Capital spending generally goes as the economy goes — which means it’s currently in the doldrums. Growth of U.S. capital expenditures (capex) has slowed from a robust 21 percent in 2006 to 13 percent in 2007 to nominal growth projected for 2008, according to business consultancy The Hackett Group. According to finance chiefs (both here and abroad) polled in Duke University/CFO magazine’s latest Global Business Outlook survey, capital spending will rise a paltry 3 percent this year.
Company after company has announced that it will tighten the purse strings in 2008. For example, department store chain J.C. Penney will open fewer new stores, while specialty retailers from Ann Taylor to Zales are scaling back capex plans. Meanwhile, skyrocketing fuel prices have forced airlines like Delta and American to throttle back on capex, too.
JX Enterprises/Peterbilt of Wisconsin, a privately owned chain of truck dealerships that had planned to open one new dealership per year, has suspended its 2008 expansion, says CFO Mark Muskevitsch. “Last year we had an aggressive capital-spending plan,” he says. “So far this year we have done only things we have to do, such as replacing computer hardware, but not facility upgrades or refinishing lots.” Computer-software upgrades will have to wait until sales pick up, he adds.
Still, says Muskevitsch, trucking demand usually begins to recover before other sectors, which means business may pick up in the second half of the year. If so, the company will consider a modified expansion plan — leasing rather than buying a new facility.
To a large extent capex strategies depend on what industry you play in. Companies in some sectors, such as biotechnology and telecommunications, still have solid growth prospects and have to invest, points out Roger Wery, director of the operational strategy practice at consulting firm PRTM. “Some companies can’t stop investing, because they are in a ruthless, competitive environment,” he adds. Yahoo, for example, is spending large amounts on capex even though its EBITDA (earnings before interest, taxes, depreciation, and amortization) has slowed. “They feel pinched, but they have to continue to invest,” says Wery.
Companies in the energy and utility sectors have been more fortunate, ramping up their capital budgets as their earnings soar. For example, ExxonMobil is spending 20 percent more on capex in 2008 (up to $25 billion), while Duke Energy, seeking to match the high demand for electricity (and concomitant rising prices), remains committed to a five-year, $23 billion capital plan to improve its power plants and build new generation capacity. While the number of “new hookups,” or customers, is slowing, usage by existing customers is rising, says Duke Energy CFO David Hauser, adding that demand is expected to exceed supply for some time.
Energy, of course, faces a unique set of challenges and opportunities that make it difficult to scale back capex as a short-term fix in troubled times. PPL Corp., which generates electricity from coal, gas, nuclear, and hydroelectric power, will devote part of its $1.6 billion capex budget this year to renewable-energy projects and compliance with pollution regulation. “The dynamic in our sector is that between regulatory pull and market pull,” says CFO Paul Farr. PPL spent $1.7 billion on capex in 2007, when it paid for giant scrubbers to remove sulfur and other pollutants from the utility’s coal-generating plants. Even as it copes with environmental issues, it is also considering building a new nuclear plant, which would be a multiyear, multibillion-dollar project. The math just might work, says Farr. “When we look at the energy marketplace, the price and the demand for electricity, it’s very compelling to spend the capital and live through those long construction cycles.”