Fearing lean times, US companies tighten purse strings

FEB 2, 20169:43 PM

[NEW YORK] The capital spending slump that originated in the hard-hit energy sector appears to be spreading more widely across other US industries.

Companies cutting or flat-lining their capital expenditures in 2016 outpace those that say they will increase spending by a factor of more than two to one, according to a Reuters analysis.

Companies in industries as diverse - and relatively strong - as healthcare, consumer goods and restaurants are among those tightening their belts in yet another sign that economic growth in 2016 may be anemic.

For instance, McDonald's Corp, which saw its stock jump 26.1 per cent in 2015 and is trading at record levels now, said it would keep capex flat with 2015 at about US$2 billion, the company's lowest budget in more than five years.

Drugmaker Eli Lilly is holding its capex budget flat and Verizon Communications Inc said it plans to cut its budget from US$17.8 billion, to between US$17.2 and US$17.7 billion.

"I think companies are going to be lean and mean and are going to keep the purse strings tight and only spend where absolutely necessary, because cash isn't coming into them," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

Companies typically invest more when they feel confident that the economy is improving, so a downturn in capital spending could portend further weakness ahead.

That corporate caution follows another expected decline in revenues in the fourth quarter and data showing U.S. economic growth braked sharply in the quarter.

To be sure, some well-heeled companies in healthy industries are bumping up their investments.

Medical technology company Stryker expects to have capital expenditures as high as US$450 million in 2016, up from US$270 million in 2015. Facebook plans capital expenditures between US$4 billion and US$4.5 billion this year, up from US$2.5 billion.

But even growth in information technology spending - which has been strong in recent years - appears to be off its recent peaks, according to International Data Corp analyst Stephen Minton. "U.S. companies will increase their spending, but not by the rate it has been over the last two years," he said.

Hardware spending in 2016 for all U.S. companies is expected to grow 3 per cent to about US$133 billion. Telecommunications and financial services companies - typically among the biggest spenders on IT - are expected to have flat to little growth in spending, he said.

At least 43 companies plan to cut, or leave unchanged, their capital spending levels in 2016, while about 20 are increasing, according to a Reuters review of Standard & Poor's 500 companies that have given explicit early guidance.

Not surprisingly, the collapse in capital spending by energy companies - which typically lead in capex - appears to be accelerating.

This year marks the second round of big cuts for energy companies, which have had to sharply scale back spending because of the drop in oil prices since mid-2014.

A slew of energy names have announced capex cuts for 2016 including Hess, Anadarko Petroleum, Halcon Resources Corp, Noble Energy Inc and Continental Resources Inc.

The broad slump in commodities prices has hit spending by materials companies, including DuPont, which is cutting capex from US$1.4 billion to US$1.1 billion, and industrials such as railroads Union Pacific and Norfolk Southern, both of which slashed capital spending plans for 2016.

Even airlines, which benefit from low energy prices, are being careful. Delta Air Lines, for example, said it would hold the line in 2016 at US$3 billion in spending. "That is really the optimum number that we can execute on,"said Richard Anderson, Delta chief executive.

REUTERS