How do you inflate earnings? You cut jobs and lots of them. Back during the bear market years from 2000 to 2003, companies faced with declining revenues or flat growth and margin pressures did what was the easiest — they axed jobs and sent employees packing.
In my view, cutting jobs might help to improve margins and earnings, pleasing Wall Street and helping to improve shareholder value. But, at the end of the day, cutting jobs also helps to disguise some potentially deep-rooted issues. Think of it this way: when a company is steadily growing its revenues, they hire more workers to deal with the extra business. This is the way it should be.
But, when companies face weak revenue growth, it should automatically suggest an underlying concern. Simply, the company is not growing its business adequately and, in my books, this is bad news. I don’t want to buy a company characterized by slow revenue growth.
A perfect example is the U.S. auto industry. Faced with rising imports from Japan, U.S. automakers have been losing market- share. Revenues, while growing, have been lackluster. The end result is pressure on margins and you know Wall Street does not want to see this. So, guess what they do? Cut jobs!
In November, General Motors Corp. (NYSE/GM) said it would restructure its operations by shutting down 12 plants in North America and handing out 30,000 pink slips. Now, these are real jobs that will be wiped out. You knew that it was only a matter of time before the other U.S. automakers caught on and mirrored the actions of General Motors.
Just last week, Ford Motor Co. (NYSE/F) announced it would slash up to 30,000 jobs and shut down 14 plants by 2012. It was like a domino effect. The day after, DaimlerChrysler AG said it would axe 6,000 jobs in an effort to streamline the company and boost profits.
Do you see the trend here? It happened in technology over the last few years. No industry is immune from it. In the pursuit of profits and in the face of slow growth, companies will have no other choice but to axe jobs in order to make Wall Street and shareholders happy. It is unfortunate when jobs are lost, but it is the reality of the corporate world.