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
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
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
. As Goldman Sachsput it, "As confidence gears higher, then capex
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
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 (
) 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
|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
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
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
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
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.
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