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May 06

Excess capacity continues to stunt capex

Posted by mcole in recoverydemandCashcapital expenditures


Capital expenditure among US companies fell more than anticipated in 2009 and although the trend is expected to reverse this year and next, growth is most likely to be modest.

Capex fell by 16.6 percent in 2009, compared with a 9.9 percent decrease projected by Fitch Ratings. The difference was largely driven by the fact that revenue was 4 percent lower than Fitch forecasted for 2009.

Fitch sees aggregate capex for a sample of 308 companies increasing by 3.1 percent in 2010 over 2009, and by 1.4 percent in 2011 over 2010. For 2010 and 2011, the rating agency also expects capital intensity, measured as capex divided by revenue, to grow by about 5.2 percent and 5 percent, respectively. Aerospace and defense; gaming, lodging and leisure; and homebuilding will lead the recovery in capex over the next couple of years.

Sectors expected to have capex going down in 2010 include energy and natural resources, mostly because they didn't cut capex in 2009.

The slow growth in capital expenditures reflects Fitch's expectation that demand will continue to be weak. As such, companies will look to use excess capacity before making any significant new capital investments.

"One challenge to the recovery in capital spending is that not only must demand return, but companies must exhaust excess capacity that has built up over the past couple of years," Fitch wrote in a report this week. "As a result, a modest increase in demand will likely not result in any material increase in capital expenditure."

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