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.
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.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.