Symyx's Formula for Success: Wait

Who wouldn't want a piece of the next nylon or Kevlar, which were both invented by DuPont (NYSE: DD  ) ? That's basically what SymyxTechnologies (Nasdaq: SMMX  ) is all about -- helping very large companies expedite materials research in the hopes of getting a small royalty on the next major chemical discovery.

First things first -- let's look at fourth-quarter results. Reported revenue rose 22% on strength in service revenue and royalties. Assessing the earnings picture is a little more subjective -- Symyx's reported operating income rose 17%, but adjusting both years for amortization and acquired research and development reverses that to a negative 9% change.

The story at Symyx, though, isn't really about revenue or profits today, but rather what the future might bring. Akin to what Affymetrix (Nasdaq: AFFX  ) has tried to do in the field of genetic research, Symyx is pioneering high-throughput materials research in fields like petrochemicals, electronics, and pharmaceuticals.

And it's not as though major companies haven't noticed; the company already has considerable agreements with the likes of Dow Chemical (NYSE: DOW  ) and ExxonMobil (NYSE: XOM  ) . Along with generating revenue from research collaborations and the sales of tools and software to facilitate research, Symyx looks to secure small royalties on potential new discoveries that involve their technology or intellectual property.

What that means in real terms is that Symyx will see royalties from new products about to be launched, like a new catalyst from Celanese (NYSE: CE  ) , a polyolefin catalyst from Dow, and a lab instrument from Canon (NYSE: CAJ  ) , as well as a new sensor for use in oil exploration.

Certainly, the potential here is exciting -- companies in Symyx's target markets spend an estimated $10 billion or so per year in R&D, and a new catalyst or polymer can be worth hundreds of millions of dollars or more. But that's also the downside to the story -- it's really easy to get all hyped up about what products future R&D could bring, and it's easy to overlook the fact that most new products will have modest sales (in the $50 million or lower range) and that Symyx gets only a modest royalty (usually from 1% to 5% of sales).

This stock has been pretty volatile over time, and I actually see that as a good thing: It means there's a reasonable chance that it'll sell off back to a point where it gets attractive to me. I definitely like the moneymaking potential of industrial R&D but would prefer a price with a better balance between sizzle and steak.

For more Foolish thoughts on chemicals:

Dow Chemical is aMotley Fool Income Investorrecommendation. Click here to learn more about getting paid to invest.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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