V-Shaped Revenue Recovery Combined With L-Shaped CapEx Growth
The chart below demonstrates two things: i) the revenue decline in the current quarter indicates no inflection point in revenue pick up, and ii) expectations are for a V-shaped recovery in revenue.
So the logical question is where will all this revenue come from? With massive excess capacity overflowing in the economy, pundits point to inventories, which will be "restocked" in order to increase sales for all these lean and mean companies that continue laying off workers even as the recession progresses. In other words, capex spending should already be picking up, as that is the primary driver of revenue increases down the line: indeed, a simple fact nobody likes to talk about. We shall get back to that in a second.
The other notable fact is that companies which have for the most part shut down the dividend spigot, and are virtually not paying any corporate taxes anymore (hey, if Goldman can get away with it, everyone will be pocketing those NOLs compliments of a horrendous 2008 for a long, long time). So cash should be higher? Presumably. And that cash should be going to paying for capex. At least that is the thinking if one wants to be bullish on revenue increases.
Zero Hedge decided to analyze quaterly revenue and capex trends among S&P 500 companies over the past year, and we also threw in a study of total and net debt, just to get a sense of what the capitalization of these "poised for a recovery" companies looks like.
Here are the results:
Not only has CapEx not been increasing, it continues plunging: both YoY and sequentially. In fact, S&P CapEx likely at maintenance levels on a revenue/capex basis: not one company is interested in investing in revenue growth projects. Which makes sense: if you have a horde of cash and no clue what your access to debt will be like, any IRR on new CapEx projects can be thrown out of the window before it is even started. Forget the revenue V-recovery: companies will be lucky to preserve revenues where they are, let alone grow them in the future. Alas, what the MSM forgets is that you need investment in expansion opportunities to grow the topline - SG&A trimming can only take you so far, and with decimated and unmotivated work forces, good luck growing organically in this oversupplied economy.
Intuitively, if CapEx is dropping cash should be rising, and indeed it is, although while it peaked in Q4 of 2008, it has since been declining. Yet it is not going to fund CapEx, and as the debt chart demonstrates, total debt in the company sample has been actually flat if not slightly growing in the last 3 quarters. All this simply means that companies are not interested in paying down debt: probably the inverse trend is obvious, and the government has given a carte blanche for most. Load up on enough debt, take advantage of a bubble market, (bonus points if you have a sizable unionized labor force), and become too big to fail- the Administration will bail you out. Absent this line of thought, do nothing about the debt load: and total debt being flat at $4.5 trillion in over 6 months, this is as good an indication as any that not only is the consumer not deleveraging, but neither are big companies.
And thus the original question is how quickly can the accumulated corporate cash buffer be converted into revenue growth? It seems companies don't really care to answer that: the growth will come from "elsewhere" they will be happy to announce, and refer you to the GDP - where all "growth" comes from transfer payments, and other fictitious items indicating "growth" yet all those merely do is sucker more and more people into the stock market at bubble valuations (why are not more companies doing follow on offerings, absent REITs of course? Is it because institutional stock managers know that valuations, which this is all really about, are simply insane?). Absent some investment in CapEx you can kiss your V-shaped revenue (and thus earnings) recovery goodbye. But who honestly cares about how a stable economy works any more when you have trillions in excess liquidity provided by Bernanke Capital LLC?