It is crunch time for earnings. Companies are under extreme pressure to at least meet and better yet beat Wall Street estimates. After two straight up years of earnings growth, there are concerns regarding slower earnings growth ahead this year, perhaps extending into 2006.
So far, the first quarter, while good, was not exceptional. All eyes will now focus on second quarter earnings, and the pressure to report strong growth is immense. Any sign of weakness in a company’s revenues or earnings could send investors to the exits in a herd mentality. You don’t want to be caught up in the charge to the exits.
International Business Machines Corp. (NYSE/IBM) fell on earnings concerns in the first quarter, trading as low as $71.85 on April 20. But the tech powerhouse, fresh off its divestiture of its PC unit to China-based Lenovo, reported an awesome second quarter report on Monday, in which earnings of $1.12 per diluted share beat the socks off the Wall Street estimate of $1.03. The results drove investors back into IBM, pushing up the stock over $3 per share. But not stopping there, “big blue” is looking to ramp up earnings even more.
To achieve stronger earnings growth, IBM is going back to the strategy many companies use when their earnings growth becomes stagnant and revenues are flat or declining. IBM has made major cuts in its job force, in the hope of supercharging its earnings growth.
Of course, I’m not surprised by the cuts, and neither should you be. The reality is, companies are ultimately responsible to their shareholders–and that means making money and driving up the share price. Job cuts are commonly used to keep shareholders happy. I expect, as earnings slow, we’ll see a trend of further job cuts materialize. This is the way it works in a competitive world, and there’s nothing you can do to avoid it.
Take a look at Hewlett-Packard Co. (NYSE/HPQ). The PC maker announced on Tuesday that it would cut 14,500 jobs, or about 10% of its full-time workforce. Since taking over the helm from Carla Fiorina, who was shown the door, new CEO Mark Hurd is quickly putting his mark on the company. The job cuts are part of a restructuring plan intended to save Hewlett-Packard $1.9 billion annually, while increasing profit and margins. The hope is that the stock will regain some lost luster in the end.
Job cuts will always be used by companies as a strategy to boost earnings and satisfy shareholders. That’s life, and you can only hope that you’re not on the chopping block.