3 Ways To Profit From A $150 Billion Capital Spending Boom

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When the U.S.economy was on the cusp of falling into an abyss in late 2008, companies across the nation collectively decided to cut all unnecessary spending. An uncertain road ahead meant it was time to preservecash .

Of course, these companies eventually loosened up, and as we've seen in the past four years, have been buying back massive amounts of their ownstock while doling out ever-higher dividends.

But there is one area that companies remain quite conservative:capital spending, also known as capitalinvestment orcapital expenditures (orcapex , for short).

Although capital spending has moved up from the crisis-era lows, it still remains far below typical levels.Analysts at Goldman Sachs who have studied the spending patterns see "the U.S. reaching a near 50-year low in private non-residential fixed investment when measured againstGDP ." These analysts believe it would take a $150 billion increase to bring capitalinvestments back in line with historical norms.

Yet companies know that it takesmoney to make money. Capital investments in new factories, equipment, software,logistics and other areas sets the stage for higher levels ofproductivity , enabling companies to boost output without a commensurate rise in headcount.

So why isn't corporate America getting busy? Blame it on the economy andCEO confidence.

Over the past four years, a series of headwinds, from Japan's tsunami disaster and the European crisis, to the negative impact of the U.S. government's automatic budget cuts (known as sequestration) have all conspired to keep the economy growing at a subpar pace.

Companies need to see the economy on a sustainable 2.5% to 3% growth path before they'll have the confidence to make long-term investments in the health of their business. For the currentyear ,economists expect the U.S. GDP to expand around 1.5%. Yet in 2014, that figure should rise to 2.6%, as The Wall Street Journal noted .

Equally important, leading CEOs need to believe that the political backdropwill also be benign. The good news: They no longer think Washington will create the headaches it's induced in recent years, as this article notes . As Goldman Sachsput it, "As confidence gears higher, then capex shouldopen wider."

Smaller businesses, many of whichsupport a broader supply chain of capital equipment production, noted a hint of small optimism in a recent Wells Fargo/Gallup survey, as this chart indicates.

According to these pollsters, small-business sentiment "improved 9 points since second quarter and 36 points since the fourth quarter of 2012, to a positive 25." That's the highest reading since the third quarter of 2008.

So which companies are likely to most greatly benefit from an eventual rise in capital spending? Firms involved in construction, business process automation, and other productivity tools. Here's a short sample, though you should keep an eye out for any companies that have a high level of sensitivity to changes in capital spending levels.

1. Rockwell Automation (NYSE:ROK )
This maker of factory automation systems has managed to boostsales less than 10% from fiscal 2008 to fiscal 2012. Yet management hasn't been waiting around for business to improve. In that time, Rockwell has beeninvesting hundreds of millions in its Logix Automation control platform, an open-source software system that enables all components of a production process control system to easily interoperate. Moreover, Rockwell's core strength in manufacturing has now been extended into the fields of energy refineries, mining, and food and beverage production.

2. Manitowoc (NYSE:MTW )
The world's largest purveyor of construction cranes (along with a food service division) has surely felt the impact of the global slowdown in construction, as a 2012 base of sales of $3.9 billion was well below the $4.5 billion generated back in 2008. And the fact that sales are expected to rise around 5% in 2013 and 2014 tells you there is no capex boom yet underway.

Still, investors have started to embrace this stock in advance, noting the impressive 30%-plusprofit growth that is expected in 2013 and 2014, thanks to solidmargin gains . Though analysts anticipateearnings per share ( EPS ) of $1.65 in 2014, theynote that Manitowoc earned around $2.50 a share back in 2007, which took place during the last cycle of high-capex spending. The fact thatshares trade at around $20 tells you that furtherupside lies ahead as rising capital expenditures helps pushEPS back up to past peaks.

3. Danaher (NYSE:DHR )
This company is exposed to a rise in capital spending in a broad variety of industries. Its products include test, measurement and monitoring equipment; water disinfection systems; life sciences lab equipment; and sensor and control equipment used in a variety of manufacturing applications.

A series of acquisitions have helped sales nearly double to a recent $18 billion since 2006, although organic growth has been much more muted. The deal spree means that "Danaher

now boasts one of the premier defensive growth portfolios in the sector," according to analysts at Citigroup, who suggest that the company now has roughly $7 billion in financial firepower to buy its way into additional attractive niches.

Risks to Consider: A pullback in the U.S. economy would have a strong negative impact on both capital spending and the outlook for these companies. 

Action to Take --> The best way tocapitalize on the capex theme is to identify how a company's products are being used. If they help clients boost productivity or generally expand their capacity or capabilities, then they are likely to see accelerating demand as the U.S. economy strengthens.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas , Stocks

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