Bob, you make a fair point that gross margins ought to be compared after subtracting R&D. Since the tech company bears the business risk of the consequences of unproductive R&D, the net of the two better be higher than a cyclical non-tech company not requiring much R&D. (I think SG&A is an unrelated issue.)
I tested this using one leading cyclical industrial company, to be fair on comparing cyclical apples to apples. Caterpillar had gross margins of 21.5% last quarter and R&D of 3.5%, for a net of 18% (consistent with the prior year, by the way). Linear Technology had gross margins of 74.2% last quarter and R&D of 16.2%, for a net of 58.0%. Intel had gross margins of 48.8% last quarter and R&D of 15.5%, for a net of 33.3%. On the other hand, Atmel had gross (commodity) margins of 13.8% and R&D of 22.1%, for a net of minus 8.3%. (Merck had gross margins of 37.3% last quarter and R&D of 5.3%, for a net of 32.0%.)
Note that Merck and Intel had similar net results, significantly better than Caterpillar. Linear Tech and Atmel show the spread you can have in technology. The conclusion I draw from this exercise is that there is nothing "wrong" with investing in technology, provided you stick with companies with proprietary product margins, and of decent size, such that their market position is unlikely to change materially. |
