By now regular readers should be aware that one of our favorite metrics on the state of not only the economy, but corporate viability in the New Normal centrally planned age, are not fudged, manipulated earnings which always find a way to “beat” downward revised expectations, not even free cash flow (which in far too many cases has ceased to exist), but capital expenditures for two reasons: i) it number can not be fudged, adjusted, recasted or in any other way modified, and ii) it represents the managements’ own view of what the growth prospects of the company are. The logic is simple: if management itself is not confident on growth prospects, it will not replenish its asset base (already at a record old age across the world) and will not invest in projects that have a high hurdle rate but only after several years of gestation. Instead, management will merely opt to use the company as a cash cow in the here and now, extracting as much shareholder value is possible with dividends and buybacks while the future viability of the company… well, that can be some other management team’s concern.
How long until Intel (and every other company’s) ROA shrinks and shrinks and shrinks some more (as every last cent of “capital intensity” is extracted), before both its top line and cash flow starts getting crushed? That too will be some other management’s team’s concern. And yes, the current management team just cut the full year capex forecast from $13 billion to $12 billion.
Why is lack of CapEx spending a very big issue? The chart below explains best: