Brian,
The problem with Murphy's formula is that it values R&D dollars the same as earnings, whereas they are not the same at all. Earnings are for real, whereas some R&D pans out, some doesn't. And that varies from industry to industry, company to company. Intel's R&D money on Merced is just about a sure thing, whereas a biotech's R&D money searching for a cure for cancer is not. So his formula is a simple screening tool, but investors must still look at how the R&D money is likely to project into future earnings to get some idea of its quality. For AMAT and INTC, their track record is superb, their R&D focused, and I would agree with his conclusions in general, if not in timing (I'm more in keeping with Jubak's column in Microsoft Investor recently). For SFAM, for instance, their R&D may be entirely unsuccessful to allow them to keep up with AMAT, and thus using that formula for them (or other companies in a tenuous competitive position) may be misleading. As you said, it would be nice to see some backtesting analysis of how this formula would actually work.
Bob |
