This Company Is Investing in Itself -- Should You?


Stocks fell today, with the Dow and the broader S&P 500 losing 0.3% and 0.4%, respectively.

The macro view: In yesterday's Are U.S. Companies Turning Into Scrooges?, I cited a report from credit ratings agency Standard & Poor's. According to the report, U.S. businesses were under-investing to the tune of $175 billion over the period 2009 to 2011, which could potentially harm their future competitiveness. S&P's analysis, which covers approximately 1,400 non-financial corporations that the company has rated over the past five years, showed that non-investment grade issuers had made the most severe cutbacks to capital expenditures.

An interesting topic, worthy of digging into a little deeper.

A separate report from data-provider Factset shows that trailing twelve-month (TTM) fixed capital expenditures as a percentage of revenue for companies in the S&P 500 did fall significantly in the second half of 2009 through the first half of 2010 (from roughly 6.6% to below 5.5%). However, the most recent data in the report, which covers the first half of 2012, show that the ratio is back above its 10-year average, and has been since the first half of 2011.

The micro view: Here's an example of that phenomenon: TTM capital expenditures, as a percentage of revenue, has doubled from 2% to 4% at online retailer between the second half of 2010 and the third quarter of this year. In fact, on that basis, Amazon's capital expenditures are higher than they've ever been over the past decade.

No wonder value analyst Joe Magyer recently wrote that, "Amazon's heavy investments in marketing and strengthening its logistics are widening the company's moat and masking its true earnings power." To read his full assessment of the company and the upside in the shares, click here to receive the Motley Fool's premium report, which includes 12 months of ongoing coverage.

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Alex Dumortier, CFA has no positions in the stocks mentioned above; you can follow him @longrunreturns. The Motley Fool owns shares of Motley Fool newsletter services recommend Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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