2Q Profits: Cost and Tax Cuts>Revenue Loss

by Dollars and Sense

From Reuters:

Corporate cost-cuts: early gains soon turn to pain?

Tue Jul 21, 2009 4:43pm EDT
By Nick Carey - Analysis

CHICAGO (Reuters) Much of Corporate America has slashed costs to stay in the black during the recession, but wielding the knife too heavily could also remove the ability to grow in a recovery.

"If you cut into flesh long enough, eventually you find bone," said David Rosenberg, chief economist at Gluskin Sheff in Toronto. "Cost cutting is not a bottomless pit."

Firing people, introducing hiring freezes, halting investments, trimming budgets or even skimping on office supplies are time-tested ways to prove the old adage that a penny saved is a penny earned.

A slew of companies reported better-than-expected first-quarter results because aggressive budget slashing more than made up for falling sales. According to Rosenberg, 40 percent of companies missed their top line expectations in the first quarter.

And as the bulk of results for the most recent quarter hits in the next two weeks, many U.S. companies are expected to do the same again. Some already have.

Perhaps the biggest example so far has been General Electric Co (GE.N), which managed on Friday to report earnings that whizzed past expectations despite a drop in revenue that was more dramatic than Wall Street had predicted. The major reasons: cost cutting and a dip in its tax rate.

Mind you, investors can be smart to the numbers game. They question the quality and sustainability of such results--and despite the earnings beat GE's shares dropped more than 5 percent on Friday.

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Labels: economic indicators, financial crisis, profits

 

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7/22/2009 05:23:00 PM