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
growth in the years to come.
This strategy was the cornerstone for
in the 1980s,
Cisco Systems (Nasdaq:
in the 1990s and
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
Eli Lilly (NYSE:
Bristol-Myers Squibb (NYSE:
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.
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
tangible benefits, check out
Analog Devices (NYSE:
. 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
turns up, look for this company's strong investments in R&D to
even more fruit.
Similarly aggressive investments in R&D are being made at chip
Advanced Micro Devices (NYSE:
, which has badly lagged behind rival
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
. The firm raised many eyebrows in 2010 by predicting sales would
hit $8 billion and
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
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
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.
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