Real Growth or Cost Cutting and Buybacks boost EPS?

J

jefferis

I have asked this question of several stock gurus, but gotten no replies:

I hear all the talk of increasing profits at companies as a sign of economic health, or general prosperity, in the overall economy. BUT I wonder, what percent of this increase is due to stock buy backs and cost cutting. In other words, if EPS are increasing due to stock buy backs and massive cost cutting, BUT the businesses are not actually increasing total sales and market share, by what measure can we say that the economy is really expanding?

From where I sit, I see friends in I.T., web design, and pharmaceutical sales encountering layoffs, lowered salary offerings, fewer positions, and unemployment. Job searches for Pitt and Philly are showing few openings in the tech industry and the salaries are 2/3 of what they once were or less.

If the companies are showing bigger profits because they are laying off US workers, buying cheaply overseas, and selling here, but are not increasing total sales or market, are we really prospering? If profits are coming because they are cutting work forces but not increasing sales, they LOOK more profitable, but they aren't really growing their businesses...

Is there some way to evaluate and understand if the reported growth in the economy is because companies are actually growing real sales revenues, or if what we have experience in the past 2 years is nothing but a huge corporate shell game?

Thanks
Jeff

I'm starting to wonder if the WTF and NAFTA are really the beginning of our economic undoing...
 
I think thats why there is such a disconnect betweeen consumer confidence and the stock market. Yea the stock market is booming, but at the expense of a lot of people. Although, you can only go so far before the consumer spending takes a turn and that will be the end for a large portion of the stock market.
 
It's a shell game. Profits have come at the expense of the average worker through wage and benefit cuts. Short term....great. Long term...can't last.
 
It bothers me to see Billions of dollars in profits being wasted to buy back share prices. The money would be better used to invest in capital expansion ,which gives real jobs to real people. MSFT..wtf??? XOM wtf??
 
Quote from TheDudeofLife:

It bothers me to see Billions of dollars in profits being wasted to buy back share prices. The money would be better used to invest in capital expansion ,which gives real jobs to real people. MSFT..wtf??? XOM wtf??
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So far I think we are all in agreement in "feeling" the same things about the big picture. I'm wondering if anyone has stats? I can't find any. All I see is fund managers and the like touting "profit growth." But I think it begs the question. Yes. I think some individual named companies are actually growing real revenues substantially, but I wonder how the OVERALL economy and corps are really doing. It seems the big mega corps are just buying back stock, and that makes it seems like EPS growth is the same as market share growth...

Jefff
 
Quote from jefferis:

So far I think we are all in agreement in "feeling" the same things about the big picture. I'm wondering if anyone has stats? I can't find any. All I see is fund managers and the like touting "profit growth." But I think it begs the question. Yes. I think some individual named companies are actually growing real revenues substantially, but I wonder how the OVERALL economy and corps are really doing. It seems the big mega corps are just buying back stock, and that makes it seems like EPS growth is the same as market share growth...

Jefff
More...

If you were going to write a textbook recipe of how the middle class will be phased out, or shrunk down, this is how you would do it. The good news is that if you think that it is a slam dunk, all you have to do is buy stocks in these companies to participate. But the bad news is that you may have missed the boat. Once the prosperity is over, and the companies stop making as much profit due to a lack of sales of their products, then they won't have anymore money to buy stocks back. So what you are describing is essentially a temporary phenomenon...
 
I think there is very little organic growth going on. Most of it is because we just had the most massive stimulus in post war history and a ton of financial engineering. If we didnt devalue the currency would there have been an energy boom?
 
Quote from jefferis:

I have asked this question of several stock gurus, but gotten no replies:

I hear all the talk of increasing profits at companies as a sign of economic health, or general prosperity, in the overall economy. BUT I wonder, what percent of this increase is due to stock buy backs and cost cutting. In other words, if EPS are increasing due to stock buy backs and massive cost cutting, BUT the businesses are not actually increasing total sales and market share, by what measure can we say that the economy is really expanding?

From where I sit, I see friends in I.T., web design, and pharmaceutical sales encountering layoffs, lowered salary offerings, fewer positions, and unemployment. Job searches for Pitt and Philly are showing few openings in the tech industry and the salaries are 2/3 of what they once were or less.

If the companies are showing bigger profits because they are laying off US workers, buying cheaply overseas, and selling here, but are not increasing total sales or market, are we really prospering? If profits are coming because they are cutting work forces but not increasing sales, they LOOK more profitable, but they aren't really growing their businesses...

Is there some way to evaluate and understand if the reported growth in the economy is because companies are actually growing real sales revenues, or if what we have experience in the past 2 years is nothing but a huge corporate shell game?

Thanks
Jeff

I'm starting to wonder if the WTF and NAFTA are really the beginning of our economic undoing...
More...

Jeff,

I think you've identified a key driver behind the p/e multiple compression that's shown up over the last 5 years... Look at HD, INTC, BBBY, YHOO stock then and now for instance for a good idea. And then look at the charts for XOM, PD, CAT and BA in comparison... I don't see how all 3 indices can plough higher ahead with this kind of divergence in sector performance over the longer term.

Eps growth by itself is pretty meaningless, unless accompanied by operating cash flow growth driven by revenue and margin as opposed to reduced intangible expenses such as D&A. And I think that what you'll find is that very often 20% or more of eps growth will come from stock buybacks. CEOs and CFOs will tout the fact that they would rather buy back their 'undervalued' stock but it's all bs, they are not growing their capital expenditures or reinvesting in the business, the truth is they can't even see out 6 months.

If you back out the earnings of energy companies from the S&P, I think you will find eps growth of non energy S&P to be closer to 5%. If you back out buybacks, I wouldn't be surprised to see that shrink even more. So if you ask me, is it a bargain to buy the S&P at 15-20x fwd earnings when you've got 0% real eps growth, 'low' interest rates, 2% gdp growth and a core PCE measure that is equal to higher than the Fed's threshold? I don't think it is. But of course, hot money has been piling into the US equity markets for the simple reason that things aren't all that bad on a relative scale, right? Hot money would rather be in stocks than a dicey US housing market, a low yield bond market with inflation creeping up etc etc, blah blah blah. But ultimately even liquidity can only take an index so much higher before fundamentals are given the limelight again and due respect. We'll see how long this recent binge goes on for.
 
One thing not mentioned so far: this latest expansion is totally due to some selected major industries (and government) growing wildly. However, other sectors are shrinking or they are under huge cost competitiveness. So, it's a HAVE and HAVE-NOT economy which on THE AVERAGE looks good.
In my neighborhood, there are a lot of "thrivers"...they are in Healthcare, Biotech, Law, Defense (Boeing, Lockheed Martin !), Big Pharma , oil. And there are the those not so well off: software, web development, engineering, graphics, real estate, mortgage financing, etc. If you disect this list, you'll find outsourcing a huge contributor to the decline in these areas. In fact, there are a ton of traders in this forum who were former software developers, programmers, and engineers.
Bottomline: you're either flyin or dyin in this current economy.
 
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