By David Randall
NEW YORK (Reuters) – The first global increase in corporate spending since 2012 will likely boost the earnings of technology companies outside of the so-called FAANG group of Facebook Inc (O:FB), Amazon.com Inc (O:AMZN), Apple Inc (O:AAPL), Netflix Inc (O:NFLX) and Google (O:GOOGL), adding momentum to a 25 percent rally in the sector for the year to date.
Capital expenditure – a term that encompasses corporate spending on everything from new buildings to new computers – is expected to climb 5.5 percent in 2017 after falling 7 percent or more in each of the last three years, according to a July 31 report from S&P Capital.
Spending is expected to increase in every region of the world, with North American capex growing by 4 percent, and spending in Western Europe and Japan each surging about 10 percent, the report noted.
Rising corporate confidence and the prospect that the administration of President Donald Trump and the Republican-controlled Congress will lower taxes is one reason behind the increase in U.S. capital spending, said Steve Chiavarone, a portfolio manager at Federated Investors in New York.
“Labor is no longer cheap and abundant, so companies are looking for somewhere else to invest,” he said.
McDonald’s Corp (N:MCD), for instance, is expanding its use of self-service kiosks and mobile ordering technology, rather than hiring new workers, he noted. The company has said that the kiosks, each of which costs about $50,000 to install, should be in nearly all its 14,000 U.S. locations by 2020.
Corporate investment in technology over the next 12 months will likely focus on automation, cybersecurity and new software systems, allowing companies to increase or maintain productivity as labor costs rise. That, in turn, should boost revenues for technology companies that focus more on businesses than consumers.
“With every additional dollar in capex comes more spending on technology and automation,” said Matt Litfin, a portfolio manager of the $4.8 billion Columbia Acorn fund (O:LACAX).
Litfin has been adding to his position in cybersecurity company Qualys Inc (O:QLYS), whose shares are up 60 percent for the year to date, betting partly that technology spending will climb after high-profile data breaches at companies like Equifax (NYSE:EFX).
While the bulk of capex spending will likely go to technology, industrial companies such as Deere & Co (N:DE) and CNH Industrial NV (MI:CNHI) should also benefit as corporations either expand new facilities or put more money into maintaining existing assets, said Brian Sponheimer, head of industrial research at Gabelli Funds.
Shares of equipment rental companies such as United Rentals Inc (N:URI) are up 25 percent over the last three months, due in part to cleanup efforts in Texas and Florida after recent hurricanes, yet shares of industrial stocks as a whole do not reflect rising capex spending, he said.
“You have a backdrop of a half decade of delayed maintenance and that’s going to set a nice foundation” for revenues in the sector, he said.
The Industrial Select SPDR ETF (P:XLI), which tracks the performance of industrial companies in the S&P 500, is up 15.7 percent for the year, slightly more than the 14.1 percent gain in the benchmark S&P 500 stock index, while the Technology Select SPDR (P:XLK) is up 24.8 percent over the same time.
Chiavarone, the Federated fund manager, said Amazon is the most likely of FAANG stocks to benefit from capex due to its Amazon Web Services division, which hosts websites and other cloud-based services for corporate customers.
Amazon has roughly 34 percent of the cloud market, more than triple the size of its nearest competitor, according to Synergy Research Group. Shares of the company topped $1,005 in midday trading Friday.
“How do you compete with Amazon? It’s a monopoly that is still growing and taking more market share,” Chiavarone said. “I don’t know what the right multiple is for a monopoly, but it’s higher than the company is trading at right now.”