The 50 Best Performers
If success today requires moving at Internet speed, no one knows how to kick it into gear like Oracle Corp. Chairman Lawrence J. Ellison. Over the past five years, Ellison has rebuilt Oracle's portfolio of software products almost from the ground up to make them work on the Web. Last May, for instance, Oracle was the first major software company to begin delivering to customers over the Net its software for such management tasks as financial reporting and human resources. And now corporate customers can order Oracle products off its Web site, cutting down on the need for highly paid salespeople to handle such routine tasks. The goal is to slash $1 billion in costs in two years.
As he moves to lock up big customers, Ellison is a blur of activity. Oracle signed on as a partner with Ford, General Motors, and DaimlerChrysler in the new Internet exchange the auto makers are developing to link with their suppliers via the Web. And Ellison's plans to integrate the exchange software with other Oracle products such as database management programs could ensure he's tied into even more megadeals in the future. "I don't believe that companies want to have ten different software suppliers," Ellison insists. "You can't put all those products together. They don't fit." He figures Oracle's ability to offer one seamless package will be a critical advantage. "No one else is trying. No one else is big enough."
GORILLAS. Don't think shareholders haven't noticed Oracle's combination of muscle and speed. In the past year, the company's stock returned nearly 300% while earnings have jumped 33%, to $1.4 billion, on sales of $9.3 billion. Along with a rise in its profit margins and return on equity, that showing landed it the No. 4 spot on Business Week's fourth annual Performance Ranking of the 500 companies in the Standard & Poor's 500-stock index.
Four years into our ranking of Corporate America's best and brightest, it is clear that what sets these hot performers apart is a knack for leveraging their strengths to seize new opportunities. Not surprisingly, the list is heavy with the likes of Microsoft, Pfizer, and Home Depot--the gorillas of their respective industries. These players use their sheer size and market clout to stay ahead of the pack.
Microsoft Corp., which ranked No. 1 for the third straight year and is one of only 11 companies to make the BW 50 all four times, is a perfect example. Chairman William Gates III and company have pumped up net income an astounding average annual 53% over those three years, to $8.7 billion in 1999, thanks to the company's dominance in personal computer software. One cloud: the antitrust mess, which so far has proven to be only a big distraction. Still, the courts could rule that Microsoft violated antitrust laws and break it into pieces, scattering sales and profits into baby-Bill offshoots. For now, though, Microsoft steams onward, having plowed $2 billion into developing its new Windows 2000 software. That program will generate profits to help fuel future forays into products for the Internet, personal digital assistants, and interactive TV. Those new ventures could be huge in future years, as PC sales growth falls off. Says Chairman Gates: "In terms of absolute profitability relative to other companies, our track record is quite clear there. That's not going to go away."
But as our list shows, size isn't always the most important edge. While Oracle is hardly the biggest player in its key markets--IBM has slightly more market share in database management software, while SAP is bigger in corporate applications such as accounting--the company has leveraged a key strength, its broad portfolio, to offer the integrated packages customers want. And then there are the true upstarts on our list, such as No. 6 Citrix Systems Inc., which generated '99 sales of $403 million by helping companies manage myriad software packages. Players such as Citrix have figured out how to identify niches and use a laserlike focus and agility to serve them better and faster than their bigger brethren.
That's the strength of the BW 50 methodology. Our ranking factors in a variety of performance measures, not relying simply on who has the biggest revenue base or hottest stock price. The result is a list that shows the growth champions in each industry as well as the top 50 companies overall. These are players that drove up both the top and bottom lines, while generating healthy margins and a big payback for investors.
Consider the shareholder returns for last year's class of stars. The companies on the 1999 BW 50 went on to trounce other indexes that track blue-chip stocks, just as our lists did in the two previous years. The Class of 1999 racked up a 29.2% return from Mar. 1, 1999, to Mar. 1, 2000. The S&P 500 index was up 11.5% during that period, while the Dow Jones industrials climbed just 8.7%.
"SEISMIC SHIFT." To track the BW 50 on an ongoing basis, we're launching an index of the companies on the list that you'll be able to check online throughout the day as well as each week in the magazine. For an explanation of how we crunch the mountain of performance data to come up with our rankings, turn to page 130. The overall Performance Rankings, starting on page 141, give a quick sense of how each company stacked up under eight key growth measures, with a letter grade assigned for each. For more detail and to see how companies compared with their peers, flip to the Industry Rankings starting on page 167. Those tables include the numbers behind the letter grades plus data such as earnings per share and recent share price. Our alphabetical listing of the companies in the S&P 500 starts on page 195, with each company ranked by market value, sales, and profits. Finally, for an investor's guide to reading the tables, see page 138.
The evolution of the BW 50 roster over the past four years mirrors the unprecedented technological changes sweeping through the global economy. Says Jeffrey M. Applegate, U.S. chief investment strategist for Lehman Brothers Holdings Inc.: "It is the most seismic shift in the organization of economic activity that any of us has seen in our lifetimes." Since the BW 50 measures change and not just size, it has proven highly dynamic. Each year, some 50% to 60% of the rankings list turns over. Where those changes occur tells the story of the U.S. economy.
When the BW 50 premiered in 1997, it was dominated by financial and health-care companies; 27 of the 50 winners came from those two industry categories. Just 12 technology and telecommunications companies made that 1997 BW 50. This year, the tables have turned. A full 24 of the BW 50 are technology and telecom players--while the number of financial and health-care companies has shrunk to 13. Our list includes companies from almost every front in the Internet revolution, from software players such as Microsoft and Computer Associates International Inc., No. 24, to storage company EMC Corp. at No. 5, to the companies that control the pipes of the Internet, such as No. 3 Cisco Systems Inc., and access provider America Online Inc. at No. 33.
SHEER INGENUITY. Just as interesting, however, are the outliers, the companies that have managed to claw their way onto the BW 50 while their industries were out of favor. That includes Morgan Stanley Dean Witter & Co., No. 7, one of only six financial-services companies that made the BW 50 this year, compared with 14 in 1997. You can blame that falloff in part on Wall Street's fears of rising interest rates--and credit Morgan's ability to tap into fast-growing global markets. Another example: pharmaceutical house Warner-Lambert Co., No. 9, which used a strong marketing campaign to boost sales of its blockbuster Lipitor cholesterol-reducing drug. It was one of only seven health-care companies to make the list, down from 13 in '97.
Clearly, industry forces alone don't fully explain the rise and fall of companies on the BW 50. Each year, at least some companies spring onto the list through sheer ingenuity rather than through some shift in their market. Kansas City Southern Industries Inc. made its debut at No. 44 this year--payoff for management's decision 16 years ago to bust out of the slow-growing railroad industry and purchase the increasingly popular Janus Capital Corp. After years of struggling, retailer Best Buy Co. landed the No. 25 spot by improving inventory controls and enhancing its shopping experience with services such as kiosks where customers can get information on merchandise. And who would think of the less-than-sexy defense industry as a cauldron of growth? Nonetheless, defense contractor General Dynamics Corp., No. 40, has posted torrid sales and net income growth by making smart acquisitions and then managing them adroitly.
Of course, these new stars had to take some other outfit's place. In several cases, companies fell off after a growth streak put stress on other parts of the operation. Maytag Corp. rose to No. 38 last year on the strength of its innovative new high-margin washing machines. But it fell to No. 197 this year as sales and net income growth--and Maytag's stock price--slipped when its lower-end appliances started underperforming. The wobbly stock market also took a toll on several phone companies, including BellSouth, Bell Atlantic, and SBC Communications. All fell off the list. A big reason for their sliding shares was concern about how those Baby Bells will fare as local phone competition heats up.
Other shifts in the BW 50 occur because of substitutions in the S&P 500. Companies such as Bristol-Myers Squibb and Navistar International just missed making this year's cut because new, faster-growing companies were added to the S&P 500. In fact, nine of the 42 new names added to the index in the past year earned a spot on the BW 50. Among the more notable examples: Qualcomm, No. 26, which licenses cell-phone technology and sells chips to phone makers, had the top-performing stock of any S&P 500 company, up 1,461%. Six of the S&P 500 newcomers are tech or telecom outfits, including wireless systems supplier Comverse Technology Inc., at No. 11.
Change is nothing new for the S&P 500, which is updated throughout the year. In the latest turnover, S&P announced it would add Sabre Holdings Corp., the airline reservations systems company, to the index after the close of business on March 15. It replaces Service Corp. International. No wonder: SCI, the big funeral-home operator, buried shareholders under returns of minus 86.8% the past three years, the worst of the 500 companies. Given that our rankings rely heavily on growth measures, it's not surprising to find a few anomalies. One-time events can skew results. And companies on the rebound from a period of poor performance have an easier time posting big gains, helping them to rise in our rankings. Time Warner Inc. is the most notable example. It vaulted into the No. 2 spot from a lowly 231 the year before, in good part because of an unsusual development. The company's revenues leaped 87% in 1999, to $27.3 billion, largely because of a change in the structure of Time Warner's joint venture with MediaOne Group. Last year, Time Warner began booking revenues from its 75%-owned Time Warner Entertainment, which includes assets such as cable systems and HBO, directly on its income statement. In addition, Time Warner booked $2.24 billion in pretax gains on the sale or exchange of cable systems and other investments--a big reason its net income rocketed up 1,067% in 1999.
Still, Time Warner's high position also reflects some real improvements in operations. Its strong return to shareholders--321% over three years--is partly due to Wall Street's love affair with cable systems. But it also shows that CEO Gerald M. Levin finally got his arms around the many fiefdoms that resulted from the 1989 Time and Warner merger, and the purchase of Turner Broadcasting System in 1996.
Then there's the evolving case of Tyco International Inc., which has come under fire for the way it generates the sort of performance numbers that placed it 23rd on our list this year. A dealmaking machine, Tyco has averaged nearly 300% net income growth each year over the past three years. But critics last year questioned whether these gains had been inflated through creative and aggressive merger accounting. The company vehemently denies the charges, but the Securities & Exchange Commission has launched what Tyco calls an informal inquiry into the matter. Meanwhile, investors punished Tyco's stock, dropping its year-to-year returns to a negligible 1.9%, although it is still up 159% for the past three years.
"COSMIC DUST." Those special cases aside, typically the companies that make the BW 50 roster again and again are giants that know how to exploit their size. Nowhere is that more apparent than in the information revolution. These are companies that dominate their markets with a combination of internal innovation, dealmaking, and high-impact marketing. "Most of the segments [in these high-tech industries] are terribly capital intensive," says Edward M. Kerschner, chairman of the investment policy committee at PaineWebber Group Inc. "In the information age, size truly matters."
Consider telecommunications giant Lucent Technologies Inc., a master innovator. Few companies can match the research capabilities of Lucent's Bell Laboratories division. Already famous for inventing the transistor and the laser, Bell Labs last summer came through with a new, highly efficient device called SoftSwitch that allows phone carriers to handle both Internet-based calls and traditional circuit-switched calls. That switch, along with other innovative products, sent Lucent's net income up 149%, to $3.5 billion last year. That was enough to move the company from No. 69 on our 1999 list to No. 10 this year. Here's the scary part for rivals: Whereas Bell Labs used to file just one patent per day in 1996, it now files four. Says Lucent CEO Richard McGinn: "Bell Labs is accelerating its pace of innovation."
Still, having an innovative product is only half of the game. Increasingly critical is the need to market the heck out of those products. Companies such as Intel Corp., No. 27, and AOL have poured millions of dollars into making themselves household names. That trend has helped Omnicom Group Inc., an advertising and marketing holding company, keep its berth on the BW 50. At No. 32, Omnicom has positioned itself for technology clients who feel they need to move quickly to establish a name. It bought up some smart dot-com firms, and last year Omnicom boasted a 34% return on equity. "We're the people who take cosmic dust and turn it into a brand," says CEO John D. Wren.
Sun Microsystems Inc., at No. 12, serves as a good example of Silicon Valley success that's as much about savvy sales and marketing as technology. The first major computer maker to latch on to the Internet, it is the favorite of most Internet service providers and the dot-com set. And now it's once again in stride with an emerging trend: companies outsourcing many of their technology jobs to companies that will run them over the Net. Sun is focusing on these Net-based service providers. Already, it's Sun's fastest-growing business, with more than $1 billion in sales.
But with the technology revolution moving at blinding speed, even the best performers know they can't stay ahead on their own. That's why the top-performing tech players rely so heavily on dealmaking. Cisco Systems Inc., No. 3, is a master acquirer that inked more than 50 deals in the past seven years to build its technical expertise in unfamiliar markets such as optical networking. Cisco's sales jumped by an annual average of 40% over the past three years. Similarly, Computer Associates has relied on about 100 acquisitions to grow into a software giant that's focused today on the fast-growing client-server market--key to Internet operations. Chairman and CEO Charles B. Wang has proven to be a pro at integrating those deals, weeding out weak product lines and integrating the rest into CA's package of offerings. Investors were rewarded with a 53% return during the past year.
HARD SELL. If anything, dealmaking last year became a more prominent strategy for outflanking the competition. According to Thomson Financial Securities Data, 32,700 mergers and acquisitions were announced in 1999, for a total value of $3.4 trillion, up from 29,600 deals worth $2.5 trillion in 1998. And the companies of the BW 50 were certainly in the M&A game. Pfizer, No. 36, finally struck a deal to merge with Warner-Lambert after a nasty hostile bid. And AOL and Time Warner agreed to tie the knot, bringing together the biggest brand in the Internet with a top content provider.
It is not just the behemoths of the technology revolution that are cleaning up, though. What distinguishes the smaller players on the BW 50 is their ability to spot an opportunity--and drive toward it before the big guys notice. Take No. 11 Comverse Technology. It was early in offering hardware and software that help wireless companies manage services such as voice mail. Today, it dominates that field with 30% market share. At Citrix Systems, CEO Mark B. Templeton spent the past 10 years trying to persuade big corporations to use his software to centralize such functions as word-processing software on a server. It was a hard sell at first. But now such companies as Arthur Andersen Consulting are using those tools to save time and money when it comes to upgrading software for hundreds of users. Citrix had the second-best three-year return on the S&P 500, up 4,911%. Only Yahoo! Inc. did better, with a startling 6,235% return. But as sexy as some dot-com companies like Yahoo are to the stock market, they don't make the BW 50. That's because we require stable earnings growth.
Even more impressive, though, are the companies that are gaining ground while the rest of their industry wobbles. Take financial-services firms. Rising interest rates are just one of the challenges they face. Some big firms are also struggling to digest their own mergers. And many players in the sector, particularly in the brokerage business, are scrambling to catch up with new online competitors. The financial outfits that made our list tackled those challenges head-on. Charles Schwab Corp. nabbed the No. 14 spot thanks to its aggressive move into online stock trading. Schwab has raced to grab that business ahead of others, letting customers download computer programs to manage retirement or quiz financial planners and advisers online. The result: During the final quarter of 1999, 73% of Schwab's trades were done online, vs. 61% just a year earlier. And its net income rose 69%, to $589 million.
BANG-UP MARKETING. Success in global markets helped some of the other financial-service companies that made our list--just as woes in overseas markets pushed several off in previous years. Morgan Stanley continued to expand its European business in the late 1990s, despite some rough going. Now that mergers and acquisitions are booming in Europe, though, Morgan is cleaning up. Credit-card issuer MBNA Corp., No. 35, saw profit grow at an annualized rate of 29% over the past three years, largely because of its fast-growing program in Britain that offers credit cards tied to sports teams and professional organizations. And General Electric, No. 43, has seen results of its General Electric Capital Services group boosted by returns from equity investments in Asia in the wake of the financial crisis there.
For the few big drugmakers still on our list, the key to overcoming Wall Street's dire view of the industry was deft product innovation backed by bang-up marketing. While Warner's Lipitor has a slight potency edge over rival products, the combined marketing power of Warner and Pfizer Inc., which co-promotes the drug, turned Lipitor into a $3.7 billion phenomenon. Pfizer has goosed its results with a series of such partnerships. Says CEO William C. Steere, Jr.: "We manage to instill a sense that not all great ideas reside at Pfizer. There's a lot of intellectual property [outside] that we should have access to."
Smaller health-care players such as No. 13 Biogen Inc. can't compete with the marketing muscle of a Pfizer. So they have to develop one-of-a-kind products. Biogen pumps some 30% of its sales back into biotech research, double the rate of competitors. That has paid off handsomely with the multiple sclerosis drug Avonex, which ignited 59% profit growth at Biogen last year, on a 42% increase in sales, to $794.4 million. "We are a smaller company that needs to have a higher flow rate of new products in this stage of our development," notes Biogen Chairman and CEO Jim Vincent.
Great innovation wasn't confined to tech companies, though. Best Buy Co. was struggling in the mid-'90s after expanding too quickly and pricing too aggressively. To dig out, it invested in systems that saved money by cutting inventory levels. It also created a more friendly shopping experience. With products such as digital video disk players and satellite TV sending consumer electronics sales soaring, Best Buy has been cleaning up, lifting net income an average 195% the past three years. And the hot streak should continue, says CEO Richard M. Schulze: "We're going to be in the sweet spot, taking advantage of the new digital cycle and customers' preference to stay closer to home."
Likewise, Home Depot, No. 15, boosted net income 44% last year, to $2.3 billion, and increased margins from 5.3% to 6%, with a relentless drive to lower costs via steps such as importing more goods directly instead of buying through distributors. But CEO Arthur M. Blank also continues experimenting to keep the top line humming, starting design centers called Expo, centered on home decorating, and testing a competitor to the local hardware store that it calls Villager. Blank's edge: being able to use Home Depot's buying power to undercut the competition on price.
Of course, if Home Depot's spin-off brands become stars, they could create the same problem faced by No. 8 Gap Inc. Gap slipped from its No. 3 perch last year, in part because same-store sales at its core Gap chain were flat or down for several months. Its newer chains--particularly its Old Navy stores--grew like gangbusters, but part of that strength came from cannibalizing its own Gap stores. CEO Millard S. Drexler took control of the Gap chain himself late last year, and sales are perking up again. Despite it all, Gap last year still managed to drive net income up 37%, and posted a 59% return on equity.
In the end, that's really the most important lesson to be drawn from four years of tracking the best corporate performers. Being in the right place at the right time helps. But over time, great management counts more. How else can you explain an energy company leaping 44 places this year to the No. 30 spot? Kenneth L. Lay, CEO of Enron Corp., saw a chance for fast growth in the deregulation of energy. He transformed his company from a boring natural gas pipeline outfit into an energy entrepreneur. And now Lay is jumping on the Internet boom: Enron will have laid 18,000 miles of fiber-optic network by the end of next year and is creating a market for trading capacity on fiber-optic lines. "I've never seen another business that has the potential that communications has," Lay says. Spotting the potential and breaking down walls to get to it--that's what sets the true champions apart.