In a recent special report, Fitch Ratings forecasts, for a 312-company U.S. Corporate sample, that free cash flow (FCF) will rise, in aggregate, nearly 22 percent in 2010. This growth compares to a 21 percent decline in 2008 and a Fitch-estimated 13 percent decline in 2009. Due to the difficult economic conditions in 2008 and 2009, many companies have focused their financial strategies on maximizing FCF to improve financial flexibility. Investors looking for protection against another credit crunch should look for companies that have the most improved FCF as that will boost their short-term borrowing needs.
“Improved efficiencies in both capital and operational spending are expected to lead to strong 2010 free cash flow growth, in spite of generally muted revenue growth expectations,’ said Michael Weaver, managing director at Fitch.
However, investors seeking to cash in on a boom in capital expenditures coming out of the recession may want to check their expectations. Fitch estimates that capital expenditure for the same sample fell by 9.9 percent in 2009 and will fall again by 1 percent in 2010. When comparing capital expenditure to revenue, Fitch calculates this ratio as 5.5 percent for 2008 and estimates 2009 to be approximately 5.4 percent, but forecasts 2010 will fall to 5.2 percent. The 2010 rate reflects that even in the potential for recovery of demand, companies will retain low levels of capital expenditure for as long as possible.
The report, “U.S. Corporate Capital Expenditure Study: Maximizing Free Cash Flow for Financial Flexibility,” addresses the trend of capital expenditure and FCF for Fitch’s rated U.S. Corporate universe over the time period 2007–2010.
Gregg D. Killoren
victoria1014
