The Capital-Spending Criterion

S&P identifies 14 companies whose investments in property, plant, and equipment testify to an aggressive faith in future profits

By Numer de Guia

How can an investor tell if a company is getting the most out of its assets? One way to measure corporate efficiency is called fixed-asset turnover. That's a ratio showing how much revenue a company generates per dollar of long-term assets -- its property, plant, and equipment. The higher the ratio, the better management is at leveraging the assets of the company, all other things being equal.

And if a company is successful in that regard, it stands to reason that it would aggressively invest in new fixed assets if future sales prospects look good. That could be a sign of management's confidence in the company's future.

Those two notions informed this week's stock screen. Starting with the list of stocks that Standard & Poor's analysts have ranked 5 STARS (buy) -- meaning that they expect them to outperform the overall market over the next 6 months to 12 months -- we winnowed it down to the 48 companies (i.e., those in the 50th percentile) with the highest fixed-asset turnover ratios. And for our second criteria, we then selected the 14 companies with the highest 5-year growth rate in capital expenditures -- a measure of spending on property, plant, and equipment.

When we ran the numbers, these stocks emerged:

• Ameripath (PATH )

• Capital One (COF )

• Cephalon (CEPH )

• Constellation Brands (STZ )

• Electronic Arts (ERTS )

• Lehman Brothers (LEH )

• Morgan Stanley Dean Witter (MWD )

• Nautilus Group (NLS )

• Quest Diagnostics (DGX )

• Regis (RGIS )

• Scholastic (SCHL )

• SCP Pool (POOL )

• Siebel Systems (SEBL )

• Wal-Mart (WMT )

De Guia is a portfolio services analyst for Standard & Poor's

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