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Sitting Tight: The 2005 Capital Spending Scorecard

Our second annual capital spending scorecard shows that many, if not most, companies have reason to be wary about new spending.

After two years of decline, U.S. companies increased their capital spending modestly in 2003 and 2004, but the amount is still sharply lower than its peak in 2000. Petrochemical companies led the rebound, investing billions to upgrade old refineries and increase capacity, while the electronics and telecommunications sectors continued to cut spending.

Still, U.S. companies’ spending has trailed that of businesses in Europe and Asia for the past four years, according to this magazine’s second annual survey of capital spending. Total capital expenditures (capex) for the 50 largest spenders in the United States fell slightly during the period, although sales increased 9 percent a year between 2001 and 2004. In contrast, their European and Asian counterparts increased capital spending by 1.4 percent and 6.1 percent, respectively. Europe’s biggest spenders have posted sales growth of 4.2 percent a year since 2001; Asia’s big spenders recorded annual sales increases that averaged 9.7 percent.

CFO magazine’s survey of 300 U.S. companies was prepared by Pittiglio Rabin Todd & McGrath (PRTM), a consultancy based in Waltham, Massachusetts. The study examines capital spending trends domestically and globally from 2001 to 2004. PRTM also ranks the 20 largest companies in the most capital-intensive industries in the United States, Europe, and Asia by their adjusted return on gross fixed assets, or ROGFA (see “Measuring Capex” at the end of this article).

The study holds a mixed bag of news for economists who consider capital investment the key to a robust and sustainable recovery. There has been widespread fretting for the past two years as the nation’s biggest companies have opted to squirrel away cash, buy back shares, or pay dividends rather than spend on new equipment and factories. U.S. capital spending among companies surveyed rose to $228 billion in 2004, up 6 percent from $215 billion in 2003 in a trend led by a broad cross-section of industries.

In addition to the petrochemical industry, the study’s biggest spenders in terms of total dollars include aerospace and defense firms, automotive companies, industrial manufacturers, pharmaceutical companies, telecommunication providers, and utilities. Six sectors increased capex spending between 2001 and 2004: aerospace and defense, food and beverage, industrial manufacturing, medical devices, petrochemicals, and pharmaceuticals. Seven sectors decreased spending: electronics, metals, semiconductors, transportation services, telecom service providers, telecom-equipment manufacturers, and utilities.

The question going forward, however, is whether companies can earn a satisfactory return on that spending, and here the study is not especially reassuring. On average, returns in the industries that account for most U.S. spending, telecom service providers and petrochemical makers, trail those in other industries.

Among the top 10 individual spenders were General Motors Corp. and Ford Motor Co., whose serious financial troubles put new spending in doubt. As it was, capex spending by the auto sector was flat last year, at about $21 billion, compared with 2003. Of the other top 10 individual spenders, all but Intel Corp. were telecom service providers or petrochemical companies.

As this issue went to press, oil companies faced the possibility of a windfall-profit tax. U.S. telecom service providers, meanwhile, have cut their budgets dramatically since 2001. They spent $47 billion in 2004, thus accounting for nearly one-fifth of the total capital spending of the companies surveyed by PRTM. In contrast, the group had spent $94 billion in 2001.


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