Saturday, May 7, 2011

R&D spending can be a good sign for potential future growth

Saturday, May 7, 2011

Q: Which companies spent the most on R&D in 2010?

A: Investors are shifting their sights from the companies that held up during the recession to those that stand to do the best during the recovery.

During the economic downturn, many companies turned defensive, retrenched and hoarded cash. But once the shock eased, the savvy companies made investments in the future and put plans in place to drive new business and revenue in the future.

The ultimate evidence of the companies that made good investments during the downturn will be revenue and earnings. Companies that bought companies and assets when they were beat up and cheap, and made good bets, will soon see their revenue and earnings leapfrog their competitors.

It could, though, take a few quarters if not years for the fruits of wise investments to materialize.

Some investors may look for another way, other than waiting for earnings reports, to get a glimpse at which companies have been investing for the future.

One way to do this is by looking at research and development (R&D) spending. If a company is spending on R&D and is able to capitalize on that research, in theory it may have some blockbuster products in the pipeline that may be a big contributor to future results.

To the left, you'll find two charts. First is a list of all the companies in the Standard & Poor's 1500 index that spent the most on R&D over the past twelve months. That list is dominated by giant companies.

The second chart shows which companies spent the most on R&D as percentage of their revenue over the past 12 months.

A warning bears mentioning. Just because a company spends a large sum on R&D doesn't mean the spending will pay off with higher revenue or earnings in the future.

Some large companies are famous for wasting money on R&D science projects that never pay off in terms of new products or services. R&D money would be just money wasted in the lab.

But with that said, R&D one of the only early glimpses investors can get to see which companies are looking toward the future for where its revenue might come from not just next quarter, but in the next five to 10 years.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at To submit a question, e-mail Matt at Follow Matt on Twitter at:

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