Daily Gains Letter

Massive Job Cuts Reason Companies Meeting Earnings Consensus

By for Daily Gains Letter |

Massive Job CutsOil services company Weatherford International plc (NYSE/WFT) surged more than seven percent last Thursday despite a massive shortfall on its first-quarter revenue and earnings. What gave investors optimism during the first-quarter earnings season for Weatherford was not the fact that things will likely not get worse, but that the company had fired 6,449 employees and another 3,550 or so to come. This, folks, is how companies are pleasing Wall Street.

The cuts will save Weatherford more than $600 million annually. That’s a pretty good number to help offset the revenue decline during the earnings season, but it’s something that I also expect we will hear more of.

Job Cuts Boost Company Earnings, but Affect Wider Economy

Just take a look at the oil sector and you’ll see the tens of thousands of job cuts. Yet while the major firings have been centralized on the oil industry, there will be a spill-off to other sectors, such as restaurants, travel, and retail, as the cuts mean over a billion dollars in lost wages. I expect we could see revenues decline in the other sectors moving forward.

Scrolling through the daily newswires, I have noticed revenue growth is essentially non-existent during the first-quarter earnings season. From small to blue-chip companies, I’m noticing clear revenue contraction or muted growth early on this earnings season.

In fact, of the 60 or so S&P 500 companies that have reported during the earnings season, only about 45% have beaten on their already-reduced revenue estimates. And blended revenues contracted three percent so far during the earnings season. (Source: FactSet, April 17, 2015.)

Earnings are witnessing negative growth in 1Q15, which is not want you want to see, especially given the record moves by the S&P 500. In my view, the stock market appears to be confused and is rewarding mediocre results based on lower expectations. In response, investors are bidding stocks higher with little regard for valuation.

Job Cuts to Boost Earnings: Not Just an Energy Sector Phenomenon

The situation with Weatherford and other energy companies should not be viewed in isolation. It’s simply because the oil companies have been the hardest hit that they’re the headliners at this time.

A closer look at the first-quarter earnings results will show firings across numerous sectors, as companies try to deliver solid numbers in a low-revenue environment to please shareholders and Wall Street.

The lesson is to be wary and realize we are seeing numerous companies manipulate their results via aggressive cost-cutting rather than revenue generation, so be careful.

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