| Profiting
from Today's R&D Leaders |
Published: August 15, 2005
Back in 1968 a Japanese
electronics manufacturer called Busicom approached Ted Hoff with a
calculator design. The design called for 12 separate circuits, each
intended to handle one calculator function.
But Hoff didn't just
manufacture the device Busicom asked for; instead, he simplified the
calculator, creating a single programmable memory chip that could handle
all the functions of Busicom's original design.
And so, the microprocessor was
born and the company Ted Hoff worked for, Intel Corporation (INTC),
refined the basic design to create the Intel 4004 processor. That
calculator marked the first in a long line of processors that would make
Intel a world leader in computing and, eventually, one of the
best-performing stocks in U.S. history.
Fortunately, Intel isn't
unique. Rather, the company shares a common feature with many of the
best-performing, most profitable stocks of all time: a history of
innovation.
Low labor costs, cheap
materials and even clever marketing campaigns can boost sales and
profits temporarily. But over time, all of these can be easily copied
and emulated by a firm's competitors. Real long-term advantage comes
from inventing something new -- creating a new product or feature that
consumers simply must have and then maintaining that lead by constantly
improving upon that product.
This type of advantage doesn't
come cheap. Often times, the best-performing company in an industry is
the one that spends the most on research and development (R&D).
Intel, for example, spent billions of dollars on research and
development (R&D) to become a world leader in microprocessors. And
the company remains a leader in R&D spending today, shelling out
close to $5 billion year -- 13.5% of annual sales -- on research. Over
time, this enormous investment has been well worth the effort -- Intel
has enjoyed high profit margins and a defensible competitive advantage
for years.
On a broader scale, consider
that the U.S. remains either top dog or at least a prime competitor in
most of the world's key industries. However, the U.S. certainly doesn't
have the world's lowest labor costs, nor does our nation have access to
the cheapest natural resources. But American firms have an important
advantage: they've traditionally been big innovators, spending more than
most foreign competitors on R&D.
As
you can see in my chart, this spending has resulted in higher
profitability. U.S. firms spend 4.9% of sales on R&D, and partly as
a result of this, they deliver average profits of 10.3% of sales. By
contrast, EU firms spend 3.6% on R&D, and profits for firms in the
Union average just 6.8%.
But this isn't the only example
of the power of research and development. Over time, a number of
academic studies have shown that, all other things being equal, firms
that spend big on R&D tend to outperform their peers.
With this in mind, my staff and
I recently spent countless hours pouring over our extensive database of
companies, looking for firms that have spent heavily on R&D. More
specifically, we searched for companies with market capitalizations of
more than $200 million that spend at least 15% of their annual sales on
R&D. We then further refined and culled the list based on a variety
of fundamental criteria.
In the table below, I present a
list of R&D heavyweights. And in the text that follows I'll examine
nine companies that are making the investments necessary to remain at
the forefront of their respective industry groups. Thanks to their
unwavering commitment to innovation, all nine of these firm look like
solid long-term investments.
Important
Note: To view the table associated with this analysis,
as well as profiles of each of Paul Tracy's nine favorite R&D-heavy
stocks, you'll need to subscribe to our premium Market Advisor
newsletter. To learn more, please visit the following link:
https://web.streetauthority.com/subscribe-ma.asp
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
Paul Tracy
founded StreetAuthority and became Editor in Chief in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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