*DJ Tech Spending Delays Could Lift Bottom Lines -Strategist
04 Jun 08:15
By Peter Loftus
Of DOW JONES NEWSWIRES
(This report was originally published late Friday.)
NEW YORK (Dow Jones)--Amid the economic downturn, hard-hit technology firms
have defiantly insisted that corporations need to continue investing in new
technology as a way to improve productivity and, ultimately, to sustain
profits.
Don't count on it, says one Wall Street strategist.
By delaying tech investments, some companies can boost their bottom lines,
according to Tobias Levkovich, U.S. equity strategist with Salomon Smith
Barney. A cutback in tech spending would save companies depreciation costs each
quarter, not to mention training and other expenses, he said.
"If I'm a manager for a department, and I have an operating profit budget
bogey I've got to hit, and I can get myself another one or two million by not
having depreciation expense, that sounds like a plan," Levkovich said.
To Levkovich, the notion that companies can cut tech spending to boost
profits reinforces his belief that a recovery in technology spending won't
happen anytime soon.
Depreciation is a line item in quarterly income statements that reflects the
drop in value of fixed assets, such as plants and equipment. It doesn't reduce
a company's cash position, but it cuts taxable income.
Most companies depreciate buildings and plants through quarterly amortization
over 20 to 40 years. But computers, software and other information-technology
assets are usually depreciated over three to five years, Levkovich said.
Depreciation can take a big chunk out of earnings. Intel Corp. (INTC), for
instance, posted a depreciation expense of $934 million in the first quarter
ended March 31. That helped knock down its net income, which also reflected
taxes, acquisition charges and other items, to $485 million.
Levkovich said he recently spoke to a managerat a financial services firm
who said he was cutting back on IT spending to help save depreciation expenses
and preserve his bottom line. Levkovich declined to identify the firm.
Although he has little evidence beyond his acquaintance's disclosure,
Levkovich suspects that other managers are doing the same thing. The idea
prompted him to do some research and calculations about the relationship
between capital spending and the resulting depreciation.
Levkovich estimates that if U.S. companies trimmed technology budgets by 10%,
they would collectively save between $10 billion and $15 billion on
depreciation expense. That could add much-needed pennies to per-share earnings
for companies that face slower growth in a weakened economic environment.
There's already evidence that companies are cutting back on tech spending,
although it isn't clear whether they're doing so specifically to lower
depreciation expense. Many telecommunications carriers, including WorldCom Inc.
(WCOM), have reduced capital budgets this year.
Telecom companies spent heavily over the last few years building new
networks. Not only is the buildout nearly complete, but the telecoms that
continue to invest are able to buy used equipment at fire-sale prices from the
bankrupt remains of their smaller competitors, Levkovich said. AT&T Corp.'s (T)
recent purchase of assets from Northpoint Communications Group Inc. (NPNTQ) is
one example.
There's certainly room to trim IT spending, Levkovich said. He compared
historic IT capital spending to depreciation over the last 45 years. He found
that the ratio in 2000 was the highest in 20 years, with capital spending at
1.38 times depreciation. It has since fallen to about 1.26, but that's still
above the average of 1.15 during nonrecessionary periods.
Won't cutbacks in IT spending shortchange a company's future? Maybe, but
Levkovich believes some companies have no choice because they have limited
resources. Other, better-funded companies may choose to continue IT spending at
current levels because they don't want to jeopardize productivity.
Given his expectation that an IT recovery isn't near, Levkovich thinks
investors should shy away from companies that sell equipment used in
state-of-the-art telecom networks, like Corning Inc. (GLW), Sycamore Networks
Inc. (SCMR), Corvis Corp. (CORV) and Ciena Corp. (CIEN). Instead, investors
should "play the semiconductor industry cycle."
-Peter Loftus, Dow Jones Newswires; 201-938-5267; peter.loftus@dowjones.com
(END) DOW JONES NEWS 06-04-01
08:15 AM |
