3 Companies Investing for the Future
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 (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 dependant 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 (GBX – Snapshot Report)
The Greenbrier Companies primarily manufactures railroad freight car equipment. It also provides servicing as well as railcar leasing.
2. Covenant Transportation Group (CVTI – Snapshot Report)
Covenant Transportation Group is a freight transportation and logistics services company headquartered in Chattanooga, Tennessee.
3. Fox Factory Holding Corp. (FOXF – Snapshot Report)
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.
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).
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