When will tech spending improve? Not until 2004-2005, according to a recent research report by Merrill Lynch’s economics group.
In a note published Tuesday, Steven Milunovich, first vice president with Merrill, wrote that tech spending will “pick up when (or perhaps slightly later than) overall capital spending increases.”
As to when capital spending is expected to increase, the investment firm’s economics team concluded that a recovery on that front may be weak well into 2004.
The reason is that businesses are for the most part still repairing their balance sheets, reducing debt, improving liquidity and generally working on their profit ratios, the report said.
“Balance sheet repair is in the sixth inning. Some financial metrics, such as the current ratio and inventory turnover, appear to have improved sufficiently. Others, such as asset turnover, profit margins, and leverage, have a ways to go.”
But some sectors are doing better than others.
“The health care and utility sectors have done more to repair their balance sheets than have the technology and telecom sectors. The energy, tech and materials sectors have weak balance sheets now, but strong earnings growth during the next two years should put them in better financial shape,” the report said.
“On the flip side, the telecom and consumer discretionary sectors will probably grow at a more tepid pace; and the improvement to their balance sheets will come slowly. A negative economic shock would probably hurt these sectors most.” Markets have been roiled recently about rising oil prices and uncertainty tied to a possible war with Iraq.
The report noted that many companies in the tech sector have improved their balance sheets, but that asset turnover and profitability metrics are poor.
The Merrill report struck similar themes about regarding capital spending that were published in a recent economic research report from Goldman Sachs. The investment bank polled its industry analysts about capital spending expectations among the public companies they cover in their sectors.
Overall, the Goldman analysts expect capital spending to fall by 10 percent in 2003 to $326.6 billion, following a 15 percent drop in 2002.
“The projected spending decline is concentrated in a few areas, especially energy, airlines, telecom and cable firms, and electric utilities. Materials, financials, health care, and consumer sectors are projecting small spending gains,” wrote Goldman research analyst Jan Hatzius.
In the information technology (IT) sector, which includes computer/IT services, software, hardware, chips and wireless equipment, the Goldman report predicted a 5 percent drop in capital spending, or $28.1 billion overall in 2003.
Within the IT category, software infrastructure is expected to be among the larger drops, down 21 percent for the year following a 43 percent tumble in 2002, the report said.