Companies that are able to pare the cost of employees have taken a major step toward increasing profits, and it is usually during times of necessity -- such as when the country is in a recession -- that they are serious enough to cut labor costs.
This week, Manor Care of Silver Spring, the largest manager of hotels in the United States as well as a major operator of nursing homes, reported a huge jump in third-quarter earnings -- up 72 percent from the comparable period a year earlier. In reporting the quarterly results, the company noted the importance to earnings of holding down its labor expense.
There is more than just labor cost, however, that is boosting Manor Care's earnings. Both of the company's divisions -- hotels and nursing homes -- are largely immune from the debilities of an economy in or near recession.
During the late 1980s, the firm opened 37 nursing homes, amounting to more than a quarter of the capacity of all of its nursing facilities. Earnings were hit hard while the homes were being built and put into service, but, as noted by James MacCutcheon, senior vice president and chief financial officer, the company has been "absorbing and filling and building on what's been done." Occupancy rates are increasing; meanwhile, Manor Care has no current program for building more nursing homes.
An aging population creates demand for nursing homes, and Manor Care's 167 facilities are showing higher occupancy.
Manor Care's hotel division also has a shield from recession. In general, hard times cut into travel and, thus, the hotel business. However, Manor Care's hotels, which number about 2,300 in all, are on the lower end of the price spectrum -- hotels such as Quality, Rodeway, Econo Lodge -- and they're less affected by tough economic times.
Also, the lower-priced hotels are much less labor-intensive than their upper-level counterparts. They offer fewer services, which in difficult economic times can cost more than they bring back in revenue.
Manor Care's share price, in the mid-20s, is not cheap. The stock sells for about 28 times earnings which makes it vulnerable to problems from the company or the general economy.
Usually, Manor Care has been a high P-E stock, but that's not unusual for the hotel industry where P-E's above 20 are to be found. Last year, when Manor Care boosted earnings about 22 percent to 84 cents a share, the stock sold as high as 28 1/2 for a more than 30 P-E. Even the low price during 1990 -- 10 1/4 -- gave it a P-E of about 15.
Interest yield dilemma
The clamor continues from holders of certificates of deposit and just plain savers that the yields on their investments are inadequate. To improve return, there's been a lot of switching to various types of bond funds offered by mutual fund companies.
With interest rates turning upward, the value of bond funds per share will probably decline. The loss from a dip in the value of the fund is likely to be much more than any additional interest that would be earned by the holder over the period when rates are being adjusted.
Most investors are aware of mutual fund money market funds, now earning little more than 4 percent. However, the mutuals have tax-free money market funds which are paying more than 3 percent. When considering taxes, the tax-free money market funds might be a better choice.