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The Best European Performers


When German auto maker Porsche (PSEPF) showed its Cayenne sport-utility vehicle at the Geneva car show in 2002, some Porsche connoisseurs turned up their noses. But the company believed there was an underserved market for the powerful new model, based on market research that showed car buyers would pay a premium for the speed Porsche is famous for in the shape of an SUV. The crossover vehicle, which can go from zero to 100 kilometers per hour in just 5.6 seconds, proved a big hit with consumers, especially in the U.S. Brisk demand for the Cayenne helped drive Porsche's sales up 15% last year and push its profits ahead by 22%. Largely because Porsche was in tune with what its customers wanted, the Stuttgart company takes pride of place as No. 1 in BusinessWeek's second annual ranking of Europe's 50 best-performing companies. "The only thing that counts is success and that you deliver what you promise," says Porsche Chief Executive Wendelin Wiedeking.

Scan this year's list of top companies, a ranking of earnings growth and other performance measures based on the Standard & Poor's Europe 350 Index, and a few dominant themes emerge. Carmaker Renault joins Porsche in the top five. Retailers such as Tesco PLC (TWCDY.PK) (No. 12) are a big presence, thanks to credit-card-fueled shopping binges. And many banks such as HSBC Holdings (No. 5) and France's Soci?t? G?n?rale (No. 23) are seeing a boom fueled by record low interest rates and a pickup in loan demand. Energy companies such as ENI (E) (No. 8) and BP (No. 15) are also among the leaders, thanks in no small part to a surge in oil prices.

What do these top-ranked companies across a broad range of industries often have in common? Like Porsche, they have had success in spotting what customers want -- and then delivering it efficiently. British food retailer Tesco is thriving in large part by mining data generated by its Clubcard loyalty scheme, which monitors purchases and rewards frequent buyers with discounts. The company, which also solicits customer feedback through phone and written surveys, is considered by analysts to be top of the class at using the information it garners. Tesco detected that customers wanted more nutritional information over a year ago. That allowed management, led by Sir Terry Leahy, to target sales more effectively by instituting a new labeling system that will give shoppers more detailed information on the fat, salt, and sugar content of hundreds of products starting this fall.

It's a similar story for Danish oil-to-shipping conglomerate A.P. Moller-Maersk Group (No. 13). Judging from independent client surveys, it provides just the right mix for its customers, especially on the fastest-growing shipping routes between Asia and North America. There, it dominates by offering a superior combination of capacity and speed from its container ships and high-quality service from its crews and technical shore staff. As a result, Maersk is winning business from rivals and is even able to push up fees despite stiff competition. Net profits rocketed 43% last year. "If there's one thing that singles out a great company," says Tim Ambler, senior fellow at the London Business School, "it's an obsessive interest in what its customers want and how they behave."

Aid From Acquisitions

Many of the companies among the top 50 performers -- such as German power supplier E.ON (No. 36) and HSBC -- have also made major acquisitions in recent years. That defies conventional wisdom that mergers destroy rather than create value. A recent study by the Boston Consulting Group shows that, in fact, highly acquisitive companies tend to generate the highest total shareholder return -- more than a full percentage point per year greater than the return of companies that made few or no acquisitions. "There is no inherent disadvantage to growth by acquisition," says Kees Cools, executive advisor in Boston Consulting Group's Global Corporate Finance & Strategy practice, based in Amsterdam. "On the contrary, if one has a clear acquisition strategy, if one knows when to walk away from a deal, it can be the best way to generate growth above the cost of capital."

One country dominates BusinessWeek's ranking of European top performers: Britain. The nation contributed 24 of the 50 and 7 of the top 10. In part, that's because Britain has far more listed companies than any other European country, which automatically increases the likelihood of their making it onto the list. But analysts also give credit to a buoyant British economy, which has achieved 47 quarters of unbroken economic growth since 1992 and has consistently outperformed the euro zone. Another key factor is the greater flexibility of the British economy, which gives companies room to grow. "The environment in Britain is different [from Continental Europe]," says Porsche's Wiedeking. "The people [there] have confidence in the future. That helps [British] companies."

To be sure, superior performance is not all growth-stoking takeovers and brilliant boardroom strategy. The best European companies have been helped over the past year by a more favorable economic climate. After three years of stagnation, the euro zone economy is finally showing signs of life. That's good news for the likes of Swedish retailer H&M Hennes & Mauritz (No. 37) and British-based hotelier Hilton Group (No. 43), whose business picks up as the economy gains traction. The continuing buildup of the Spanish economy, which has outperformed the major euro-zone countries in recent years, helps explain why three Spanish engineering and construction groups -- Grupo Ferrovial (No. 21), Grupo ACS (No. 27), and Abertis Infraestructuras (No. 34) -- made the list. Meanwhile, a strong economy in the U.S. has helped companies with a presence there, such as the Royal Bank of Scotland Group PLC (No. 16), which increased sales by 12% and profits by 31% last year.

Detail-Driven

What separates the best performers from the rest of the 50 is clearly superior management, which can create value even when times are tough. The BW Europe 50 weeds out one-year wonders by melding the performance of companies in the Standard & Poor's (MHP) Europe 350 over both one and three years (see "Crunching the Numbers"). That provides a basis for evaluating companies through good times and bad. Standard & Poor's, like BusinessWeek, is a division of the McGraw-Hill Companies (MHP). "The best companies are obsessed with detail, unforgiving of themselves, and genuinely upset when customers complain," says Sean Meehan, professor of marketing at the IMD business school in Lausanne, Switzerland.

Europewide, the economic picture has been mixed, which is reflected in the rankings. In Germany, for instance, unemployment is more than 10%, so consumers there tend to save their money for a rainy day. Not surprisingly, there is only one German retailer on the list -- Metro (No. 32). Shoppers in Britain, by contrast, where unemployment is at a 30-year low, are bolstering the bottom line at retailers such as GUS (No. 9) and Next (No. 11). The only euro zone retailing chain on the list is Spanish apparel group Inditex (No. 38), which owns the Zara chain, among other things, and has caught the imagination of young people in more than 40 countries by spotting fashion trends, then designing and delivering attractive clothes to the market quicker than its rivals.

In fact, there are just five German and five French companies in the top 50, although the two countries together account for 40% of the European Union's gross domestic product. That disparity stems in part from rigid labor markets, consensus-driven decision-making, and heavy social security burdens in both countries. By contrast, Spain, which accounts for just 7.6% of the EU economy but is faster growing and less regulated, boasts four companies on the list.

Unlike other rankings, the BW Europe 50 does not attempt to show which companies are the biggest, fastest-growing, or most profitable for the most recent reporting date. That means an outfit like London-listed (but Australia-headquartered) mining giant BHP Billiton (BHP) (No. 2), whose performance over the past three years has been impressive, features high on the list even though sales slipped 2% last year. Nor is the list intended to be used as an investment guide. Although these companies have shown their mettle over the medium term, their stock price may not necessarily rise in the future.

The class of 2004 is a highly diverse group ranging from French auto maker Renault (No. 4) to Norwegian energy heavyweight Norsk Hydro (No. 29.) Banks make up the biggest single category, with nine in all. In Britain, banks have benefited from several years of strong consumer-loan demand and a surge in mortgage borrowing. In other European countries, they have reaped the rewards of a strong inflow of new money into wealth management accounts and long-term savings. Some, such as Switzerland's UBS (UBS) (No. 44) have also benefited from the strong recovery in investment banking, especially in the U.S.

Some banks are benefiting from the acquisitions they have made in the U.S. in recent years. London-based HSBC (HBC), which has a reputation for making successful deals, is reaping the rewards of its purchase of Household International Inc., which was completed in March, 2003. Owning Household doesn't simply mean that HSBC earns more in the U.S. It is also transferring Household's consumer-finance skills to other parts of the group. "There's a plethora of opportunities in building up our consumer-finance opportunities around the world based on Household's expertise," says CEO Stephen Green. "It's a very considerable addition to the capabilities of the group, with many opportunities in many different markets."

With oil prices hovering around $40 per barrel, it's hardly surprising that a number of energy companies have made it on to the BW Europe 50. There are seven in all, ranging from Italy's ENI to BG Group (No. 50). When petroleum prices are high, energy companies automatically do well. That's because sales and profits rise, especially since many outfits control the flow from the well to the pump. But well-timed takeovers can also help boost the bottom line. That has certainly been the case for Britain's BP. Its strong performance in recent years is in no small part due to its shrewd acquisitions of Amoco and Arco (BP) in the late 1990s. It's much the same story with France's Total (No. 25), which bagged Paris-headquartered rival Elf Acquitaine in the late 1990s and then bought Belgium's Petrofina to strengthen its refining and marketing reach.

Leading European corporations are emphasizing growth after several years of belt-tightening and restructuring to focus on core businesses. That's a big change, says Boston Consulting Group's Cools. In 2002 and part of 2003, the emphasis was on cost-cutting and restructuring in the face of the economic downturn and volatile stock markets. In the second half of 2003, however, companies began to think about growing again because economies were finally on the mend. Given those changing dynamics, it's no wonder that many companies featured in last year's list have dropped off in favor of more dynamic newcomers. All told, just 26 of the companies on last year's BW Europe 50 made it back again this year. Among the notable departures: Electrabel, the Belgian utility; Altadis, the Franco-Spanish tobacco company; and French retailer Carrefour. Spanish construction company Grupo Dragados has also disappeared after having been taken over by archrival Grupo ACS.

Rising Rates Ahead

Entire business sectors are also among the missing on this year's list. There isn't a single airline represented among the 50, mainly because they are suffering from intense competition, high fuel prices, and the ongoing fallout from worldwide terrorism. Only one telecom operator -- Telecom Italia Mobile (No. 18) -- made the ranking. That's primarily because most European fixed-line and mobile operators have been through a very rough patch since the stock market plunged in early 2002. Some, like France Telecom, have made spectacular comebacks, but their performance over three years still lagged. Meanwhile, Germany's SAP (No. 40) is the only technology company in the ranking. It stands alone because european tech outfits are recovering from the market shocks of the past three years far more slowly than their U.S. counterparts. Nor are insurance companies anywhere in evidence, due to steep losses from stock market investments in 2000 and 2001.

Among the new arrivals in the top 50 are three companies that didn't even make the S&P 350 last year: British fund management company Man Group (No. 7), plus Spanish engineering and construction outfits Grupo Ferrovial and Grupo ACS. Another fresh face is London-listed brewery giant SABMiller (No. 3), which traces its roots to South Africa. Its 2002 acquisition of Miller Brewing Co. in the U.S. helped fuel a 37% increase in sales and a staggering 118% rise in profit. Similarly, Germany's E.ON electricity company moved from No. 275 to No. 36. Adept management and two big mergers have sent it shooting up the rankings. Cost-cutting and the shedding of noncore assets helped E.ON turn a 696 million euro loss in 2002 into a 3.95 billion euro profit last year.

The big question now is how the companies represented in this year's BW Europe 50 ranking will fare over the coming 12 months. Interest rates are already on the rise in Britain, and economists say they will probably start trending up in the euro zone by the end of the year. That unsettling development could make consumers more reluctant to borrow and spend, which could in turn hurt retailers and squeeze margins at banks. But not everyone subscribes to that gloomy scenario. "We've seen interest rates go up before," says Royal Bank of Scotland Group CEO Fred Goodwin. "We have taken steps to position ourselves for rising rates."

Ultimately, however, the most successful companies are those that create powerful brands and cultivate close relationships with their customers -- and are led by the most flexible and talented senior executives. That's the winning formula that delivers superior performance in the long run.

By David Fairlamb in Frankfurt, with Gail Edmondson in Frankfurt, and Laura Cohn, Kerry Capell, and Stanley Reed in London


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