Looking To Capex and Capacity For Investment Ideas: Citi

Looking To Capex and Capacity For Investment Ideas: Citi

Future plans for capex spending provide useful insights into the business prospects of the industries receiving the capex orders. Industries or businesses that are unable to supply the demand for their goods or services due to capacity constraints are also able to obtain better prices and improve profitability.

“In both instances, there should be incremental earnings potential beyond just GDP trend that investors can jump on as a theme for 2014,” say Citi analysts Tobias M Levkovich, Lorraine M Schmitt and Christina Wood in their Monday Morning Musings issue focused on “Capex Commitment and Capex Constraint.”

Capex spending – U.S.

The chart below dispels the notion that S&P 500 (INDEXSP:.INX) companies have only been spending cash resources on shareholder friendly corporate actions such as dividends and buybacks and that capex has been on the backburner.

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The light blue bars represent capex, and show that it was on a rising trend between 2010 and 2012, even though dividends and buybacks also rose.

1-sp500-cash-use Capex

The analysts also highlight the possibility of a reversal of the trend of capex spending on locations outside the U.S. (such as emerging markets), and companies may soon find it worthwhile to channel cash resources into capex at home.

“We could see a tilt back to the U.S. for a variety of reasons including cost efficiencies, a better economy and the energy sector’s drilling revolution in the areas of shale gas and tight oil with all of its secondary effects on needed petro chemical facilities, pipelines, export trains as well as terminals, and even refineries,” according to Citi.

Petrochemical capex could be a game changer

IHS estimates that over the next five years, new capex of $100B could flow into the U.S. petrochemical industry (ten times the $10B seen in previous five years) and this could be a massive windfall for companies that supply valves, piping and pumps to the industry.

On concerns that this capex could take place in an environment of falling oil prices, Citi clarifies that the volume gains could enhance oil revenues and balance cash flows (see chart below).


Capacity constrained industries in the “catbird seat”

Refineries in the U.S. are in the sweet spot of being in the midst of surging domestic crude production that cannot be exported and must therefore be refined within U.S. shores. With little capacity addition over the past few years, existing refineries could enjoy pricing clout.

“Refineries may be in the catbird seat and names such as Valero Energy Corporation (NYSE:VLO), Tesoro Corporation (NYSE:TSO) and Marathon Petroleum Corp (NYSE:MPC) seem to be obvious beneficiaries, but this could last a year or two unless there are major legislative changes,” say Citi.

Airlines will also enjoy the benefits of consolidation and the resultant cost rationalization, plus the bar on quick capacity addition due to long delivery lead times for new aircraft.

U.S. corporate capex plans

Citi extracted the following planned capex information from over 700 companies that were covered by their analysts.


The double-digit growth in its capex confirms the investment logic for the IT sector because “the biggest customers of tech companies are tech companies,” and Citi maintains the sector as Overweight.

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