Cost-cutting, not revenue growth boosts earnings

As I sat on my couch eating Honey-Nut Cheerios and watched earnings releases from Caterpillar (CAT) and United Technologies (UTX), among others, it occurred to me that many companies thus far were beating earnings expectations on cost cutting rather than sales growth. Apparently Brent noticed the same thing as he was writing today’s Daily Insight.

To echo Brent’s comments, expectations are extremely low and it would be nice to see more revenue growth in these reports. Of course, we don't view these cost cuts as a bad thing. After all, this is what a business cycle is all about. Companies trim fat during a downturn so that they are more efficient and productive when the expansion phase of the cycle returns. It’s pretty obvious that the second-half will have easier comparisons and those companies that have trimmed excesses will post nice profits.

What should raise red flags are companies that are not aggressively trying to reduce costs. It is crucial for companies to be as lean as possible going forward – especially with the growing fear of a “double-dip” recession, or W-shaped recovery.

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Peter J. Lazaroff