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Strategies & Market Trends : The Rational Analyst
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To: HeyRainier who wrote ()2/18/1998 2:46:00 AM
From: HeyRainier  Read Replies (2) of 1720
 
[Part Three ]

From: Common Stocks and Uncommon Profits: What to Buy--Fifteen points to look for.

Point 3. How effective are the company's research and development efforts in relation to its size?

...Figures of this sort (R&D as a % of sales, or R&D per share)can prove a crude yardstick that may give a worthwhile hint that one company is doing an abnormal amount of research or another not nearly enough...But such figures can be misleading...(because) companies vary enormously in what they include or exclude as R&D expense.

...The essence of successful commercial research is that only tasks be selected which promise to give dollar rewards of many times the cost of the research.

...Finally, in judging the relative investment value of company research organizations, another type of activity must be evaluated. This is something which ordinarily is not considered as developmental research at all--the seemingly unrelated field of market research. Market research may be regarded as the bridge between developmental research and sales. Top management must be alert against the temptation to spend significant sums on the R&D of a colorful product or process which, when perfected, has a genuine market but one too small to be profitable. By too small to be profitable I mean one that never will enjoy a large enough sales volume to get back the cost of the research...A market research organization that can steer a major research effort of its company from one project which if technically successful would have barely paid for itself, to another which might cater to so much a broader market that it would pay out three times as well, would have vastly increased to value to its stockholders of that company's scientific manpower...

If quantitative measurements--such as the annual expenditures on research or the number of employees holding scientific degrees--are only a rough guide and not the final answer to whether a company has an outstanding research organization, how does the careful investor obtain this information? ...A simpler and often worthwhile method is to make a close study of how much in dollar sales or net profits has been contributed to a company by the results of its research organization during a particular span, such as the prior ten years. An organization which in relation to the size of its activities has produced a good flow of profitable new products during such a period will probably be equally productive in the future as long as it continues to operate under the same general methods.
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