then 21 cents of assets are created for each dollar that was originally invested. As additional cash investments increase the asset side of the balance sheet, this number ensures that additional dollars invested to not appear to be dollars of return from previous investments.
Put it to Us?
Q. an a stock have a negative price-to-earnings (P/E) ratio?
– Josh Marlin; Calgary, Alberta
A. Indeed, Josh, a stock can have a negative price-to-earnings ratio (P/E), however it is very unlikely that you will ever see it reported. Although negative P/E ratios are mathematically possible, they generally aren’t accepted in the financial community and are considered to be invalid or just not applicable.
Why, you say?
Typically, the lower the P/E, the lower the cost to an investor for the earnings made by the company. But a company whose stock has a negative P/E ratio is not making money; earnings at the company are negative, which means the company is losing money on the shareholder’s investment in the company. To calculate the P/E ratio, you divide the market price per share of a company’s stock by the company’s earnings per share (EPS). A company’s earnings per share are calculated by subtracting the total value of all dividends paid to preferred shareholders from the company’s net income and dividing the difference by the average outstanding shares over the time period for which the ratio is being applied.
Negative EPS numbers are usually reported as “not applicable” for quarters in which a company reported a loss.
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