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Betting On Job Losses
It seems as if most every company in America is cutting jobs these days in a knee-jerk reaction to the economy's apparent death spiral. No one is immune from it - not even those producing substantial profits. Layoffs are one thing for a company like Liz Claiborne (NYSE:LIZ), which is hanging on for its economic life. It's another thing entirely for the likes of Microsoft (Nasdaq:MSFT) that clearly don't have any problems paying the bills.
Have human resource departments become so complacent that out of this economic fog comes a clear vision of the "ideal" number of employees necessary to keep a business functioning? Not on your life. What's happening is simple: Some well-run companies are choosing to use this time to cull the herd, maintaining profit margins. This is what investors look for when selecting stocks - companies willing to maintain profits at all costs. (Take a deeper look at a company's profitability with the help of profit-margin ratios in our article The Bottom Line On Margins.)
IN PICTURES: Eight Ways To Survive A Market Downturn
If You Can't Beat Them...
You might as well join them. According to the U.S. Labor Department, 2.8 million jobs were lost in 2008, the worst year for cuts since 1945. It's predicted 2009 will bring more of the same. On CNN February 4, Christie Hefner, former CEO of Playboy Enterprises (NYSE:PLA), suggested other CEOs she has talked to feel the recession won't end until late 2010. If that's the case, 2008 will look like a walk in the park. (Learn more on this topic in The Impact Of Recession On Businesses.)
Now before you start jumping all over me for such a pessimistic attitude, keep in mind I'm discussing this from an investor's point of view. The emotional part of me absolutely cringes at this death by a thousand cuts. Back in May, I suggested readers invest in oil companies like Exxon Mobil (NYSE:XOM) if they were upset with gas prices. Sure enough, Exxon reported 2008 full-year earnings of $45.2 billion and its stock is down only 12.3% since the article was written, in comparison to the S&P 500, which is down 40.7% in the same period. Why not do the same with the job cuts situation?
Profitable Yet Cutting
In this scenario, you want to look for companies making money and likely to do so in the future. We aren't interested in those businesses barely in the black, but those squarely so. As I mentioned earlier, Microsoft fits the bill, announcing in late January that it was cutting 5,000 jobs over 18 months despite making $4.17 billion in the second quarter ending December 31, 2008. According to Microsoft, the job cuts will save the company $1.5 billion in operating expenses in the next year. We have a winner.
Another technology stock worth a closer look is IBM (NYSE:IBM), which on January 20 reported Q4 earnings per share of $3.28, up from $3.03 a year earlier. It also expects 2009 profits of $9.20 a share, up slightly from $8.96 in 2008. There you have a second possibility. If you sniff around, you'll find many more. Here's a list:
Bottom Line
It's unfortunate that businesses like Microsoft feel the need to cut jobs despite substantial profits. I can only hope they use these cuts to make their businesses even more competitive than they already are. In this instance shareholders win, employees lose.
Have human resource departments become so complacent that out of this economic fog comes a clear vision of the "ideal" number of employees necessary to keep a business functioning? Not on your life. What's happening is simple: Some well-run companies are choosing to use this time to cull the herd, maintaining profit margins. This is what investors look for when selecting stocks - companies willing to maintain profits at all costs. (Take a deeper look at a company's profitability with the help of profit-margin ratios in our article The Bottom Line On Margins.)
IN PICTURES: Eight Ways To Survive A Market Downturn
If You Can't Beat Them...
You might as well join them. According to the U.S. Labor Department, 2.8 million jobs were lost in 2008, the worst year for cuts since 1945. It's predicted 2009 will bring more of the same. On CNN February 4, Christie Hefner, former CEO of Playboy Enterprises (NYSE:PLA), suggested other CEOs she has talked to feel the recession won't end until late 2010. If that's the case, 2008 will look like a walk in the park. (Learn more on this topic in The Impact Of Recession On Businesses.)
Profitable Yet Cutting
In this scenario, you want to look for companies making money and likely to do so in the future. We aren't interested in those businesses barely in the black, but those squarely so. As I mentioned earlier, Microsoft fits the bill, announcing in late January that it was cutting 5,000 jobs over 18 months despite making $4.17 billion in the second quarter ending December 31, 2008. According to Microsoft, the job cuts will save the company $1.5 billion in operating expenses in the next year. We have a winner.
Another technology stock worth a closer look is IBM (NYSE:IBM), which on January 20 reported Q4 earnings per share of $3.28, up from $3.03 a year earlier. It also expects 2009 profits of $9.20 a share, up slightly from $8.96 in 2008. There you have a second possibility. If you sniff around, you'll find many more. Here's a list:
|
Company |
Announced 2009 Job Cuts |
EPS (TTM) |
|
Merck & Co. (NYSE:MRK) |
7,200 |
$2.10 |
|
GlaxoSmithKline (NYSE:GSK) |
6,000 |
$2.48 |
|
Morgan Stanley (NYSE:MS) |
1,800 |
$1.79 |
|
Microsoft (Nasdaq:MSFT) |
5,000 |
$1.87 |
|
IBM (NYSE:IBM) |
4,200 |
$8.96 |
It's unfortunate that businesses like Microsoft feel the need to cut jobs despite substantial profits. I can only hope they use these cuts to make their businesses even more competitive than they already are. In this instance shareholders win, employees lose.
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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