Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Investing For The Future: 3 Companies Planning Ahead

Published 09/10/2014, 03:40 AM
Updated 07/09/2023, 06:31 AM

Apple (NASDAQ:AAPL) unveiled several new products and services in Cupertino on Tuesday. These slick events are the culmination of billions of dollars in research and development for the tech giant. In fact, over the last 12 months, Apple spent more than $5.5 billion on R&D.

If companies want to thrive in the competitive market landscape, then they must invest for the future. And that means paying up for things like research and development, advertising and capital expenditures (capex).

Think Long-Term

Typically, expenses that are expected to generate future benefits over multiple periods are capitalized by firms and depreciated over their useful lives, such as new factories or expensive equipment. This is based on the matching principle of accrual accounting.

Research and development expenses generally fit this description. However, since 1975, accounting standards have required R&D costs to be expensed in the period incurred. One reason for this is the uncertainty of the future economic benefits.

Because R&D are expensed rather than capitalized, companies can skimp on these expenses in order to hit short-term profitability targets. However, this often comes at the expense of long-term profitability.

Advertising is another cost that is expensed as incurred even though it is expected to provide a future economic benefit. Similar to R&D, companies can slash these expenses, but that is usually short-sighted.

Advertising is a necessary investment for most companies. Even a well-known brand like Coca-Cola (NYSE:KO) spent a whopping $3.3 billion on advertising in 2013, or about 7% of revenues.

Investing for the Future

If you're a long-term investor, then you should pay close attention to how a company is investing for the future. Companies that pay up now for R&D and advertising may depress current earnings, but it should boost future growth.

The right amount of capex, R&D and advertising is heavily dependent on the industry it's in. It wouldn't be very useful to compare a tech company's R&D expenses to a utility's, for example.

So what are some companies that are investing for the future?

I ran a screen in Research Wizard that looked for companies with R&D, capex and advertising expenditures as a percentage of total assets that were greater than their industry median.

I also screened for companies earning cash returns on assets above their industry median, indicating that they are generating strong returns on these investments. I further screened for companies with a Zacks Rank of 1 or 2, which indicates positive earnings momentum.

Here are the 3 names from the list:

1. The Greenbrier Companies (NYSE:GBX)

The Greenbrier Companies primarily manufactures railroad freight car equipment. It also provides servicing as well as railcar leasing.

2. Covenant Transportation Group (NASDAQ:CVTI)

Covenant Transportation Group is a freight transportation and logistics services company headquartered in Chattanooga, Tennessee.

3. Fox Factory Holding Corp. (NASDAQ:FOXF)

Fox Factory designs and manufactures high-performance suspension products primarily for mountain bikes, side-by-side vehicles, on-road and off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles.

The Bottom Line

If companies want to thrive in the competitive market landscape, then they must invest for the future. And that means paying up for things like research and development, advertising and capital expenditures (capex). These three companies are spending a large amount on these three items relative to others in the industry.

Disclosure: Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services. The author owns shares of Apple (AAPL). Want More of Our Best Recommendations? Zacks Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a program called Zacks Confidential.

Original post

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.