What are we looking for?
It’s little secret that publicly traded companies throughout the world have seen their cash coffers swell in recent years – a function of a post-recession surge in profit margins coupled with extreme caution among company management to spend in still-uncertain times.
Capital spending – the investment of companies in themselves, on properties, facilities and equipment – is critical to business expansion and long-term sustainable profit growth, yet it has not kept pace with this global cash boom.
It seems a reasonable assertion that companies who are taking advantage of cash excesses, by pumping up their capital spending, have positioned themselves ahead of the pack for future profit expansion. With that in mind, we look at worldwide companies whose profit margins and capital spending ratios are both growing in leaps and bounds.
Spend those profits
Pierre Lapointe, global macro strategist at Brockhouse Cooper in Montreal, recently did a stock screen to identify the companies on the S&P Global 1200 – a global composite of the biggest stocks throughout the world’s major equity markets – that have shown the best growth in both capital spending (capex, for short) and operating margins over the past year.
“Profit margins are now turning lower everywhere in the world … If companies want to grow their earnings, they have to focus on growing the top line [sales] which involves capital expenditures,” he wrote in a research report.
“To us, the best strategy is to focus on companies which are working on increasing their market share by expanding,” he said. “The ones with growing margins are even better positioned.”
Mr. Lapointe screened the S&P Global 1200 for companies that had one-year growth of more than 20 per cent both in the capex-to-sales ratio and in operating profit margins. His screen yielded 33 stocks that cleared both of those hurdles. Since that’s more stocks than we could use in our table, we raised the bar to 25 per cent.
What we found
At the 25-per-cent level, 19 companies cleared the criteria. Three of them were Canadian – Agrium Inc., Canadian Pacific Railway Ltd. and Kinross Gold Corp.
Mr. Lapointe noted in his report that Canada has the highest capex-to-sales levels of any major global equity market – both currently and on a historical basis. (That probably has to do with our resource-heavy market; the energy and mining businesses are particularly capital-intensive.) The Canadian market’s current capex-to-sales ratio is roughly in line with its historical average.
Companies & investments Mentioned In This Article (3)
AGU-T 93.1 -0.74
-0.789% 531,374 Canadian Pacific Railway
CP-T 139.97 -2.45
-1.72% 536,353 Kinross Gold
K-T 5.62 0.22