It’s now been five years since the U.S. hit the height of the financial crisis and well-respected investment house Lehman Brothers went from market maven to bankrupt and nonexistent practically overnight. The past half-decade has been a time of once-in-a-lifetime gains for some investors while marking unparalleled financial and job losses for others.
What hasn’t stopped, though, throughout the boom and bust cycle are the constant lessons on investing to which we’re all both students and professors. That’s why I was so intrigued last week to come across a study commissioned by AOL, Inc. (NYSE:AOL) and assigned to employment services firm Challenger, Gray & Christmas to research which companies had laid off the most employees since the financial crisis. As you might imagine, being a cumulative total and not being conducted on a percentage basis, bigger companies led the list.
According to the data, here are the 10 U.S. companies with the heftiest job cuts since the financial crisis:
| Company | Total Jobs Lost |
|---|---|
| General Motors Company (NYSE:GM) | 77,100 |
| Citigroup Inc. (NYSE:C) | 75,000 |
| Hewlett-Packard Company (NYSE:HPQ) | 74,300 |
| Circuit City Stores Inc (OTCMKTS:CCTYQ) | 41,305 |
| Caterpillar Inc. (NYSE:CAT) | 40,111 |
| Bank of America Corp (NYSE:BAC) | 37,402 |
| JPMorgan Chase & Co. (NYSE:JPM) | 35,000 |
| Merrill Lynch | 35,000 |
| Verizon Communications Inc. (NYSE:VZ) | 30,700 |
| U.S. Postal Service | 30,000 |
Source: AOL, Challenger, Gray & Christmas, individual company employee figures.
There probably aren’t too many surprises on this list, but I, nonetheless, took away a few interesting investing angles.
The financial sector still has a long way to go
The first thing I noticed is that this list is littered with financial service companies — four out of 10, to be exact. That likely isn’t a huge shocker since the liquidity crisis itself was responsible for bankrupting Lehman Brothers and forcing numerous other brokerages and banks like Bear Stearns and Washington Mutual to seek the refuge of a bigger buyer.
What I find noteworthy, though, is that despite many of these banks sporting record level of liquidity in accordance with new Basel capital requirements, many financial institutions are operating at staffing levels that are nowhere near pre-recession standards. In fact, over the past few weeks we’ve actually witnessed even more job cuts, with Bank of America shedding 2,100 mortgage service jobs and Wells Fargo & Co (NYSE:WFC) shuttering 2,300 in August due to weak mortgage application originations.
The ultimate lesson here is that financial institutions are a double-edged sword. On one hand, there’s still a lot of work to be done. We’re five years removed from the financial crisis and housing bubble, yet Bank of America is still dealing with litigation associated with its foreclosure and mortgage practices. JPMorgan Chase, on the other hand, recently settled a civil suit filed against it following its “London whale” derivatives losses, which totaled $6.2 billion on top of $1.5 billion in legal fees. This goes to show that even after five years of increased scrutiny, banks’ internal controls can still fall short of investor expectations.
Yet financial institutions’ shortcomings lends to the idea that there could still be considerable upside to this sector. Bank of America, inclusive of its troubles, is still only valued at 72% of its book value despite being the nation’s second-largest bank by total assets ($2.13 trillion). In a similar fashion, Citigroup is valued at a mere 81% of its book value and is the third-largest bank with $1.88 trillion in assets. These are gigantic banks with a laundry list of legacy problems, but they are slowly getting better by the day and could still represent an intriguing investment opportunity.
Innovation is everything
I probably don’t have to go into a manifesto explaining this as I’ve done so on numerous occasions before, but innovation is the heart and soul of a business. Without it, a business will fold.
Source: Wikimedia Commons.
Circuit City and its employees learned this all too well when the company filed for bankruptcy protection and eventually liquidated in late 2008/early 2009. It fell victim to the showrooming effect, unable to compete with Best Buy Co., Inc. (NYSE:BBY)‘s enormous in-store selection and being outbid on the price and convenience factor by Amazon.com, Inc. (NASDAQ:AMZN). However, Circuit City isn’t the only victim on this list.
The U.S. Postal Service is front and center when it comes to being phased out by the latest and greatest information technology in the world: email. Although the USPS is doing what it can to streamline operations and reduce costs, there’s only so much a physical mail logistics company can do in a world that’s constantly moving to a digital platform.
Hewlett-Packard is another victim here. Along with Dell Inc. (NASDAQ:DELL), HP failed to anticipate the rapid decline in PC sales and has been scrambling to reduce head count and introduce new cloud-based hardware and software products in order to turn the tide.
Finally, even General Motors struggled with innovation. Although anyone would tell you it was GM’s highly levered balance sheet and hefty pensions that put it into Chapter 11 bankruptcy in 2009, I’d surmise its lack of overhauls to its Silverado, Sierra, and other prominent vehicles failed to get U.S. consumers excited about its brand and only added to its troubles.
The point is that innovation drives bottom-line results. Even if a company is raking in the dough now, if there isn’t a long-term solution or evolution for its business, it probably won’t make for a good investment.
Cost-cutting is masking a lack of organic growth
One factor that seems to be prominent throughout many of these companies — at least in cases where there were profits to be made — is that job cuts served as a way for them to reduce costs and artificially boost profits to mask a lack of organic growth.
Right now, we’re seeing HP shed some 29,000 jobs under CEO Meg Whitman in order to reduce its annual expenses by $3.5 billion. While a streamlined workforce helps margins and efficiency, I fail to see how HP is expecting to grow its business moving forward with 29,000 fewer workers.
Heavy construction machine manufacturer Caterpillar is in a similar bind. Global commodity prices have pulled well off their highs and demand for heavy machinery is way down, causing the company to cut jobs in order to reduce expenses and boost its earnings per share.
The concern with both of these scenarios is that job cuts are a short-term solution and it doesn’t address how a company is expected to achieve long-term growth. While HP and Caterpillar are both bringing in hefty amounts of cash flow and reducing expenses, neither have any near-term catalysts that would suggest their business is about to turn around.
The lesson here is to be wary of companies that are using job and cost-cutting as their exclusive tool to boost margins and their bottom line. Cutting costs can only take EPS growth so far and is absolutely no replacement for top-line organic growth.
The article 10 Companies With the Heftiest Job Cuts Since the Financial Crisis originally appeared on Fool.com.
Fool contributor Sean Williams owns shares of Bank of America and Dell, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool recommends and owns shares of Amazon.com, Bank of America, and Wells Fargo. It recommends General Motors and owns shares of JPMorgan Chase and (NYSE:JPM) Citigroup.
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