focus on us fixed investments - pcbef… · faster capital consumption (economic depreciation)...
TRANSCRIPT
Focus on US Fixed Investments:
Prospects for 2018-19
Mark Killion, CFADirector, US Industries
January 2018
Business investments accelerating
Growth rates of US
business investment
disappointed after the
initial rebound from GFC
Weakness in oil and
commodity prices led a
further decline in 2015-16
Recovery in 2017 with
renewed momentum at
the start of 2018
Further boost from
changes in taxes and
regulation
Return on investment
framework highlights the
key factors shaping each
industry’s performance
1
Investment patterns driven by industry profits, technology
Technology shocks, cost cutting & automation
• Oil and gas supply up, so price falls
• Chemicals and plastics enjoy lower feedstock costs
• Peak auto, electric vehicles, driverless & ride-sharing
• Automation via robotic assembly and machine learning
Cycles in global trade, currency & commodities
• Agriculture, energy and metals
• Machinery, transportation and electronics
ROI and expectations of future profitability
• Greater spending on intellectual property & technology
• Faster depreciation & higher capital intensity clash with low rates of asset turnover and capacity utilization
• Competition for use of cash from stock buybacks, M&A, dividends, marketing campaigns, employee hire
2
Which industries are largest in US fixed investments?
3
Shares Growth Rate Capital Intensity ROICSector / Industry: % of total 5 yr. CAGR US$ CapEx / Sales (%) Profits / Capital (%)
2016 2012-2016 2016 2016
All private sectors (excludes gov't) 100 6.5 10.6 10.6
Agriculture 2.1 4.4 14.6 9.7
Mining 3.2 -9.2 27.2 -0.1
Oil & Gas mining 2.5 -8.6 35.0 -0.9
Utilities 4.4 4.8 33.9 2.3
Construction 1.6 11.5 3.3 85.1
Manufacturing: durables 8.8 2.8 9.0 12.6
Computers & electronics 3.1 -0.6 23.3 7.8
Motor Vehicles & parts 1.5 7.5 6.6 22.9
Manufacturing: non-durables 7.8 6.9 8.4 21.9
Refineries 0.6 6.9 4.5 40.3
Chemicals & Plastics 5.0 6.7 14.4 17.8
Wholesale, retail, accommodation & restaurants 7.8 6.2 5.4 23.1
Transportation services 4.0 8.9 11.4 7.6
Information 9.7 5.4 18.0 14.8
Internet & data processing 2.7 16.6 33.4 1.5
Broadcasting & communications 4.5 2.9 15.2 13.2
Finance, banks & insurance 6.7 9.4 33.4 29.7
Real Estate 28.7 12.9 8.3 7.2
Business & professional services 7.3 4.1 6.0 25.3
Others incl. education, health care, entertainment 8.0 4.0 6.6 3.7
US Private Fixed Investment by Industry
Cost of capital higher in manufacturing & construction;
lower in finance and utilities
4
95 Financial Svs. (Non-bank & Insurance)
94 Utility (General)
92 Bank (Money Center)
91 Power
89 Real Estate (Development)
85 Insurance (General)
83 Broadcasting
81 Telecom. Services
79 Total Market
76 Restaurant/Dining
72 Recreation
66 Hotel/Gaming
57 Information Services
50 Retail (General)
45 Total Market (without financials)
35 Chemical (Specialty)
34 Aerospace/Defense
31 Software (System & Application)
30 Machinery
27 Engineering/Construction
19 Semiconductor
18 Retail (Online)
16 Drugs (Pharmaceutical)
5 Software (Internet)
4 Oil/Gas (Integrated)
2 Drugs (Biotechnology)
1 Steel
Business spending measured against profits and assets
Balance
Sheet:
• Equity
• Liabilities
• Assets
Income
Statement:
• Revenues
• Costs
• Profits
Cash Flow
Statement:
• Operating CF
• Financing CF
• Investing CF
Free Cash Flow (FCF)
demonstrates the inter-action
between profits, dividends and
investment spending
Net operating surplus subtracts
depreciation from the total of
corporate profits, proprietor's
income, earnings from rental,
interest and business transfers
Retained earnings = Corporate
Profits minus Dividends Paid
5
Return on Invested Capital (ROIC) Framework
6
Return on Invested Capital = Profits (Net income) / Capital StockROIC = NI / K
Ratio Analysis:
ROIC = (NI / Sales) x (Sales / CapEx) x (CapEx / Depreciation) x (Depreciation / Sales) x (Sales / K)
Ratio Reflects
(+) Profit Margin (NI / Sales) Operating efficiency & pricing power
(-) Capital Intensity Inverse (CapEx / Sales) CapEx requirement for operations
(-) Replacement Ratio Inverse (Depreciation / CapEx) Replacement of consumed capital
(+) Depreciation Cost of Sales (Depreciation / Sales) Degree of operating leverage
(+) Asset Turnover (Sales / Capital Stock) Capital utilization & sales generation
ROIC and related ratios help evaluate investment performances
One ratio is not enough, need several to fully understand conditions
Variability in the inputs over time, and across industries, also affects
their interpretation
What is being purchased by industry CapEx in the US?
7
Graph shows shares of private
sector investment that are
spent on structures vs.
equipment vs. intellectual
property products
Shares are shown over the
long term, along with the latest
history and short-term forecast
Shares on structures have
been stable over the long- &
short-run, with intellectual
property products shares rising
CapEx on machinery and
equipment have seen shares
fall, but 2018 should shows a
small reversal from the trend
Which industries are using CapEx for Intellectual Property?
8
Shares of CapEx on IP
have been rising in
technology, information,
finance & business svs.
Sectors with a legacy of
high shares of IP, such
as in Motor Vehicles,
Chemicals and
Internet/data processing,
have seen IP shares
stabilize and fall back
Transportation and
distribution have seen
rising shares, but from a
low base. Along with the
utilities sector, these
have significant room for
further increase in
coming years.
IP Share of CapEx Δ in Share
Sector / Industry: 2016 2016-2005
Total private non-residential investment 25.1 5.8
Agriculture 0.5 -0.1
Mining 3.9 2.1
Oil & Gas mining 3.5 1.8
Utilities 3.6 -0.7
Construction 4.0 -1.5
Manufacturing: durables 61.7 4.2
Computers & electronics 87.4 14.1
Motor Vehicles & parts 51.8 -2.7
Manufacturing: non-durables 49.8 0.6
Refineries 16.6 0.6
Chemicals & Plastics 64.8 -3.1
Wholesale, retail, accommodation & restaurants 21.3 3.7
Transportation services 4.9 0.5
Information 58.2 4.7
Internet & data processing 65.9 -2.4
Broadcasting & communications 36.6 6.0
Finance & banks 30.9 4.2
Real Estate 0.4 0.2
Business & professional services 59.8 6.5
Others incl. education, health care, entertainments 18.3 3.6
Intellectual Property (IP) shares of Industry
What Intellectual Property is being purchased by CapEx?
9
The 3 categories of
Intellectual Property
Products are software,
R&D and entertainment
& artistic originals
Software includes
purchases “off the shelf”
vs. made on a custom
basis by another
company vs. made ‘in-
house’
R&D is classified by the
funding industry
Fast growth seen in
spending on software, as
well as R&D from
Pharma, Electronics,
Chemicals and Finance
What is the average age of items purchased with CapEx?
10
The productive lives of intellectual property
& electronics are much shorter than
structures & other equipment
Software and R&D for electronics have
dramatically shorter productive lives
Spending on these raises depreciation
charges to income, and more quickly leads
to the need for replacement spending (via
capital consumption)
Faster capital consumption (economic depreciation) reflected in high replacement ratios & capital intensity
11
Greater spend on software, electronics and
automation carries faster capital consumption and
thus higher replacement ratios. The slowdown in
CapEx over 2014-16 will help stabilize these by
2018, but then they should rise again thereafter.
Competitive and market pressures will continue to
direct new spend toward technology, cost cutting
and automation, which, along with increased
need for replacement of used capital, pushes up
rates of capital intensity in several industries.
Weak asset turnover hurts the ROIC of key industries
12
Higher capital intensity raised
the asset stock, relative to the
sales it generates, for several
big-spending industries
Falling asset turnover counters
some of the benefit to ROIC
from secular increases in profit
margins and operating leverage
The few exceptions have been
in motor vehicles and finance,
with steady asset turnover, and
health care, with rising asset
turnover due to fast sales
Manufacturing saw asset
turnover reach a bottom in
2016, due to slow CapEx in
previous years, and turnover is
now expected to rise into 2018
Late cycle rise in margins extended by lower tax burdens
13
Profit Margin = Net income (after tax) / SalesPM = NI / Sales; PM = (NI / EBT) x (EBT / EBIT) x (EBIT / Sales)
Ratio Reflects
(-) Tax Burden Inverse (NI / EBT) Taxes on Income
(+) Interest Earnings (EBT / EBIT) Net interest earned
(+) Operating Margin (EBIT / Sales) Operating efficiency
2017 recovery in margins
boosted by better pricing and
high operating leverage
Further gains in 2018-19 from
lower tax rates and
expensing of investments
Will faster wages put a cap
on margins by 2019-20?
Sector impacts from Tax Cuts & Jobs Act of 2017
4 key changes in TCJA:
1. Changes to tax rates
2. Cap on interest deduction
3. Full expensing of CapEx
(5yr.-10yr. window)
4. Overseas earnings treatment
Using the first 3 as a trifecta ---
Sector winners are those with:
Past high effective tax rates
High CapEx intensity
Low debt, interest due
Transportation, Metals, Mining,
Machinery, Retail, Real estate
Relatively lower impact due to:
Previous low effective tax
rates, low CapEx, high debt
Hospitality, Hotel & Gaming, Diversified
Services, Computer Services, Utilities
14
3 tech-related sectors account for 45% of “trapped cash”
? How much of the overseas profits will be
recognized in 2018?
8 years to recognize the past
overseas profits at special rates
Some may opt to wait until their
taxable income is be lower
A portion of the taxed profits may
be deployed overseas
? What are the uses of the money that is
directed to the US?
Pay taxes, keep liquidity, pay
down debt, buybacks & dividends,
hiring, marketing, OpEx or CapEx
? How fast will the CapEx be put to work?
Apple recently designated $30
billion to be deployed over 5 years
3 scenarios for use of the overseas profits in the US
1. Slow walking
50% recognized in 2018
Lower shares for CapEx
5 year deployment
2. Apple’s plan
90% recognized in 2018
Higher shares for CapEx
3.5 year deployment
3. All in, and right now
98% recognized in 2018
Highest CapEx shares
2.5 year deployment
Scenario allocations of recognized foreign profits(shares allocated to different uses of funds)
Scenario impacts range between 1.5% to 6% of 2017 CapEx
Forecast change in leadership of sector investments
18
Sector / Industry: 2016 2017e 2018f 2019f 2020fAll private sectors (excludes residential investment) 1.9 6.6 8.8 5.9 4.0
Agriculture -2.7 -8.3 4.6 3.3 2.4
Mining -38.4 41.4 13.4 10.0 7.4
Oil & Gas mining -41.7 47.5 14.6 10.8 7.9
Utilities 0.0 0.4 6.2 6.0 4.0
Construction -5.0 3.9 7.5 6.0 5.3
Manufacturing: durables 4.1 4.6 7.0 5.6 3.8
Computers & electronics 4.9 5.1 7.4 5.9 3.2
Motor Vehicles & parts 5.6 4.4 8.0 5.5 3.8
Manufacturing: non-durables 4.2 4.5 7.7 5.9 4.8
Refineries -0.5 1.6 5.4 4.3 5.2
Chemicals & Plastics 5.8 5.2 8.3 6.3 5.3
Wholesale, retail, accommodation & restaurants 7.2 7.0 8.9 6.1 5.1
Transportation services -10.0 1.7 6.8 3.4 3.0
Information 4.4 5.9 8.4 4.9 4.1
Internet & data processing 6.0 9.2 9.1 5.2 4.1
Broadcasting & communications 3.7 2.9 8.8 6.3 5.5
Finance & banks 2.3 4.8 7.3 6.1 3.0
Real Estate 8.0 7.2 10.6 6.6 3.4
Business & professional services 3.8 6.2 8.2 4.6 3.7
Others incl. education, health care, entertainments 4.3 7.1 8.9 5.7 3.8
Annual growth of US Industry Investment (Nominal US$)
Thank you !
Questions ?