U.S. companies including Ford Motor Co. (F) and Microsoft Corp. (MSFT) are poised to boost business investment to a record in 2014, using a growing cash hoard to propel corporate spending past last year’s $2 trillion.
Chief Executive Officers are buying new machinery and investing in real estate as a U.S. budget deal and growth in Europe signal a rebound in customer demand. That marks a reversal from four years ago, when companies began restraining spending from pre-recession levels and made do with the oldest equipment in 15 years, according to BMO Capital Markets Corp.
“The U.S. is on the verge of an early capex recovery, one that is likely to have some considerable legs,” said Brian Belski, BMO chief investment strategist.
CEOs who raised dividends and increased share repurchases in recent years now must lay the groundwork for future profit increases, said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC. Investment will rise 6.7 percent, after a gain of about 2.6 percent in 2013, according to UBS Securities LLC.
“They’ve got the cash and they have no choice,” said Scott Davis, a Barclays Plc analyst in New York who covers industrial companies including General Electric Co. and Honeywell International Inc. (HON) “They need to grow and they don’t want to lose market share.”
Companies on the Standard & Poor’s 500 Index can draw on $3.4 trillion in cash as rising share prices make repurchasing stock less attractive and low borrowing costs damp the urgency of paying down debt, Davis said. Private non-residential fixed investment stood at an annualized $2.06 trillion at the end of September, according to U.S. Bureau of Economic Analysis data.
Ford plans to increase investment by $1 billion to $7.5 billion this year to add capacity as analysts project U.S. auto sales will surpass levels not seen in at least seven years. Microsoft plans to more than double investment in its fiscal 2014, which ends in June, to $6.5 billion from two years ago, mostly on data centers and networking equipment. And Honeywell plans to invest $1.2 billion, a one-third increase from 2013, in part to build new chemical factories in Louisiana and Alabama.
Smithfield Foods, the pork producer bought in September by Hong Kong-based Shuanghui International Holdings, plans to increase capital expenditures to as much as $350 million over the next 12 months, up from $278 million in the fiscal year concluding April 28, 2013 and double the amount in 2011. The Smithfield, Virginia-based company has a “slate of nice payback projects,” said Chief Financial Officer Kenneth Sullivan in a Dec. 23 call with analysts.
Investments in physical assets from machinery to buildings and technology, accounted for 12 percent of the economy in 2012, lower than 13 percent in 2008 and 2007 before the deepest recession in six decades caused companies to pare spending.
Companies have juiced profits to record levels on the back of cost cuts and lower investment to cope with disappointing global growth. A financial crisis in Europe and U.S. budget squabbles that culminated in a government shutdown last year sapped confidence. Now, it’s time to grow, Luschini said.
“I would like companies to demonstrate a capital expenditure program that is consistent with needs to keep their plants and equipment efficient and productive and not starve the business for fear of what’s over the horizon,” he said.
In December, the U.S. government passed a budget bill, resolving contentious cuts to education, defense spending and infrastructure investments for now and helping to prevent another government shutdown for the next two years. At the same time, the euro-area economy is predicted to grow 1 percent this year, after contracting 0.4 percent in 2013, according to ECB estimates, as it slowly emerges from a record-long recession.
Honeywell, the Morris Township, New Jersey-based maker of aircraft engines to thermostats, is investing to keep up with higher demand for chemical products designed to lower output of greenhouse gas emissions, said Chief Executive Officer Dave Cote.
“These plants are already full the day we build them, so we’ve got to get them built,” Cote said in an interview in November.
Honeywell had kept capital spending at about 1.1 times the rate at which assets depreciate, or the value they lose over time. It’s now accelerating that investment as the company does “seed planting” for future growth, Cote said.
The reluctance to invest comes from a lack of confidence in the economy, which is growing slowly, and concern that higher outlays will crimp profit margins, Davis said. Operating margins for S&P 500 companies were 13.4 at the end of 2013, higher than a 20-year average of 12.05 percent.
With U.S. economic growth forecast to accelerate to 2.6 percent this year from 1.7 percent in 2013, that may spur companies to expand factories to keep up with demand. The use of industrial capacity climbed to 79 percent in November, the highest level since June 2008 and matching a 20-year average.
A rebound in investment in the U.S. may not be followed elsewhere around the world.
Globally, capital expenditures may decline because of a pullback in mining projects and as China grapples with excess capacity in heavy industries such as steel and cement and pushes toward a domestic-led economy, said Gareth Williams, an economist with Standard & Poor’s Ratings Services in London.
Meanwhile, Emerson Electric Co. Chief Executive Officer David Farr said he’s going on offense this year to boost sales after reining in spending. Emerson, a St. Louis-based maker of compressors and automation equipment with a market value of $49 billion, expects global fixed investment to rise as much as 4 percent this year from 1 percent in 2013.
“For two and a half years of really keeping things really tight, the time is to pivot and to increase our investments,” Farr said in a November conference call with analysts. “We believe the wind is starting to shift to our back.”
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