| BUSINESSWEEK ONLINE : MARCH 29, 1999 ISSUE | ||||||||
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| COVER STORY
The BW 50: The Best Performers Which corporations in the S&P 500 have the most on the ball? Our rankings offer surprising insights into some of America's most closely watched companies For the folks at Home Depot Inc., 1998 was a dream year. Interest rates hit rock bottom, employment soared, and U.S. consumers spent money like college kids with their first credit cards. Home sales beat all previous records, fueling demand for the paint, kitchen tiles, and plywood that line the superstores' long aisles. But if these were glory days, you would never have known it by watching Home Depot scramble to improve its operations. CEO Arthur M. Blank and the rest of his management team had already spent much of the 1990s buffing up a concept many considered incomparable. Then last year, Blank took convenience and selection a few steps further. He kept some stores open 24 hours a day and introduced truck rentals to encourage shoppers to splurge on high-margin goods such as flooring. At the same time, Blank and his team pushed to goose profits, negotiating price cuts from vendors and dumping some distributors altogether, as it directly imported more goods itself. Little wonder, then, that Home Depot both boosted sales and lit up its bottom line. Sales at existing stores jumped a dazzling 9% in the fourth quarter. ''There is nothing more profitable for a retailer than adding sales to existing stores,'' says Blank. Indeed, earnings jumped 39%, and investors who bought shares a year ago have nearly doubled their value today. Add it all up, and it's clear why Home Depot sprang to No. 13, up from No. 44 a year earlier, on BUSINESS WEEK's third annual Performance Ranking of the 500 companies in the Standard & Poor's index. Sweating the details even when all signs indicate you could kick back and relax. If there's one management trait knitting together the performance standouts on this year's BW 50--our exclusive ranking of the best overall performers among the S&P 500 companies--that's it. Consider drug giant Schering-Plough, No. 10, where CEO Richard Jay Kogan chairs the monthly product-review board meetings to make sure the company spends its $1 billion research budget wisely. Or take David D. Glass, CEO of No. 35 Wal-Mart Stores Inc. He certainly wasn't afraid to reshuffle the deck at what was already one of the most efficient U.S. retailers. To keep growth from stalling out, Glass slashed inventory, centralized worldwide product sourcing, and jumped into groceries. The same go-for-broke mentality was seen in the confidence with which John F. Welch, CEO of General Electric Co., No. 44, approved 108 acquisitions last year, worth $23 billion. ''There's no way in hell [they] are all going to work out,'' says Welch. ''But 75% of them--I hope they will and believe they will, and in fact I know they will.'' HONOR ROLL. That constant drive for improvement is what the BW 50 is all about. That's because our list isn't about capturing the biggest--it's about capturing thE best. We look for growth in a variety of categories, unlike other rankings that judge companies by one measure alone, such as size or return to shareholders. The result is an honor roll in which the stars in each industry--and overall--truly stand out. These top performers spurred revenue without sacrificing earnings and got the most out of their equity, all while racking up handsome shareholder rewards. How handsome? Consider that the stock performance of companies on the 1998 BW 50 sprinted past the other broad indexes, as did the Class of 1997 the year before. For the 52 weeks ended MAr. 12, 1999, last year's BW 50 scored a total return of 32%, compared with a gain of 21% for the broader S&P 500 and 15% for the Dow Jones industrial average (page 103). Read line by line, the BW 50 provides a telling narrative about the forces that have transformed the U.S. economy and a scorecard of the firms that best exploited them. A host of technology companies were building and servicing the Internet economy, led by Microsoft Corp., which repeated as No. 1. Corporate America wrestled with stagnant prices, which squeezed earnings and fueled an obsession with productivity and outsourcing that landed companies such as Compuware Corp., No. 6, on the list. And with profits at a premium, corporations such as Capital One Financial Corp., No. 15, fine-tuned their new products through consumer research that increased the chance of success long before anything got out the door. There were other formulas for success. Stars such as Dell Computer, No. 2, didn't wait for their product lines to grow stale: They showed the flexibility to shift to new products swiftly and even to reinvent their business model completely when necessary. Others, such as Gap Inc., No. 3, sharpened their focus on customer service and product selection. Meanwhile, whole industries--from pharmaceuticals to telecommunications to finance--were realigned in a mergers-and-acquisitions boom that spanned the globe. HOT SPOTS. Among the standouts, techies led our list once again. Joining Microsoft and Dell were Oracle, No. 4; EMC Corp., No. 5; and America Online, No. 7. The pharmaceutical industry was also well represented, thanks to strong research and the power of new megamarketing campaigns to create blockbuster drugs. Schering-Plough Corp., No. 10, was one of six drugmakers among the BW 50. And Home Depot was not alone in successfully feeding the wants and needs of the buoyant U.S. consumer. Seven retailers muscled their way onto the list, up from just three the year before. Ours is clearly a growth-oriented ranking, so it's no surprise that many of these companies benefited from operating within the economy's hottest sectors. But it was hardly necessary to have a .com in your name--or in your future--to make it on. Ford Motor Co. became the first auto maker to make the cut, at No. 26, by pumping out high-margin sport-utility vehicles that customers just couldn't get enough of--even as it chopped billions in costs. Leaner manufacturing helped truckmaker Navistar International reengineer itself to an 86% jump in net income--good enough to earn the No. 29 spot. And who would have thought the dowdy old appliance industry could produce a star? Thanks to smart products like its new Neptune washer, which the company swears gets whites whiter, No. 38 Maytag posted 44% average annual net income growth over the past three years. But woe to those who suffer a slowdown; they don't last for long. Altogether, some 30 newcomers joined the list. Consumer giant Gillette Co. fell from favor, from No. 38 to No. 167, as earnings dropped 24% because of a large restructuring charge and falling overseas sales. Oil-services giants Halliburton and Schlumberger slipped along with the rest of the energy sector, while trouble squeezing earnings out of managed-care has left HealthSouth ailing. Some of last year's winners, such as Pfizer and Fannie Mae, lost out this year in part because S&P added new companies to its array of 500. Each year, as companies merge with others or just fall out of favor--as did Venator, the troubled former Woolworth's--a committee at S&P selects replacements. Since the committee tends to favor fast growers, 11 of the 48 new names added to the S&P 500 last year found a place on the BW 50. The newbies included Compuware and AOL, as well as supermarket giant Safeway and cruise-line owner Carnival. But perhaps no industry demonstrates the dynamism of the BW 50 better than financial services. Surging U.S. consumer spending fed credit-card companies such as Capital One and No. 27 MBNA, as well as mortgage lenders Washington Mutual, No. 48, and Freddie Mac, No. 39. Gone, however, are all but one of the big Wall Street firms that dominated last year. Bruised by overseas trading losses, Travelers Group (now Citigroup) fell from No. 16 to No. 168, and Merrill Lynch & Co. dropped from No. 19 to No. 165. Turnover is to be expected, really. After all, the BW 50 is designed to be dynamic. To find these performance champions, we started with the 500 companies on S&P'S widely followed index. Then, we focused on several key growth measures to evaluate a company's performance. We compared sales growth, net income growth, and total shareholder returns over both a one-year and a three-year period. We also studied last year's figures for profit margin and return on equity. And finally, we weighted the 500 by sales volume to compensate for the advantage that a small company enjoys by growing off a more limited base. (For more on our methodology, see page 100.) WINNOWING. Taken together, the resulting rankings separate the wheat from the chaff: The best overall performers--the BW 50--rise to the top. Our Performance Rankings, which include a wealth of information on how every company in the S&P 500 stacked up in the individual criteria, start on page 113. Next, beginning on page 141, the 500 are compared with industry peers. Here are the numbers behind the letter grades, plus useful information such as recent share price, price to earnings ratio, yield, and earnings per share. An alphabetical index of the S&P 500, with ranking by market value, sales, and profits, starts on page 168. As you thumb through the rankings, keep in mind that like any numerical analysis, ours has its anomalies. By looking at both one- and three-year performance, our aim is to reward companies that have churned out growth consistently. Still, unusual charges sometimes have a noticeable impact, up or down. A company recovering from a big write-off in 1997 can look remarkably good by comparison in 1998. Asset sales, too, can have a big effect. Ford's spin-off of consumer lender Associates First Capital boosted net income $16 billion in 1998, improving its return on equity, margins, and net income. On the other hand, Compaq Computer Corp. plummeted from No. 5 to No. 245 because of a $2.7 billion loss last year after it took a huge write-off on its purchase of Digital Equipment Corp. Of course, that sort of asset-chopping and shuffling has grown commonplace at many corporations, including our stars. But having gone through what Abby Joseph Cohen, co-head of Goldman, Sachs & Co.'s investment policy committee, calls ''restructuring, phase one,'' many U.S. companies have already cut costs to the bone. With a near-zero chance of raising prices, how can companies raise profits? Cohen says the opportunities lie with those that have entered phase two. ''It's not just getting rid of costs, it's moving capital and moving people into higher-returning businesses.'' Some top performers have made a science out of identifying those high-profit products. Credit-card issuer Capital One Financial tests rigorously both its consumers and their credit risk to maintain one of the lowest loss levels in the business. ''If we can peel the onion of customer needs several layers past where other companies have, we can meet those needs much better,'' says CEO Richard D. Fairbank. Last year, his company introduced successful new products at a blistering pace despite an industrywide slowdown. Of the more than 6,000 credit-card deals it offers today, half didn't exist six months ago. FARM IT OUT. As companies focus on their core strengths, many are also turning to outside specialists to run operations that aren't crucial. For No. 34 Paychex Inc., this outsourcing boom has been the ticket to explosive growth. The company specializes in payroll services, which have grown more complex as government regulation increased. By marketing itself to smaller employers, Paychex has upped revenues at a 40% annual clip the past three years. Nine years ago, it processed only payrolls. Today, it offers everything from 401(k) record-keeping to cafeteria-style benefit plans. That's not the only area where management is looking for help. Many companies today need outsiders to manage their big data operations. Here, Peter Karmanos Jr., CEO of Compuware, has carved out a killer business by ignoring the latest fads and focusing instead on what his customers already own. Even though hulking mainframe computers are no longer cutting-edge technology, corporations have billions of dollars of programs still in use. So this provider of software and services has concentrated on mainframes--a big reason why its sales jumped 45% last year, to $1.5 billion, and earnings rose 85%, to $302 million. ''We try to stay away from the latest and greatest stuff because oftentimes, it doesn't come to pass,'' explains Karmanos. WIDE WEB. The technology that is getting the most attention, of course, is the Internet. And the explosion of Net-based business is found throughout the BW 50. Of the 11 tech companies on the list, almost all have some significant Internet business. Microsoft sells the software that lets you access it, EMC sells the devices that store the Internet's lifeblood data, and No. 14 Cisco Systems supplies much of the network equipment itself. Microsoft has been posting remarkable sales and earnings growth since the days when the Internet was exclusively a chat room for a few university academics. Still, it recently redesigned all of its best-selling products--its Office suite of productivity programs and the Windows and Windows NT operating software--to be entirely Web-ready. Windows NT has a built-in feature that lets you construct and run a Web site, and Windows users find it just as easy to open a Web page as a word-processing file. Embracing the Web so tightly has certainly increased Microsoft's already phenomenal net margins, to 38% last year. It also may have gotten Microsoft in trouble with the Justice Dept., but management isn't stopping. The company estimates only 25% of U.S. households are hooked to the Net. As a source of future growth, it says, getting the other 75% can't be beat. The purest Internet play on the list is AOL. In the early days, when other online services targeted the techno-elite, AOL zeroed in on the mass market. Carpet-bomb mailings of AOL disks built brand recognition, and an easily navigated site has kept consumers loyal. By creating the dominant Web brand, CEO Stephen M. Case expanded his earnings stream far beyond subscriptions, to advertising and E-commerce deals. The payoff: AOL drove its earnings up a BW 50-best 440% last year, and an S&P 500-best 513% average over three years. Its one-year shareholder return of 486% beat all 500 companies, and AOL's three-year total return, 1,348%, was second only to Dell's 3,630%. Dell's phenomenal performance owes much to its ability to turn manufacturing on a dime to match the frenetic pace of the PC industry. A custom PC can be built in a couple of days: Online orders flow directly to the factory. The secret to Dell's flexible manufacturing is holding almost no inventory. Outside suppliers take that risk. Dell just orders as needed. CEO Michael Dell most recently realigned his company to exploit Intel Corp.'s new Pentium III chip. His hope is that a big bounce in sales of the new machines will help reverse a slowdown of sales growth in the fourth quarter, to a 38% annual pace from the usual 50%. Dell's flexibility extends beyond manufacturing, though. This revolutionary reinvented the PC industry once with his direct-sales model. Now he's rewriting the script again, looking to exploit his company's mastery of Net distribution. Dell has started a new online shopping site, Gigabuys, that will stock Dell PCs as well as extras such as modems and printers made by other companies. Gigabuys, Dell contends, is ''a logical extension of our relationship with customers.'' As the Internet train picks up speed, whole industries are seeing their business models knocked flat. That turmoil has provided remarkable opportunities for companies that can adapt fast, such as the Charles Schwab Corp. Schwab, which started out as a pure discounter, reinvented itself first into a mutual-fund company, then seized on the Net as a great way to help customers trade stock. While brokerage rivals like Merrill Lynch struggled this year, Schwab's stock has soared 197% since February, 1998. Schwab's share-price explosion owes a lot to the appetite of investors for any successful Net business. Last year, it solidified its position as the dominant E-broker. In early 1998, 40% of its trades were conducted online; today, it's 65%. But Schwab is no virtual wonder--at the same time, the company was also adding to its discount-brokerage branches, which totaled 300 at the end of last year. Early in 1998, Schwab made the tough decision to lower its commissions across the board to reflect lower Web prices. Co-CEO and founder Charles R. Schwab doesn't regret the results: a 27% return on equity over the past year, and three-year average earnings growth of 25%. ''We cannibalized ourselves substantially at first,'' says Schwab of the pricing move. ''But we would never be where we are today had we not done it.'' It isn't only technology that's forcing companies to reinvent themselves. Increasingly productive drug research means new pharmaceuticals face competition sooner, making their selling and branding more critical than ever. Drug giant Schering-Plough Corp. has mastered the art of selling drugs by balancing a heavy focus on research with savvy marketing. In 1998, the company spent $185 million advertising its allergy fighter Claritin directly to the public, more than twice what it spent on pitching to doctors. The move helped boost Claritin, a six-year-old U.S. drug with plenty of rivals, to $2.3 billion in worldwide sales last year, up 31%. For some companies, it isn't a question of tearing up the old formula but of finding ways to keep it fresh. Gap has always been hugely focused on customers and the basic fashions and service they want. To add freshness, this year it introduced catchy new television advertising and a popular Internet site, and continued top-notch performance at its three chains. Sales at Gap, Old Navy, and Banana Republic stores blew away those of rivals, appealing to everyone from new parents to executives dressing down for casual Friday. ''It's in our blood that whatever we accomplish or whatever we do, we can do it better,'' says Millard S. Drexler, CEO of Gap. ''I place a premium on change for the sake of keeping in front of the world.'' SHOPPING SPREE. Staying in front increasingly means buying up your competitors. Merger deals continued to jump off the Richter scale--$1.6 trillion worth were announced in the U.S. last year, according to Securities Data Co. Over the past three years, the 50 companies on our 1999 list themselves closed nearly $400 billion worth of deals, they add. Not all carried an immediate payoff. Insurer Conseco Inc., for example, fell from No. 25 last year to No. 155 this year largely because of its struggles to assimilate the acquisition of subprime lender Green Tree Financial Corp. But a number of companies on the BW 50 made their mergers work, and in doing so ended up with a performance record any CEO would applaud. Although the Morgan Stanley-Dean Witter marriage was originally seen as a mismatch between Morgan's world of high finance and Dean Witter's more pedestrian brokerage clientele, it has succeeded remarkably. CEO Philip J. Purcell says that pairing Morgan's initial public offerings, mutual funds, and research talents with Dean Witter's large client base is responsible for strong growth in underwriting and retail customers. Net income rose an impressive 32% annually on average over the past three years. In some industries, the success of consolidation leaders has led to what Steven Koch, co-head of M&A for Credit Suisse First Boston, calls the ''follower effect'': One or two players in an industry do a big deal, then competitors scramble, aware that they are suddenly looking a whole lot smaller. That's the case in supermarkets, where Safeway, No. 31, has leveraged purchases of big regional chains into solid three-year growth in profits and sales. And since the 1996 Telecommunications Act opened the door to phone competition, SBC Communication has aggressively bulked up. It bought Pacific Telesis in 1997 for $17 billion and is awaiting regulatory approval on a $62 billion deal for Chicago-based Ameritech. The deals give SBC the size to compete with the likes of telecom giants AT&T and MCI-WorldCom, according to CEO Edward E. Whitacre Jr. ''I'd like to see SBC as a global telecommunications company able to serve its customers anywhere, at anytime, with anything,'' he says. DON'T DAWDLE. And the dealmaking didn't stop at the border. Many of the CEOs on our list are placing big bets on depressed foreign markets such as Japan, where the bounce-back has yet to begin. Despite last year's global turmoil, they believe, the best chance for future growth remains abroad. And their commitment extends beyond just opening up bigger customer bases. Jacques A. Nasser, Ford's CEO, recently paid $6.5 billion for Swedish carmaker Volvo. It certainly will add new cars and greater presence in Europe, but Nasser also uses globalization to improve at home. By bringing in management talent from all over the world, Nasser argues, Ford can tap into a different way of thinking to do a better job of connecting with consumers. In an era of tough choices, rushing into falling markets is as tough as they come. But according to GE's Welch, one of the worst things that a CEO can do is dawdle. In the teeth of last year's Asia crisis, his company's GE Capital Services Inc. arm has poured billions into the region, buying up assets ranging from Thai auto loans to Japanese consumer-lending companies. Welch is expected to shell out as much as $60 billion more in coming years. Sure, there are risks--but he figures that the risks of losing out by not swiftly seizing opportunity are even higher. ''How many times in your life have you ever made a call where you said [later], 'Gee, I wish I had waited six more months before I did that'?'' asks Welch. ''Make the call, live with it, go with it.'' Making the decision work, of course, is the trick. And some clearly do it better than the rest. By Nanette Byrnes in New York, with William C. Symonds in Boston, Dean Foust in Atlanta, and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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