By Andrew Leckey
Companies have cut costs to the bone in this brutal recession.
Lost jobs, shuttered facilities and difficult mergers are commonplace throughout corporate America.
The question for investors is whether all that slashing actually improved efficiency at the firms whose stock they own or instead rendered them too emaciated to participate in an economic recovery.
On the other hand, the crash diet that
Demand for products is increasing and companies are running out of places to cut costs, Hogan acknowledged. Companies benefitting most from all this are those beating expectations in both revenues and earnings.
"Too many companies slash costs as soon as they see trouble, and those broad-brush headcount reductions signal that you better be careful to take a good look at that company," warned James Hardesty, president and chief economist of
Overall, manufacturers have tended to do a better job than service companies of tightening up their businesses to the benefit of their shareholders, said Hardesty.
"Expectations were low for this year, but investors will now be more demanding," predicted Kelley Wright, managing editor of the Investment Quality Trends newsletter in Carlsbad, Calif. "When your expectations are zero and you report a penny in earnings, you've beaten expectations by 100 percent!"
Companies will have to show organic growth or investors are going to reject them in a hurry, he said.
Hardesty and Wright both hold Caterpillar and Pfizer in high regard as corporate ax-wielders that benefitted their shareholders and positioned their firms for a stronger worldwide economy. Hardesty called recent Caterpillar earnings "staggeringly good," while Wright said Pfizer results indicate management "has done a really nice job."
Semiconductor companies such as Hogan's favorite stocks in the specialty retailer category are the youth-oriented "The CFOs at most companies have very little patience to tough it out through an economic cycle, so when they see cash flows have fallen, they get out the knives and start cutting," said Hardesty. "Unlike Hardesty's favorite companies among those whose cost cuts are likely to pay off are
Bristol Myers Squibb (BMY). Government intervention has done some good, Wright said, but it has produced no miracles. "Cash for Clunkers was -- let's be honest -- a rescue plan for the auto industry to blow out its inventory," said Wright. "In banking, it looked as though there'd be positive earnings for any bank that was able to hit each customer with an overdraft fee -- and
But there will be winners emerging from recession in numerous industries, he said, with two noteworthy examples being The true results of cutting all those costs must, of course, show up in future quarterly earnings to make a difference.
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