Why I’m Not Sweating The Latest Round Of Layoffs


Monday the major indices traded lower as two big layoff stories grabbed headlines. First, Google (NASDAQ:GOOG) announced that it is cutting 4,000 jobs from its newly acquired Motorola Mobility (NYSE:MMI)—20% of the unit’s workforce. One-third of the jobs lost will be in the U.S.

Then, FedEx (NYSE:FDX) announced that it is offering a voluntary buyout to its U.S. employees. The company hasn’t specified how much of its workforce will be cut, but FedEx’s Express and Service units will mostly likely experience the cuts because they aren’t growing as quickly. In total, these units employ more than 158,000. We’ll receive more details on these cuts at the company’s annual investor meeting at the beginning of October.

But while the words “layoffs” and “job cuts” are all but taboo in today’s economic climate, sometimes leaner operations are necessary for more sustainable growth.

In the case of Google, shares are trading modestly up. That’s because the consensus is that this is a good first step to make Motorola Mobility—which has lost money in 14 of the past 16 quarters—more profitable. Google bought Motorola’s cellphone-making unit for $12.5 billion last year and hopes to use its patent portfolio to defend itself from ongoing intellectual property lawsuits aimed at the Android mobile platform.

As you can see from my Portfolio Grader report, GOOG is actually doing decently in terms of its fundamentals, especially its sales growth, earnings momentum, cash flow and return on equity.

And sometimes layoffs are a necessary part of a company’s lifecycle — in fact, certain industries experience such wild seasonal swings in demand that it’s all but certain that there will be layoffs at a certain time of year. This was most certainly the case with FedEx Corp., which hired a whopping 20,000 season workers before the last holiday shopping season to beat the rush. Now that we’re in the dog days of summer, FedEx is cutting back to cope with the seasonally lower demand.

Of course, some other waves of layoffs give us greater cause for concern as they are a telltale sign of tougher times to come: The first company that comes to mind is the down-and-out Research in Motion (NASDAQ:RIMM). Over the past several months this company has cut its workforce by over 12% and further layoffs are in the works. As we all know, this smartphone player has been in a downward spiral — one glace at my stock report page can tell you as much.

But I don’t want to have you thinking that the entire U.S. jobs market is in decline. As bad as layoffs are for morale, initial claims for unemployment have been on a steady decline over the past three years. In the past year, they’ve stayed consistently under the 400,000 benchmark—suggesting a growing jobs market:

Initial claims for unemployment from 1/3/2009 to 1/3/2012

At the end of the day, I don’t want you to get overly worked up about these layoff announcements. If you own shares in a company that announces cuts, I recommend that you run it through my Portfolio Grader tool. This will give you a better idea about how this company is doing fundamentally and whether the cuts are part of a larger growth strategy or an act of desperation.

Article printed from InvestorPlace Media, https://investorplace.com/2012/08/why-im-not-sweating-the-latest-round-of-layoffs-goog-fdx-mmi-rimm/.

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