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Companies are expected Put the brakes on capital investment this year as they assess downside risk and grapple with higher funding costs.

The slowdown in capital spending, meaning investments in property, equipment and technology, would mark a change from the past two years, when companies took advantage of large cash hoards and low interest rates after the initial shock of the pandemic to spend heavily on distribution centers. , technology upgrades and other big ticket items.

Of the 464 S&P 500 companies that reported capital spending in the third quarter through Jan. 13, capital spending rose 23% from a year earlier to $235.8 billion, according to S&P Global Market Intelligence, a financial data firm. of the company. During the previous year, the capital expenditures of the same companies increased by 21% and amounted to 191.9 billion dollars. Higher construction and investment costs also inflated capital budgets.

But the prospect of a recession makes companies more cautious about overextending themselves, given the potential drop in earnings, advisers said. S&P 500 companies are forecast to increase capital spending by about 6% in 2023, compared with an estimated 20% increase in 2022, according to an analysis by consulting firm Ernst & Young using FactSet data..

Capital spending rose 9% in 2021 compared to 2020, the first year of the pandemic, EY said.

After two years of big spending, some companies want to take a break to digest the investments they’ve made, advisers say. “Let’s consider what we do based on what we spend,” said Hardik Sheth, a partner and deputy managing director at Boston Consulting Group, describing the mindset of many CFOs.

Companies are grappling with continued uncertainty about the future rate of interest rate hikes and inflation, as well as geopolitical risks, including risks stemming from Russia’s war on Ukraine. “I think there is a legitimate concern about the concentration of risks that are not manageable at the individual company level,” said Andrea Guerzoni, EY’s global vice president of strategy and transactions.

FedEx: Corp.

Last month, it cut its capital spending forecast for the current fiscal year by $400 million to $5.9 billion. The delivery company faces weaker demand for packages after benefiting from a surge in e-commerce early in the pandemic. Revenue fell 3% to $22.8 billion in the quarter ended November 30. Profit decreased by 32% in the same period, reaching 788 million dollars.

At the start of its fiscal year in June, Memphis, Tenn.-based FedEx said it expected to spend about $6.8 billion on capital projects, but cut that forecast to $6.3 billion in September. In particular, the company plans to spend less on its ground transportation division. “The high growth rate, especially on the ground over the last few years, that’s in the rearview mirror,” CFO Mike Lentz said on the Dec. 20 earnings call. The company declined to make Mr. Lentz available for an interview.

Like many of the pandemic’s beneficiaries, FedEx invested heavily in the belief that strong, early-pandemic demand would continue, but that hasn’t entirely materialized, said Jonathan Chappell, senior managing director at investment firm Evercore. Inc.

Other transportation companies are also downsizing, though not to the same extent, he said.

FedEx continues to move forward with the expansion of its flagship terminal in Memphis, but other planned investments in the facility are on hold. indefinitely or reassessed, Mr. Chappell said.

Other companies facing weaker customer demand are also pulling back on capital investment. Used Car Retailer CarMax Inc.

said in December that it expected to spend $450 million on capitalization in its current fiscal year, which ends Feb. 28, rather than the $500 million originally planned. The company’s sales fell late last year as rising rates put car shopping out of reach for many potential buyers. “We have adjusted capex to give us more flexibility in the current environment,” a company spokesperson said.

In addition, semiconductor company Micron Technology Inc.

It said last month it was forecasting $7 billion to $7.5 billion in its 2023 fiscal year, down from a previous estimate of $8 billion. A company that makes computer memory chips is experiencing a slowdown in electronics demand.

According to Boston Consulting Group’s Mr. Sheth, many companies are expected to remain cautious on capitalization until the second half of the year, when there may be more certainty about a possible recession and other macroeconomic factors.

The aggressive pace of interest rate hikes over the past year has prompted some finance executives to reconsider their capital investment plans. About 30% of CFOs plan to cut back on planned capital spending because of higher interest rates, according to a survey by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta. The survey was conducted between November 14 and December 2.

An additional 14% said they would hold back if the Fed raised its benchmark federal funds rate by an additional 1.5 percentage points. The rest said they do not finance their capital expenditure plans through borrowing, or their borrowing is not sensitive to changes in interest rates. The CFO survey included 312 responses from what Duke describes as a representative sample of companies across the country, including large, small, publicly traded and private.

Last month, the Federal Reserve raised its benchmark federal funds rate to a 15-year high of 4.25% and 4.5%. It also signaled plans to continue raising interest rates through the spring to combat inflation. The Fed’s next meeting is scheduled to end on February 1.

At the same time, however, companies benefiting from the current economic climate are increasing their spending. Conagra brands Inc.,

The Chicago-based food company plans to spend more than 4% of its sales on capital projects over the next two years, Chief Financial Officer David Marberger said. After that, the company expects to slow investment to 3.5-4% of sales. Net sales rose 8% to $3.3 billion in the quarter ended Nov. 27.

Conagra has recently focused on adding capacity in its supply chain. Last June, the company completed a $320 million plant for its Birds Eye frozen vegetable brand in Waseca, Minn. It is also increasing capacity at its facilities to meet growing demand for its Slim Jim meat snacks, Mr. Marberger said. “The best investment you can make in capex is capacity,” he said.

In addition, the company invests in new technologies for its factories. Its new Birds Eye facility, for example, was built with technology that gives managers immediate information on their iPads about any breakdowns or slowdowns on their production lines. “If something fails, they know why, and they can fix the problems faster,” Mr. Marberger said.

Conagra is testing the same technology at four additional facilities and will evaluate potential efficiency gains before making similar investments at other plants, Mr. Marberger said.

Email Kristin Broughton at [email protected]

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