Why CFOs Aren’t Boosting Capex

As you can see from the table above, in America as of April 11th RevPAR, which is revenue per available room, was down 31.1% compared to 2019. That’s the best performance out of the major countries listed. On the other hand, the declines in France, Italy, Germany, and Spain were 94.7%, 90.9%, 86.2%, and 91%. Americans won’t be visiting Europe en masse this summer.

No Capex Growth

Investors now want companies to boost CAPEX with their extra cash. That makes total sense because companies are now well-capitalized and asset prices are high. There is no need to improve liquidity at most firms. Plus, equity valuations are very high which makes retiring shares less interesting. Many firms will buy back shares at any price just to return capital to shareholders. However, it probably doesn’t make sense to buy shares at excessive valuations. No firm will admit their shares are too high, but realistically many multiples make no sense. How many companies have cheap stocks with the forward PE ratio of the S&P 500 at a 10 year high (it’s above 22)?

The chart above shows how CFOs responded when they were asked why they won’t spend more on CAPEX over the next six months. The most common answer was “no need to expand capacity.” Over 60% of firms said this which is much higher than it was in Q3 2020. It’s a big issue if firms have nowhere to spend money because it signals returns on capital will be low. There is just so much capital and not enough places for it to get a great return.

On the other hand, you have to consider the other options. Clearly, the need to preserve cash and uncertainty have declined. One of the only other possibilities is to say capacity is a problem. The improvement in financial conditions spurred this spike in CFOs responding that they don’t need to expand capacity. That doesn’t necessarily mean firms are all pulling back on CAPEX. The reopening plays are still investing in capacity. The domestic travel boom this summer will be unprecedented. There is pent-up demand, consumers have a lot of savings, and international travel isn’t as safe.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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