Five Global Patent Kings to Consider

Delian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are many ways investors rank companies – growth vs. value, cyclical vs. non-cyclical, large cap vs. small cap, developed markets vs. emerging markets, socially responsible vs. not socially responsible, and dividend paying vs. non-dividend paying. A straightforward way to select investments is to take the top companies that have issued patents in the U.S. during the year, according to IFI Claims Patent Services. This article will discuss the top company from each of the first five countries for 2012 whose shares are traded on a major U.S. stock exchange. According to the rankings, these companies are as follow: 

  • International Business Machines (NYSE: IBM) – United States, 6,478 patents in 2012;

  • Canon (NYSE: CAJ) – Japan, 3,174 patents;

  • Research In Motion (NASDAQ: BBRY) – Canada, 986 patents;

  • Siemens (NYSE: SI) – Germany, 977 patents; and

  • Ericsson (NASDAQ: ERIC) – Sweden, 843 patents.

Valuation

Even an innovative company may not be a good investment because of its stock price. Below is a table with several valuation measures and how IBM, Canon, Research In Motion, Siemens, and Ericsson stack up against the S&P 500 Index, followed by a short discussion for each of them.

<table> <tbody> <tr> <td> </td> <td> <p>IBM</p> </td> <td> <p>CAJ</p> </td> <td> <p>RIMM</p> </td> <td> <p>SI</p> </td> <td> <p>ERIC</p> </td> <td> <p>S&P500</p> </td> </tr> <tr> <td> <p>Market Cap*</p> </td> <td> <p>230</p> </td> <td> <p>43</p> </td> <td> <p>9</p> </td> <td> <p>93</p> </td> <td> <p>34</p> </td> <td> <p>13,500</p> </td> </tr> <tr> <td> <p>Enterprise Value*</p> </td> <td> <p>252</p> </td> <td> <p>35</p> </td> <td> <p>6</p> </td> <td> <p>107</p> </td> <td> <p>28</p> </td> <td> <p>n/a</p> </td> </tr> <tr> <td> <p>EBITDA</p> </td> <td> <p>25.6%</p> </td> <td> <p>17.1%</p> </td> <td> <p>5.4%</p> </td> <td> <p>12.7%</p> </td> <td> <p>13.5%</p> </td> <td> <p>20.2%</p> </td> </tr> <tr> <td> <p>Div. Yield</p> </td> <td> <p>1.7%</p> </td> <td> <p>4.0%</p> </td> <td> <p>0.0%</p> </td> <td> <p>3.6%</p> </td> <td> <p>3.3%</p> </td> <td> <p>2.2%</p> </td> </tr> <tr> <td> <p>PEG ratio</p> </td> <td> <p>1.2</p> </td> <td> <p>n/m</p> </td> <td> <p>-0.3</p> </td> <td> <p>0.5</p> </td> <td> <p>0.6</p> </td> <td> <p>2.4</p> </td> </tr> <tr> <td> <p>PE ratio (2013)</p> </td> <td> <p>11.1</p> </td> <td> <p>14.7</p> </td> <td> <p>-38.6</p> </td> <td> <p>11.4</p> </td> <td> <p>11.2</p> </td> <td> <p>12.8</p> </td> </tr> <tr> <td> <p>Price-to-sales</p> </td> <td> <p>2.2</p> </td> <td> <p>1.3</p> </td> <td> <p>0.7</p> </td> <td> <p>0.9</p> </td> <td> <p>1</p> </td> <td> <p>1.4</p> </td> </tr> <tr> <td> <p>Price-to-book value</p> </td> <td> <p>12.3</p> </td> <td> <p>1.6</p> </td> <td> <p>1</p> </td> <td> <p>2.3</p> </td> <td> <p>1.6</p> </td> <td> <p>6</p> </td> </tr> <tr> <td> <p>Beta</p> </td> <td> <p>0.7</p> </td> <td> <p>1</p> </td> <td> <p>1.8</p> </td> <td> <p>1.6</p> </td> <td> <p>1</p> </td> <td> <p>1</p> </td> </tr> <tr> <td> <p>Price-to-CFO (trailing)</p> </td> <td> <p>10.2</p> </td> <td> <p>8.5</p> </td> <td> <p>2.8</p> </td> <td> <p>10.7</p> </td> <td> <p>19.2</p> </td> <td> <p>n/a</p> </td> </tr> <tr> <td> <p>One Year Performance</p> </td> <td> <p>7.3%</p> </td> <td> <p>-18.1%</p> </td> <td> <p>7.9%</p> </td> <td> <p>14.8%</p> </td> <td> <p>19.8%</p> </td> <td> <p>15.9%</p> </td> </tr> </tbody> </table>

*In $ billions; EBITDA – earnings before interest, taxes, depreciation, and amortization; PEG – price-to-earnings-to-growth; PE – price-to-earnings; CFO – cash flow from operations; Source: SEC filings, Reuters, author's estimates; n/m – not meaningful; **Latest SEC filing.

It is difficult to judge these companies as each one is unique. Research In Motion seems like a deep value company as it is trading at near its book value and has a price to sales ratio of under one. It is also the smallest of the five companies and the only company that does not pay a dividend, and it has the highest beta. It seems like Research In Motion is the riskiest investment, offering the highest return potential.

On the opposite end of the spectrum is IBM as it is the largest company of the five, has the lowest beta of 0.7, and the highest price to book value ratio. Also, it has the highest PEG ratio, which is the PE ratio adjusted for growth, and the highest EBITDA margin, which is likely sustainable due to, among other factors, its patents and ability to innovate.

Between IBM and Research In Motion are the remaining three companies, each exhibiting different characteristics. Canon, Siemens, and Ericsson pay handsome dividends and are relatively inexpensive based on such measures as price-to-book value and price-to-sales. Siemens seems like the most compelling investment due to its good cash-generating ability as measured by price-to-CFO and is also moderately levered (conservative leverage provides additional returns for equity holders in a profitable company). Also, Siemens has a low PEG ratio of 0.5 and is a diversified industrial conglomerate with exposure to different industries and geographies.

Competitive Positions

IBM, Canon, Research In Motion, Siemens, and Ericsson are global leaders in their respective areas. Canon and Research In Motion have been under pressure lately, however. Canon is suffering from competition to its digital cameras from increasingly good cameras on smart phones, and its print and copy business is experiencing a decline due to a transition to digital. Similarly, Research In Motion and its main product, the BlackBerry, has seen intense competition from Apple's iPhone and Google's Android operating system and more recently from Microsoft Windows 8 mobile operating system. Not surprisingly, Apple, Google, and Microsoft ranked 22nd, 21st, and 6th in the 2012 Top U.S. Patent Assignees list.

On the positive side, Research In Motion reported better than expected fiscal third quarter results and more recently, Visa approved Research In Motion and the BlackBerry's operating system for payments by using near field communications. Similarly, Canon had some tailwinds in mostly rough economic and consumer waters. Its latest U.S. commercial “Inspired” won the approval of critics while the company will be releasing new power shot cameras with advanced Wi-Fi and geotagging in 2013 that can compete more effectively with smart phones and tablets.

IBM, Siemens, and Ericsson are leaders in technology services, engineering, and communications equipment, areas that are likely to grow. However, Ericsson is facing increasing competition from low-cost Chinese communication equipment makers and its lead is increasingly depending on innovations. Similarly, IBM's size and slowing growth make the company somewhat of a questionable investment. Thus, of these three companies, Siemens looks the most appealing based on its innovation capabilities as well as its competitive position and valuation.

Conclusion

Investing based on patents is one way to select companies that are leaders in new technologies, innovations, and commercialization of scientific discoveries. However, there are many other factors that investors should consider when making investment decisions including their risk tolerance and the company's valuation. IBM, Canon, Research In Motion, Siemens, and Ericsson are the companies with the most U.S. patents issued in 2012 based on their country of origin and whose stocks are traded on the major U.S. stocks exchanges. There are tens of other innovative companies that could offer better investment options. However, these five companies provide a diversification to different regions and sectors as well as another important metric, exposure to innovation.


didiooodotcom has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus