Buffett Calls Out Cap-Ex Wimps: How to Find the Anti-Wimp Stocks
In this year’s letter to Berkshire Hathaway (BRK.B) shareholders, Warren Buffett called attention to the fact that in 2012 his conglomerate plunked a record $9.8 billion into capital expenditures -- a 19% increase from 2011-and that he and consigliere Charlie Munger will green light an even bigger sum this year.
Buffett contrasted Berkshire’s open-wallet reinvestment plan with the more common tight-fistedness among many C-suite types who’ve been stockpiling cash.
“There was a lot of hand-wringing last year among CEOs who cried “uncertainty” when faced with capital allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash).
Indeed, as this chart shows, in most regions of the country, manufacturers weren’t in the mood to spend on capex.
Buffett went on a lengthy riff about the upside of looking past any near-term uncertainty. An excerpt:
“American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor…Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”
That becomes even more impressive when you consider that a huge chunk of the Berkshire portfolio-insurance companies-requires very little capex. Nearly $7 billion of Berkshire’s $9.8 billion spend in 2012 went to the BNSF railroad subsidiary and MidAmerican Energy.
The very top of the list is dominated by companies where capex is required not just to grow, but to maintain. Energy companies such as Exxon-Mobil (XOM), Chevron (CVX) and Conoco Phillips (COP) increasingly have to spend gobs of money just to replace existing reserves. The telcos Verizon (VZ) and AT&T (T) face a similar need to pony up billions in capex to pay for the latest round of tech upgrades.
Beyond those “forced” capex situations, it’s interesting to see which firms that don’t necessarily have to invest, are nonetheless choosing to. Outside of the energy and telcos, the biggest spenders last year were Wal-Mart (WMT), Intel (INTC), Apple (AAPL) and General Electric (GE).
Research & Development expense is another metric at YCharts that can give some insight into a firm’s investment in its future. Pharma is typically the biggest investor in R&D, given the need to keep the pipeline flowing. And indeed, sorting the same screen by R&D shows a who’s who of drug companies, led by Merck (MRK), Pfizer (PFE) and Johnson & Johnson (JNJ). But the info techs are just as prevalent. Indeed, both Intel and Apple are also high on the R&D list.
In the case of Apple, reinvestment has actually grown far faster than its high-profile cash buildup.
But in absolute dollar terms Apple’s $40 billion cash stake is more than three times the combined outlay in cap ex and R&D.
Between their cap ex and R&D outlays, Intel and Apple are clearly investing in their future. That investors have grown cold to both lately might spell opportunity to the far-sighted. The next few quarters are beside the point. While there’s no guarantee throwing a lot of money at the future will pay off for either, but both have reinvented and rebooted before. Today, both sell at below 10 PE ratio’s.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.
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