Cover Story: THE BW 50
THE BEST PERFORMERS
The Business Week Fifty
The companies of the S&P 500 are the most closely watched in America. Now, for the first time, we are ranking them on how well they perform. At the top are the Business Week 50--the new corporate elite.
Merck & Co. may date back to the era of the horse and buggy, but when it comes to turbo-charged performance, the health-care titan could teach any Silicon Valley startup a thing or two. When the partially constructed Virginia plant for Merck's new AIDS drug, Crixivan, got buried under four feet of snow last year, everyone from managers to lab workers rushed in with snow shovels. That helped Merck get the lifesaving drug off the production line just 15 months after breaking ground, nine months ahead of schedule.
You won't find a column measuring that kind of dedication and resourcefulness on any balance sheet. But it's one potent ingredient in a mix of factors that helped propel Merck to double-digit sales and earnings gains last year, when it reaped a staggering 45.5% for shareholders. Merck may be an old-line company, but compare its performance with those of many other stalwarts in Corporate America, and it's a sprightly standout. The pharmaceutical giant charged into the No.6 slot on BUSINESS WEEK's all-new performance ranking of the 500 companies in the Standard & Poor's index.
Merck is in good company. Intel Corp. stood out as the top all-around star. Close behind were three other high-tech giants: Microsoft, Dell, and Cisco Systems--proof, if ever it was needed, of the incredible strength and vibrancy of America's technology leaders. "Being in the right business is sort of the equivalent of being to the manor born," says Intel Chairman and Chief Executive Andrew S. Grove. But a high-tech focus wasn't necessary to win a spot on the honor roll. Rounding out the top ranks were such powerhouses as Nike, financial services giant Travelers, and MBNA, a Delaware-based bank that has become a star in the credit-card industry.
What makes a top corporate performer? Who's the best across the corporate landscape--and who's the best within each industry? That's what BUSINESS WEEK set out to discover. Deploying a range of key growth measures that investors and managers alike use to judge operating and financial performance, our aim was to ferret out those champions that stand head and shoulders above their peers. The result: the BUSINESS WEEK Performance Ranking, and their centerpiece, the BUSINESS WEEK 50--the best overall performers among the S&P 500 companies.
Taken together, the Performance Ranking and the BW 50 provide a detailed, wide-ranging report card on corporate performance. They won't look like many other best-of lists you've seen, but they will give you a host of insightful new ways to analyze many of the biggest-name companies trading in America. Why? Because on most lists, sheer size is what counts. Indeed, the new ratings replace the BUSINESS WEEK 1000, which ranked companies by market capitalization.
But being the biggest doesn't always mean being the best. Case in point: General Motors Corp. Although it continues to rank as America's largest company by sales volume--a heft that enables it to reel in more profits than all but a handful--when analyzed by such performance-driven measures as sales or earnings growth, margins, or return to shareholders, gm is a less-luminous giant. It came in just No. 286 in overall performance.
Instead, BUSINESS WEEK's new ranking capture the dynamism and the growth that are at the core of any successful company. At the end of the day, what really matters in an ultracompetitive global economy is performance. And ultimately, performance means growth: It's a reflection of management's ability to build new businesses, to find new revenues, to drive earnings up, and to create shareholder value. "Finding ways to grow," says John F. Welch, chairman and CEO of General Electric Co. "is the ticket to the dance."
LITTLE FAT LEFT. Moreover, with the economy heading into its seventh year of expansion--and fears of an inevitable slowdown on the rise--the need to squeeze additional growth out of assets weighs more heavily than ever on management. And after years of downsizing and restructuring, many of the best managers in Corporate America know they've wrung about as much as possible out of costs. Sure, keeping expenses down is important, but companies from GE to Gillette Co. are far more focused on developing new businesses and digging more revenues out of the old. "Companies are finally realizing that you can't shrink to greatness," says Eric Almquist, a vice-president of New York-based Mercer Management Consulting Inc.
That's certainly true of the top performers who have made it to the BW 50. They have gone about it in different ways, but all focus on growth. Some have bulked up through acquisitions; others have spent heavily on research and development and produced a steady stream of innovative new products. Still others concentrate intently on core businesses, dominating their markets. And along the way, many have reworked incentive systems to reward workers and managers alike for going the extra mile.
So how did BUSINESS WEEK calculate its ranking? We began with two of the most important components investors use to judge operating performance: top-line revenue growth and earnings growth. Next, we added total returns, a core measure of how well management is performing for shareholders. Since sustaining growth is far more difficult than hitting on a short-term spurt, we measured all three of those key rates over both one- and three-year time spans. Finally, we added two key indicators of financial performance: net margins and return on equity. After all, growth does little good if management gets scant return from its assets.
With the eight criteria set, next came judgment day. We evaluated each of the companies in the much-watched index produced by Standard & Poor's. S&P is owned by The McGraw-Hill Companies, which also owns BUSINESS WEEK. Why the S&P? Quite simply, it has become the universally accepted measure for stock market performance, both on Wall Street and among small investors. Its 500 companies together make up two-thirds of the total market value of U.S. stocks. As such, they are some of the most important--and most closely followed companies--in Corporate America (page 82).
The results provide an in-depth look at how these companies really stack up against one another. Who has got the best--or the worst--three-year sales growth record among the 500? The best net margins? The worst return to shareholders? You'll find the answers scattered throughout the accompanying pages. But you'll find much more. BUSINESS WEEK also assigned the 500 companies a report-card grade for each of the eight criteria, based on how well each performed against its peers. It's just like in school: For every measure, the companies that ranked in the top 20% received an A, the next 20% got a B, and so on down to the Fs in the bottom quintile. (The handful of S&P companies for whom data was not available--primarily new spin-offs--received an incomplete.) Those grades can be found in the Performance Ranking table starting on page 91.
TWO ALL-STARS. Finally, to obtain our overall Performance Ranking of the 500, BUSINESS WEEK then averaged the ranking each company received. Here, to recognize the fact that it's a lot easier for small companies to score big percentage gains than for big companies, we weighted the ranking slightly by sales volume.
The result? Think of it as the corporate equivalent of a student's grade-point average. And it's no surprise that Intel and Microsoft are the class valedictorians: Among all 500 companies, they're the only two that received straight As.
More surprising is that a corporation such as Walt Disney Co.--often thought of as among America's best--ranks as low as No.96. But a glance at the report card shows it's no mystery: Although Disney earned As for its shareholder returns, it averaged just a middling C for its financial and operating performance.
Since even the best companies sometimes get slammed--or boosted--by factors affecting the entire industry, it's important to compare them to their peers. And even within a middling industry, superior management often allows some companies to rise above the pack. That's why we also included extensive industry ranking based on the same criteria as our overall ranking. Those tables reveal a wealth of additional data as well. They include the actual growth rates upon which our performance grades are based, in addition to sales and profits figures and such shareholder information as recent share price, the price-earnings ratio, yield, and earnings per share. Industry Ranking begin on page 119. An alphabetical index of the S&P 500 companies, including their ranking by total market value, sales, and profits, begins on page 152.
Taken together, the tables add up to a vivid and sometimes surprising snapshot of those companies--and those industries--that have become standouts. Who made it to the top? After a decade of transformation in the way health care is delivered and financed, that industry has emerged stronger than ever, with 13 companies in the BW 50 honor roll--giving it the best performance of any industry measured in our ranking.
The relentless demand for semiconductors and computers paid off for high-tech companies. Altogether, the office equipment and computer industry took eight of the top 50 spots, while electrical and electronics, which includes Intel, took two.
Banks also figure large, with seven entrants in the Top 50. Why? A spate of mergers brought quick growth to some--and may have boosted the stocks of some others in the hopes that they, too, would become targets. Just as important, a moderately growing economy, low interest rates, and low inflation have created a near-perfect environment, with borrowers both eager for loans and solvent enough to pay them off.
CONTRARIAN COMPANIES. But those economic factors combined to make for extremely rough going for the metals and mining industry. Performance there was almost uniformly dismal, with over half the entrants ranking below 400, including No.495, Echo Bay Mines Ltd. The low inflation that helped the banks, flattened gold prices. Aluminum prices were also weak last year.
Still, just being in the right place does not assure success. Companies from cyclical industries, such as Phillips Petroleum Co. in fuel and Tyco International Ltd. in manufacturing, have also found their way to the top. Lockheed Martin Corp. explodes in an ailing industry, and Digital Equipment Corp. ails in an exploding one. Peppered through the BW 50, too, are some extraordinarily well-performing companies that most people have probably never heard of: Illinois Tool Works, Andrew, and Tellabs, to name a few (page 85).
Of course, no list is perfect. Ours tends to make companies recovering from a period of lackluster performance look better than they actually are. That's the case with No.88, Loews Corp., which was deep in the doldrums three years ago but has revamped since, selling off CBS and adding to its CNA insurance subsidiary. Other corporate events can also create anomalies. Lucent Technologies' stock climbed 81.7% from last April, when it went public, through February 21. Still, the company didn't register on the BW 50 radar screen because it hasn't been around long enough to have measures in our three-year growth categories. Meanwhile, companies such as ITT Industries and CVS Corp., which have spun off units, also move down the ranks. CVS is sure to catapult back up the ranks when its purchase of Revco D.S. Inc. becomes complete, making it the second-largest drugstore chain in the country.
TELECOM BLUES. Almost as interesting as which companies are achieving rapid growth is which companies are not. The BUSINESS WEEK Performance Ranking uncovered emerging problems at some old favorites. Hewlett-Packard Co., an icon of performance, saw sales grow 18% last year, to $39 billion. Still, it slips just one notch below the BW 50. Why? Falling prices for printers and chips pulled profits growth down to 3%--well below the S&P average of 13%. And one-year shareholder returns of just 14% earned HP only a C.
Boom times also seem to have bypassed the telecommunications sector. Only two telecom companies made it into the BW 50: Tellabs Inc., a Lisle (Ill.) maker of telephone transmission equipment, at No.21, and Northern Telecom Ltd., another equipment maker, which came in No.47. It's telling that the industry stars were providers of equipment and not services. Service companies, such as the Baby Bells, shelled out lots of money for equipment from the likes of Tellabs, hoping for a payoff in a demand for new services that has yet to materialize. The result: While the rest of its industry languishes, Tellabs, with sales last year of $869 million, has racked up a three-year total return of 547.6%, second only to Dell Computers. "We've had the wind at our backs," says Michael J. Birck, chief executive since the company's founding 22 years ago.
So what makes the great ones great? While there's no single formula for success, there are traits among the BW 50 that crop up in company after company and industry after industry. For GE, like many others, a tight focus on core businesses has proven key. GE may not be in the top 10 in our ranking, but it is in the top 10% at No. 42, a remarkable feat for an $79 billion behemoth. For GE to achieve its 11% profit growth last year, it had to generate a staggering $707 million in additional earnings--more than our smallest companies had in total sales. Over the past three years, sales have increased an average 10.6% and profits 17.3%. Shareholders have been rewarded with returns of 110% over the past three years.
With an intensely driven, competitive culture, General Electric generates much of its growth internally. But it's not the only company that turns its resources inward to grow. Nobody, in fact, has gotten more mileage out of R&D dollars than the health-care providers. With profits squeezed by the new demands of managed care, pharmaceuticals are boosting productivity and funneling the difference into new drugs. "There's nothing like new products to accelerate your financial performance and stimulate your growth," says Merck Chief Executive Raymond V. Gilmartin. He should know. Merck's sales and profits have both grown at a better than 20% average rate over the past three years. While the company got a big boost from its acquisition of Medco in 1993, Merck has also benefited handsomely from new drugs. Crixivan alone contributed $188 million in sales last year.
R&D doesn't work for everyone, however. Other companies have rocketed ahead through acquisitions. In industry after industry, the trend toward consolidation and the need to bulk up for global markets have produced a wave of mergers and buyouts. Still, there are pitfalls. Just look at Quaker Oats Co., No.435 on our list, which is still staggering from its disastrous $1.7 billion purchase of Snapple in 1995.
However, when it works, the right partner in a merger can offer a company a quick route to leveraging hard-won expertise or expensive facilities. Take HFS Inc., No.20 on our list. Sales have grown at a blistering 46.5% average pace over the past three years and profits by 68.1% Its secret? HFS scours the market for brand-name franchise businesses, such as Ramada, Avis, and Century 21, that it can acquire, fix up, and market to the baby boomer customers it focuses on. That gave it the best sales growth for last year--93%--of any company we measured. It's not alone in its strategy: Many of the Top 10 players on our one- and three-year sales growth lists made it there through acquisitions.
But the best example of the power of mergers may be No.5-ranked Travelers Group. A troubled Travelers Inc. was gobbled up by Primerica in 1993, which then took its target's name. Last year it also added Aetna's property and casualty business. Those combinations have helped Travelers, which leads the nonbank financial industry in our ranking, rack up an impressive average annual sales growth over the past three years of 44.4%. Profits averaged 35% a year over the same period. Most of Travelers' business is split evenly among property and casualty insurance, life insurance, and securities. "We have concentrated on things we understand," says Chairman and CEO Sanford Weill.
Whether they buy new businesses or generate them from within, most of the companies that top our list believe in making the people who run their units responsible for the unit's performance. That's part of the GE formula: decentralization. It has 13 independent businesses, from plastics to airplane engines to medical products. Each has $25 million it can spend without going to the board or Jack Welch.
A similar hands-off structure shows up again and again among the BW 50, transcending size and industry. When Johnson & Johnson launches a particularly hot product, it may build what amounts to a new company around it, even giving the outfit a distinct name. "When people look at us as a $20 billion-plus company, I keep telling them that that's not the way to look at J&J," says CEO Ralph S. Larsen. "We are 165 to 170 decentralized operating companies, all of which are growing at different levels."
That belief in entrepreneurship shows up another way at the top companies on our list: They tend to reward their employees lavishly for performance. Norwest Corp. in Minneapolis, No.22 in our ranking, believes that it pays to pay for great results. The bank's stock-option plan reaches 53,000 employees--right down to the tellers. Employees own 9%, or $1.7 billion worth, of Norwest shares, with just $100 million in the hands of the top 15 executives. Shareholders inside and outside the company have done just fine, thank you very much: The bank's total return over the past three years was 124.2%.
DOWN TO A SCIENCE. Many of the superstars also got to the top by doing just one or a few things better than almost anyone else. Intel in computer chips, for example. And in banking, No.9-ranked MBNA leads the rest of the pack with a clearly defined strategy of issuing credit cards to borrowers with above-average payment records. The bank's specialty: selling affinity cards to groups of consumers with similar professional or recreational interests. "Success is getting the right customer and keeping the right customer," says MBNA President Charles Cawley. That kind of discipline helped MBNA achieve 26.5% return on equity last year, far above the 14.3% industry average.
Hand in hand with focus is a common belief in the importance of market leadership. No.28-ranked Gillette aims to dominate the market in every category in which it competes. In 10 years, it has gone from a slow-moving razor-blade maker to a nimble leader marketing an array of consumer products. Indeed, 80% of its $9.7 billion in revenues comes from businesses in which it's a world leader, such as pens, batteries, and toothbrushes, up from 50% five years ago. "Worldwide leadership is vitally important," says Alfred M. Zeien, chairman and CEO. "It allows you to mobilize resources to fight local battles."
More than anything, the Performance Ranking that follow show that when viewed through the lens of growth and performance, a very different picture of America's corporate superstars emerges. Stripped of the advantage of sheer size, some familiar names start to look decidedly mediocre. Others that are less well known suddenly stand out. In assessing the overall excellence of prospective investments, stock pickers need to consider lots of factors. Sure, size counts. Market position, the industry that a company is in, and management are all important, too. In the end, however, investors need to answer just one question: Will a dollar invested in a company today be worth more or less next year or five years from now?
No list can predict the future. But by providing a sense of how well the 500 most-watched companies in America have met that test in the recent past, the new BUSINESS WEEK Performance Ranking offer a much better starting point for assessing the future.By I. Jeanne Dugan in New York, with Alison Rea in New York, Joseph Weber in Philadelphia, and bureau reportsReturn to top