Slow with the Flow

Most companies applied the brakes to capex as recession lurked. Don't expect them to accelerate soon.

Valero Energy Corp., a $95 billion oil refiner headquartered in San Antonio, funneled only a tiny fraction of its cash into capital spending last year. Stingy by comparison with rivals in the North American oil-and-gas industry (which committed seven times as much, on average), Valero earmarked just 2.4 percent of its 2007 sales to capital expenditures. A conservative laggard? Hardly. Valero’s stock delivered a stellar total return of 213 percent over three years through December 2007, versus an industry average of 149 percent.

But even companies with capital at their disposal proceeded very cautiously in 2007, and certainly nothing that has happened lately is likely to change that. “We try to be realistic,” says Valero CFO Mike Ciskowski. By “realistic” he means “rigorous.” The company has put more emphasis on prespending analysis, and works harder to standardize its cost estimates so that comparisons across potential investments will be more accurate. Valero also applies different hurdle rates to different kinds of projects, seeking, for example, at least a 20 percent return on strategic projects and a 12 to 14 percent return on cost-cutting projects.

Using analysis by PRTM, a global management-consulting firm focused on operational strategy, our 2008 capex scorecard takes vital measures of capex performance and ranks companies by their returns on gross fixed assets, or ROGFA. Based on that measure, companies have clearly reined in spending; after increasing by 15 percent in 2005 and 18 percent in 2006, last year capital spending grew a scant 3 percent.

But even at a mere 3 percent growth, capex still outpaced revenue growth, a fragile trend in normal times and far less sustainable in today’s climate. High energy prices and a vanishing credit pool will make it very difficult to fund capital investments, adding yet more urgency to the never-ending need to hone a competitive edge, conserve financial resources, and generate adequate returns for investors.

Only 4 of the 14 capital-intensive industries — communication services, network-equipment manufacturers, medical devices, and food and beverage — grew capital spending faster last year than in the prior two years. Two sectors, industrials and automotive, posted a net reduction. For the outliers, the numbers tended to be driven by industry specifics rather than broad economic themes. In the telecommunications sector, for example, the changeover to third-generation wireless systems and fiber-optic networks has kept capital spending high, while in the auto industry, slumping sales of fuel-thirsty trucks and SUVs, long the best-selling models for North American automakers, have dampened the need for manufacturing capacity.

Bright Spots

Amid the gloom, however, some companies manage to thrive the old-fashioned way: by spending more to make more. Garmin Ltd., the $3.2 billion maker of GPS navigation devices, tops all electronics companies in this year’s capex scorecard, having poured 4.9 percent of sales into capex last year. While CFO and treasurer Kevin Rauckman says, “We spend only what’s needed to support the business,” Garmin bucked the outsourcing trend and instead spent around $2 million to expand company-owned production facilities in Taiwan. That investment, Rauckman says, generated $75 million in revenue.


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