The Floodgates Have Opened
With corporate profits rebounding, stronger global economic growth, and a weak dollar spurring exports, companies that once hoarded every dime are increasingly laying out serious cash on capital expenditures. In the second half of 2003, business spending on equipment and software finally perked up, rising at an inflation-adjusted 14% annual rate (chart).
Most forecasters expect these double-digit gains to continue. Capital spending on everything from software to backhoes should rise at an annualized rate of at least 10% in the first half of 2004 and perhaps considerably faster, says Steven Wieting, a senior economist at Citigroup (C ). The result? Makers of tech and telecom gear and even battered steel companies could see generous profit increases this year.
The information technology sector is experiencing a long-awaited revival as companies that deferred purchases in the last few years upgrade software and replace rickety hardware. Worldwide IT spending could rise 5% this year, to $915 billion, according to IDC. But that's a conservative estimate. "If the economic recovery plays out the way most economists currently expect it will, then we should see global IT growth of 6% to 8%," says IDC economist Kevin White. Microsoft (MSFT ), IBM (IBM ), and Intel (INTC ) should all get a boost.
Telecom equipment companies also figure to benefit. Their big clients are improving digital offerings in wireless, data transmission, and other areas. SBC Communications Inc. (SBC ) posted capital expenditures of $5.2 billion in 2003 -- $200 million above initial expectations -- and projects it will spend $5.3 billion this year. Verizon Communications (VZ ) foresees a $3 billion capital outlay. Such spending should help the likes of Nortel Networks Ltd. (NT ) and Lucent Technologies Inc. (LU ).
Old Economy corporations are sharing in the largesse, too. Caterpillar Inc. (CAT ) was the top-performing stock in the Dow Jones industrial average in 2003, and this year looks even better for sales of its bulldozers and other heavy equipment: Profits are forecast to climb 40%, says CEO James Owens. The company credits global economic expansion, including a construction boom in China. Demand for capital goods is also giving the steel sector new pricing power. U.S. Steel Corp. (X ) and Nucor Corp. (NUE ) raised prices on Jan. 1 by about $30, to about $330 a ton. Another hike of $50 to $60 is set for April. Nucor predicts steel will hit $500 a ton by summer. Those prices could help U.S. Steel return to profitability this year.
Many companies are also finally expanding capacity. Rockwell Automation Inc. (ROK ) expects sales of assembly-line equipment and production systems to increase 4% to 6% this year, thanks to spending in the food and beverage and pharmaceutical sectors. "We are finally beginning to see a sustained upturn in our end markets," saysCEO Keith D. Nosbusch.
Even the possibility of higher interest rates may not crimp corporate spending since companies are generating plenty of cash internally. That means many won't have to borrow. "The capability to spend on capex [capital expenditures] has seldom been greater," says James W. Paulsen, chief investment strategist at Wells Capital Management. After a long capital investment drought, that's good news for U.S. equipment and software makers.
By Faith Arner in Boston and Michael Arndt in Chicago, with bureau reports