Data: Standard & Poor's Compustat | |
JUNE 27, 2005
The Best European Performers Mining, shipping, and oil companies shot to the top of the rankings, propelled by Chinese demand for commodities. And Britain, with its flexible economy, continues to dominate the list
That profits-on-steroids performance landed BHP Billiton the top spot in BusinessWeek's third annual ranking of Europe's best-performing publicly listed companies. (Yes, BHP is based in Melbourne, but its main listing is in London, giving it entrée to our list.) BHP was 12th on the BW list just two years ago. And you thought iron ore was boring. Will the Aussie wonder still be king of the hill next year? BHP executives say they are ready to manage the expected China slowdown, the biggest threat to their profit growth. Chinese demand is big, says BHP, but not essential. "The danger is you invest because you think prices are going to be high in the long term," says BHP Chief Executive Charles (Chip) Goodyear. "We take a view of the business over decades." Take BHP's 47% investment in the $1.3 billion Mozal aluminum smelter in Mozambique in 1998. The move, criticized at the time since commodity prices were sinking, turned out to be a boon. Two years later, BHP spent another $700 million to expand the plant. That put the company in a good position for today's thriving market. Such a measured approach sets BHP apart from many of its peers. But it's no guarantee that the company will hold on to its No. 1 status. To choose the members of the list, BusinessWeek ranks earnings growth and other performance measures based on the Standard & Poor's (MHP ) Europe 350 Index. (S&P, like BusinessWeek, is a division of The McGraw-Hill Companies.) The list analyzes how companies fare over both one- and three-year periods, and thus favors those with staying power. Even so, the roster captures the high volatility of corporate fortunes. Thus, two years ago British bank HBOS (HBOS ) ranked No. 1, and financial firms, utilities, and consumer-product marketers dominated the top quartile of the 50. This year, China's demand for commodities, and its impact on everything from oil prices to shipping, has pushed a new group into the winners' circle. British mining concerns Rio Tinto (RTP ) (No. 22) and Anglo American (AAUK ) (No. 36) are two examples. Shipping giant A.P. Moller-Maersk (No. 4) has also reaped profits from the China trade. Similarly, high oil and gas prices have put energy companies like Norway's Statoil (STO ) (No. 2), the Netherlands' Royal Dutch Petroleum (RD ) (No. 13), and France's Total (TOT ) (No. 20) in the upper echelon. But already fears of a commodities slowdown have affected these stocks. BHP shares, for example, are off 10% in the past few months. If BHP's profit growth tracks its stock price, another company will claim top honors next year. But just making it onto the list signals that a company knows how to thrive, even as the broader European economy remains in a funk. How? By maintaining a sharp focus on expanding sales and profits elsewhere. BHP, for one, relies on Europe for just 37% of its sales, according to researcher EuroStockCity in Paris. Asia makes up 43% of the mining company's revenues, with North America, Africa, and the rest of the world rounding out the balance. "You don't need strong European economic growth to get strong profitability," notes Patrik Schowitz, European equity strategist at HSBC in London. Some companies, like Swedish truckmaker Volvo (VOLVY ) (No. 11) look to the U.S. for growth. Swedish fashion retailer H&M Hennes & Mauritz (No. 29) has also thrived by betting big on the U.S. consumer. Despite a sluggish retail environment in Europe, H&M shows no signs of slowing down. It has kept growth on track by sticking to its tried-and-tested formula of providing affordable fast fashion, the cheap chic that fills a young fashionista's closet. Over the past three years, sales have jumped an average of 10% a year. H&M now has 1,200 stores in 21 countries. Innovation Counts Honing in on the U.S. market also has paid off for Britain's Diageo (DEO ), a big gainer on this year's list. The company, which jumped 134 places, to No. 154, offset declining sales in Europe with a strong U.S. performance. Diageo, the world's largest wine and spirits group, whose better-known brands include Guinness, Smirnoff, and Johnnie Walker, now gets 37% of its sales from North America. And even in an age-old business like liquor, innovation counts. Flavored vodkas and ready-to-drink cocktails, for example, have made the Smirnoff label a growth product again. (American drinkers love citrus and fruit-flavored Smirnoff Twist, which now accounts for 20% of Smirnoff's U.S. volume.) Finding new markets can be crucial when you're based in a grow-slow zone. Expansion in Continental Europe is expected to run just 1.4% this year, down from 1.7% last year, according to estimates from Dresdner Kleinwort Wasserstein. Growth in the euro zone may get a kick late in 2005 from the weakening of the euro against the dollar. But the consensus among economists is that strong growth cannot happen in core Europe without significant structural change. That's especially the case in Germany and France, where business investment, employment growth, and consumer spending are all sluggish. "There's an absence of demand-driven growth in the euro zone," says David Owen, an economist at DKW in London. "It's a moribund recovery." Not surprisingly, only three German companies -- tire and auto parts maker Continental (No. 9), utility RWE (RWEOY ) (No. 50), and household product maker Henkel (No. 48) -- made it to the top 50 this year. That's down from five last year. Similarly, five French companies rank in this year's top 50, the same number as last year. By contrast, Britain hasn't had a recession since the early 1990s, and it dominates BusinessWeek's list once again. That's partly because it has more listed companies than other markets in Europe. But the nation's performance also gets a boost from a flexible labor market, limited regulation, and low taxation. Of the top 50 companies, 20 are British, down from 24 last year but still dominant. Strong consumer spending and a real estate boom have helped the British banks on the list. Moreover, the biggest British banks have a global base that puts them beyond the vagaries of the local market. Take HSBC (HBC ) (No. 12). Although there was a spike in bad loans in Britain last year, HSBC makes under 25% of its profits there. The bank benefited from improved credit quality in the U.S. and Hong Kong's revival. The other country with a repeat performance is Spain, with four companies in the top 50 and 10 in the first 100. Standout Telefónica, which jumped 52 places, to No. 57, is now the world's third-largest telecom group based on market capitalization. It's offsetting its falling share of the fixed-line market at home with a triple-play phone package combining voice, TV, and broadband. Abroad, the company not only acquired Bell South Corp.'s (BLS ) Latin American mobile units, but also beat out other European rivals for a majority stake in Cesky Telecom of the Czech Republic. With 140 million customers in 17 countries, the company increased profits by 31% last year, on a 7% rise in sales. Several companies made it to the top 50 for the first time. Swiss pharmaceutical firm Roche (No. 30) climbed 39 places this year, thanks to its focus on powerful, targeted drugs such as its new cancer treatment Avastin and its broad portfolio of cutting-edge diagnostic tools to detect and monitor disease. Anglo-American cruise line Carnival Corp. (CCL ) (No. 7) added capacity just as travelers' interest in cruises picked up after a rough patch. Looking ahead, Carnival Chief Executive Micky Arison expects more of the same, even in pokey Europe. "Europe has huge growth potential, especially Germany," he says. "That country has only 300,000 to 400,000 cruise passengers a year compared to millions of package holiday makers." Of course, a drop in the BW ranking does not necessarily indicate that a company has run into trouble. Germany's carmaker Porsche, for instance, was No. 1 last year, but fell to No. 96 this year. Its one- and three- year returns and one-year net profit and net margins were all somewhat worse than in 2004. Sales of Porsche's last-generation 911 -- the company's model with the highest profit margins -- fell while a new model was being rolled out. Also, Porsche also took higher loss provisions in fiscal 2004. Still, analysts anticipate another record year for the company, with margins bouncing back to traditionally high levels. The stock is up 20% in the past six months. Will a European recovery boost the fortunes of the 50 even further? No one is counting on it. Some even worry that political uncertainty, highlighted by the rejection of the European Constitution by France and the Netherlands, will throw a monkey wrench into investment plans. Guy Dollé, chief executive of Luxembourg's Arcelor (No. 25), Europe's top steelmaker, says the recent votes were depressing news for Europe. "When the rest of the world is changing fast, Europe is not moving," he says. "[Politicians] have to tackle some of the main issues linked to the economy." There's little chance of that happening anytime soon. But the cream of the crop of Europe Inc. will still find ways to keep growing.  By Laura Cohn in London, with Jack Ewing and Gail Edmondson in Frankfurt, Ariane Sains in Stockholm, Carol Matlack and Rachel Tiplady in Paris, Carlta Vitzthum in Madrid, and Stanley Reed, Kerry Capell, and John Lawless in London
BW MALL
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