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.
Apple (AAPL) unveiled several new products and services in Cupertino, CA 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 research and development. So, shouldn’t everyone be thinking long-term?
Based on the matching principle of accrual accounting, 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.
Since 1975, accounting standards have required R&D costs to be expensed in the period incurred due to uncertainty of the future economic benefits. As R&D is 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.
Similarly, advertising is another cost that is expensed as incurred even though it is expected to provide a future economic benefit. Slash advertising expenses is also short-sighted as 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 revenue.
Screen for Forward-Thinking Companies
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 CAPEX, R&D and advertising should boost future growth.
So, which companies are investing for the future?
I ran a screen in Research Wizard that looked for companies with CAPEX, R&D and advertising expenditures as a percentage of total assets that were greater than their industry medians.
I also screened for companies earning cash returns on assets above their industry medians, indicating that they are generating strong returns on these future investments. I further screened for companies with a Zacks Rank of 1 or 2, which indicates positive earnings momentum.
3 Companies Investing for the Future
1. The Greenbrier Companies (GBX)
The Greenbrier Companies primarily manufactures railroad freight car equipment. Also, Greenbrier provides servicing as well as railcar leasing.
2. Covenant Transportation (CVTI)
Covenant Transportation is a freight transportation and logistics services company headquartered in Chattanooga, Tennessee.
3. Fox Factory Holding (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
The Greenbrier Companies, Convenant Transportation and Fox Factory Holding are spending a large amounts on CAPEX, R&D and advertising relative to others in the industry. If companies want to thrive in the competitive market landscape, then they must follow the aforementioned examples and invest for the future.
The author owns shares of Apple (AAPL).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report.