Why Some Blue-Collar Stocks Are Tough as Nails Right Now

While not popular, job-cutting has made these names more efficient

   
Why Some Blue-Collar Stocks Are Tough as Nails Right Now

Good thing Alcoa (NYSE:AA) kicked off earnings season last week with some good news. The market looked to be on the verge of a total meltdown, but the aluminum company’s strong results injected some bullishness back into the market when it needed it most.

But there’s a bigger story unfolding here than just one quarter’s decent results. While Alcoa’s bottom line still is more than a little inconsistent from one quarter to the next, when you take a step back and look at the bigger picture, it does indeed look like earnings are on the mend.

The amazing part about the recovery: Alcoa’s earnings aren’t stabilizing because aluminum prices are persistent — they’re stabilizing despite wild swings in aluminum prices.

From $1.10 per pound in 2007 to a peak of $1.48 in 2008, to a low of 57 cents per pound in 2009 to $1.22 in the middle of last year, then back to the current price of 93 cents, aluminum prices have been all over the map. It’s a miracle Alcoa was able to make any money at all for the past five years, as the aluminum market was a Forrest Gump-like box of chocolates. Alcoa (nor any aluminum player) had any idea what it was going to get in any given month.

So how did the aluminum company muster consistent earnings for the past two years, and why do analysts look for similar income of 55 cents per share in 2012? This is where the story gets compelling, even if AA stock’s chart isn’t yet.

Tough Decisions Bear Fruit

It’s an ugly reality, but when Alcoa started to cut capacity and lay off people in early 2009, the cost-cutting measures worked.

The original swing of the ax in March of that year lopped off about 13,000 workers. It’s a number that’s so big, most investors can’t even make a quick guess as to how it could fiscally impact the company. So, here’s some quick math to put it in perspective: If 13,000 workers each cost the company $30 per hour, that translates into an expense of more than $800 million per year. For a $10 billion company that turned $21 billion in sales into $548 million in operating income, that payroll savings is a very big number.

It’s not a matter to be taken lightly, letting go of people. While they’re only numbers on an income statement, for the workers on the wrong end of the cost-cutting measure it can be devastating. But in a capitalist society, the bad comes with the good.

The company has continued to cut its payroll more and more between then and now too, a hundred (or even less) at a time. Now what’s left might be a smaller organization, but definitely a stronger one — Alcoa has learned to be a lean, mean, money-making machine.

It’s not just Alcoa, though. Other industrial manufacturers that tend to be labor-intensive (and therefore labor-expensive) have been forced to take drastic cost-cutting measures, and have emerged stronger — by necessity — as a result.

Caterpillar (NYSE:CAT) is one of them. Feeling the same early 2009 pinch that Alcoa was, the heavy equipment manufacturer started to unveil plans to let go of 20,000 workers … approximately 18% of its work force at the time. The measure had the intended immediate impact, as the company never had to dip into the red ink.

In the meantime, Caterpillar has not only returned to pre-recession revenue levels, but is now exceeding them. More than that, though, net margins are rolling in at 8.2%. versus 2008’s 6.9%. The difference might seem small, but when you’re talking about a $4.9 billion profit with margins of 8.2% or only a $4.1 billion profit when net margins are 6.9%, the difference doesn’t seem so small.

General Motors (NYSE:GM) is another example of the same idea, though with a slight twist. GM really pushed a buyout offer to its 62,000 workers back in early 2009, rather than forcing bulk layoffs. A large number of eligible employees took the offer, though General Motors still had to shed workers by the thousands in 2009.

While it would be unfair to say that shedding employees and associated benefits costs is the only reason General Motors is back into viable territory today (the rebound in the auto market deserves at least some of the credit), like Caterpillar and Alcoa, GM is better off by being forced to learn efficiency. The numbers say so. Even when the revenue spigots were turned on high in 2007 — when the company posted a top line of $181 billion — GM still managed to do slightly worse than break even. Yet in 2011, the company managed to turn revenue of $150.2 billion into a profit of $9.2 billion.

Bottom Line

Losing a job is nothing short of miserable. For investors, though, the benefit of forced layoffs is real. Certainly these organizations will eventually become bloated and labor-heavy as the economy continues to firm up, but the lessons and hardships from 2009 have turned at least some blue-collar names into rock-solid — even if unsexy — contenders. That’s a condition that should linger for a few years.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/why-some-blue-collar-stocks-are-tough-as-nails-right-now/.

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