Great companies know the key to future success lies in the steps
you take today.
These companies dole out massive amounts of cash to their
engineering teams to develop cutting-edge products that will
provide for sales and
profit
growth in the years to come.
This strategy was the cornerstone for
Microsoft (Nasdaq:
MSFT
)
in the 1980s,
Cisco Systems (Nasdaq:
CSCO
)
in the 1990s and
Apple (Nasdaq:
AAPL
)
in the most recent decade.
But not all of this spending on research and development (R&D)
pays off. Each of these high-tech companies has also had
considerable flops. That's alright with management, though, because
they know that taking risks is what yields success. And R&D
efforts must have the freedom to aim high in search of new
blockbuster products.
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Merck (NYSE:
MRK
)
,
Eli Lilly (NYSE:
LLY
)
,
Bristol-Myers Squibb (NYSE:
BMY
)
and
Amgen (Nasdaq:
AMGN
)
spent a collective $22 billion on R&D last year. Each firm aims
to find the next blockbuster drug that can help to reverse the
trend of anemic sales growth in recent years.
Pfizer (NYSE:
PFE
)
set the industry tone. The drug company routinely generated more
than $10 billion in sales for its cholesterol drug Lipitor (before
it recently lost patent protection), and the drug has generated
more than $60 billion in cumulative sales for the company, well
ahead of the reported $3 billion it took to develop it. Of course,
for every Lipitor, Pfizer also pursued dozens of drugs that never
even made it to market.
If you're looking for a clear example of where R&D investments
yield
tangible benefits, check out
Analog Devices (NYSE:
ADI
)
. The company makes a wide range of chips that go into cars,
communication networks, industrial systems and a host of emerging
technologies such as clean energy.
The company routinely spends nearly $500 million every year on
R&D and now boasts amazing growth. Sales rose 37% in fiscal
(October) 2010 and are expected to rise at another double-digit
clip this year as well. When the global
economy
turns up, look for this company's strong investments in R&D to
bear
even more fruit.
Similarly aggressive investments in R&D are being made at chip
maker
Advanced Micro Devices (NYSE:
AMD
)
, which has badly lagged behind rival
Intel (Nasdaq:
INTC
)
in terms of hot new products. As I noted in July, AMD's big R&D
push finally appears to be paying off.
Future-focused investors should also check out biotech firm
Celgene (Nasdaq:
CELG
)
. The firm raised many eyebrows in 2010 by predicting sales would
hit $8 billion and
earnings
per share would hit $8 by 2015. After all, the company generated
just $3.6 billion in sales and earned $2.80 a share in 2010.
What is the company's strategic weapon? It spent a hefty 30% of
2010 sales on R&D to strengthen the company's pipeline of
immune-suppression drugs.
Action to Take -->
Despite the impressive commitment to future-oriented investments by
these companies, they have been tarred and feathered along with
many other stocks in this recent stock market pullback. This may be
a good time to buy their
shares
.
For example, shares of Analog Devices have fallen more than 20% in
the past three months on concerns the weak economy will crimp
near-term growth. This may still be the case, but Analog Devices'
long-term outlook has never been brighter.
In a similar vein, shares of Celgene are actually a bit lower than
they were a year ago, even though the company's revenue base and
profits have grown roughly 25% since then.
The key is to lock on to these long-term big spenders when their
shares are being pressured by short-term concerns.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.