Markets & Finance

The Capital-Spending Criterion


By Numer de Guia How can an investor tell if a company is getting the most out of its assets? One way to measure corporate efficiency is called fixed-asset turnover. That's a ratio showing how much revenue a company generates per dollar of long-term assets -- its property, plant, and equipment. The higher the ratio, the better management is at leveraging the assets of the company, all other things being equal.

And if a company is successful in that regard, it stands to reason that it would aggressively invest in new fixed assets if future sales prospects look good. That could be a sign of management's confidence in the company's future.

Those two notions informed this week's stock screen. Starting with the list of stocks that Standard & Poor's analysts have ranked 5 STARS (buy) -- meaning that they expect them to outperform the overall market over the next 6 months to 12 months -- we winnowed it down to the 48 companies (i.e., those in the 50th percentile) with the highest fixed-asset turnover ratios. And for our second criteria, we then selected the 14 companies with the highest 5-year growth rate in capital expenditures -- a measure of spending on property, plant, and equipment.

When we ran the numbers, these stocks emerged:

Ameripath (PATH)

Capital One (COF)

Cephalon (CEPH)

Constellation Brands (STZ)

Electronic Arts (ERTS)

Lehman Brothers (LEH)

Morgan Stanley Dean Witter (MWD)

Nautilus Group (NLS)

Quest Diagnostics (DGX)

Regis (RGIS)

Scholastic (SCHL)

SCP Pool (POOL)

Siebel Systems (SEBL)

Wal-Mart (WMT) De Guia is a portfolio services analyst for Standard & Poor's


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