Capital Intensive Companies
Not good stocks to invest in?

What are capital intensive companies? They are companies such as steel producers, telecommunications companies and airlines that require large amounts of expensive equipment, machinery or planes in order to trade.

Why do I generally avoid them? Equipment goes out of date in time and unless the companies continue to inject large amounts of earnings into new equipment, or can reduce costs by leasing, they will lose their competitive edge.

Those earnings will be lost to shareholders. So I ask myself, is the equipment or machinery they are using likely to become obsolescent in the next 5 or 10 years?

Because of the high cost of maintaining their business, these companies are limited in using retained earnings in a way that will enhance future earnings. Hence their stock prices are likely to go nowhere.

Also, they are more likely to have higher debt in order to finance the capital expenditure. Higher debt increases risk.

Of course, there are always exceptions. Large scale mining companies come to mind like BHP Billiton and RIO. These companies need to fund massive rail, port and processing infrastructure to bring large scale mining projects on line.

They also make massive profits, particularly at times like now when some ore prices are at historic highs and likely to remain so while the China growth saga plays out.

So for these companies I have to make a judgement as to how long the good times will roll on ... for quite a while I expect.

Return from Capital Intensive Companies to Good Stock Investments