Comfort food. That's the business Nestlé (NSRGY ) of Switzerland is in--ice cream, pasta, chocolate. And in this turbulent global market, comfort food sure sounds like a great idea. In a year when U.S. corporate scandals, a worldwide telecom meltdown, and general uncertainty hammered the planet's biggest bourses, Nestlé's steady earnings drove its market capitalization up, close to 20% over the past 12 months, to $96 billion. That was enough to make the giant Swiss confectioner the world's 30th largest company by market cap, up from 45th place a year ago. Rock-solid accounting helped too. "We've often been accused of being too traditional, of not leveraging enough," says CEO Peter Brabeck-Letmathe. "Well, a conservative balance sheet is not the worst thing to have."
No kidding. Flight to quality--or just sheer flight--is the dominant theme in this year's Global 1000 survey. Using data from Morgan Stanley Capital International Inc. in Geneva, BusinessWeek ranks companies in 23 countries by market capitalization as of May 31, 2002. As such, the Global 1000 provides a good barometer of investor sentiment around the globe. Not surprisingly, sentiment stinks. In this, one of the most chaotic years on record, investors either retreated to a few favored stocks or categories, parked their cash in bonds or real estate, or switched funds to hot emerging-market bourses like Korea. The net result was an overall 12% shrinkage of market cap in the exchanges of Japan and the West, to $18.5 trillion. Even favorites like General Electric (GE ), Intel (INTC ), and Citigroup (C ) saw their shares droop. The value of the telecom sector, which dominated the list just two years ago, contracted 34%. A debt overhang from a giant spending spree on fiber-optics networks, 3G licenses, and acquisitions battered the industry. Scandals at Qwest Communications International Inc. (Q ) and Global Crossing Ltd. didn't help either.
But even in this annus horribilis, size counts--and so, surprisingly, does Americanness. Despite the declining dollar and the steady tom-tom of earnings disappointments and scandalous revelations, American giants dominate the top 25 slots in the Global 1000, with GE (GE ), Microsoft (MSFT ), ExxonMobil (XOM ), Wal-Mart Stores (WMT ), and Citigroup taking the top five places. U.S. corporations account for more than half the capitalization of our entire list.
True, the rankings are based on end-of-May numbers, which predate the WorldCom Inc. bombshell. But since then, the U.S. stock market has fallen more or less in tandem with the Tokyo and European bourses--which means the general supremacy of U.S. equities still holds true.
What gives? It's simple. Investors who want to stay in developed-country stocks have to keep U.S. shares in their portfolios. And the U.S. economy could still grow 3% or more this year, while Europe will be fortunate to grow at half that rate, and Japan will be lucky to break out of recession.
But whether it's American, French, or Japanese stocks, investors are definitely being more discriminating. No longer will they buy into an entire sector. They only want the bluest of the blue chips. Those brave enough to venture back into tech will pick Microsoft Corp. (MSFT ) over Oracle Corp. (ORCL ) And in telcos, Verizon Communications (VZ ), with dependable earnings from its cell-phone franchise, is favored over AT&T (T ).
One of the few sectors that bucked the trend was consumer staples. The 79 companies that figure in this category registered a combined 19% increase in market cap. Even in a downturn, people have to eat, brush their teeth, and wash their hair. That's good news for stalwarts like Coca-Cola (KO ), Colgate-Palmolive (CL ), Unilever (UL ), and Gillette (G ). And with their strong cash positions, these global marketers can cut deals as well. Nestlé bolstered its bottom line with last year's $10.3 billion acquisition of pet-food maker Ralston Purina. The Swiss company has pulled even with Anglo-Dutch rival Unilever in ice cream by picking up brands such as Häagen-Dazs and Dreyer's Grand Ice Cream Inc. in the U.S. Nestlé's net profit rose 30% in dollar terms in 2001, to $4.2 billion, on sales of $54.1 billion.
The search for steady-as-you-go companies has moved beyond consumer staples to other categories. Thus a reputation for caution has done nothing but good for HSBC Holdings (HBC ). The London-based international powerhouse ascended two rungs in our rankings, to No. 22. That's impressive considering that pretax profits fell by 18% last year, to $8 billion, due in large part to HSBC's exposure to Argentina. Still, the company's diversified balance sheet and an emphasis on cost control have stood the bank in good stead. "HSBC's real strength is the conservative position we have always adopted as far as credit is concerned," says group CEO Keith R. Whitson. Other shrewdly managed banks climbed up the rankings too, including another British house, Royal Bank of Scotland Group PLC (RBS-K ), which climbed 30 places to No. 35. The Edinburgh-based bank is achieving annual savings of $3 billion a year from its recent merger with NatWest Group.
Oil majors also figure prominently on the list, a reflection of ongoing consolidation within the industry and a largely successful effort by producers to keep prices steady. Last year's merger of note was the $44 billion tie-up that created ChevronTexaco Corp. (CVX ) The combination debuts on our list at No. 31, while Royal Dutch/Shell Group (RD ) and BP PLC (BP ) both stayed in the top 10. Oil companies will continue to post solid earnings in 2002 on a combination of firm oil prices and ongoing cost-cutting.
Pharmaceutical stocks--traditionally seen as safe harbors in choppy markets--have performed poorly in the past year. The main culprits: patent expirations and weak product pipelines. One company that didn't disappoint was Johnson & Johnson (JNJ ). The company soared to No. 9, from 21, largely on the back of blockbusters such as Procrit (sold as Eprex outside the U.S.), an anemia treatment with $3.4 billion in sales last year. The market has clearly endorsed management's move to beef up the prescription drug side of the business though a combination of investment in existing product lines and acquisitions, such as the 1999 purchase of Centocor Inc., a biotech player that sells a fast-growing drug to battle rheumatoid arthritis. "We expect the next couple years to be stronger than typical growth," says Chief Financial Officer Robert J. Darretta. It could still be a rocky road, though: On July 1, U.S. regulators turned down J&J's application with its partner Alkermes Inc. to market a long-acting version of its schizophrenia drug, Risperdal. J&J's shares tumbled on the news.
One big surprise is the strength of the auto sector. Fiat (FIA ), Italy's deeply troubled carmaker, slid all the way down to No. 658, from 435 the previous year. But carmakers generally profited from the fact that demand for autos held up surprisingly well in the U.S. General Motors (GM ), DaimlerChrysler (DCX ), Nissan (NSANY ), Honda (HMC ), and Volkswagen (VLKAY ) all climbed in the rankings.
Among the carmakers, Honda Motor Co. was one of the few Japanese companies that increased its market cap. It has Americans to thank for it: Three-quarters of the Tokyo-based carmaker's profits come from the U.S. Honda's mainstay sedans are as common a sight in the suburbs of Chicago as they are in the streets of Shanghai. And its family-friendly minivans like the Odyssey and SUVs such as the CR-V are also a big hit with soccer moms--and dads--worldwide. "Sensitivity to the specific needs of customers in markets around the world" is a key ingredient of the company's success, says CEO Hiroyuki Yoshino.
Honda's compatriot, Sony Corp. (SNE ), didn't fare as well. It fell 14 spots in this year's list, to No. 63. For a while, it looked as if Sony would escape the problems plaguing the rest of Japan's electronics sector. It has a standout brand and the talent and verve to produce the most stylish, innovative digital gadgets on the planet. Valuable assets, but they haven't helped halt the earnings slide. Sony posted a 40.3% plunge in operating profits, to $1.1 billion, on sales of $63.2 billion for the fiscal year ended in March. This year should be better, thanks to the success of the movie Spider-Man and booming sales of PlayStation 2 consoles and games. If not for the PS2, Sony would have fallen into the red in fiscal 2001.
One fresh threat to Sony's recovery poses a danger for all Japanese exporters. "The strong yen is a problem," says Kun Soo Lee, senior analyst at WestLB Securities Pacific Ltd. in Tokyo. "Sony bases its calculations on an exchange rate of 130 yen to the dollar, but it's already down under 120 and may soon be 115 yen." Other Japanese companies dependent on the U.S. market, including Matsushita Electric Industrial Co. (MC ), the carmakers, and specialty tech companies like Rohm Co. (ROH ) and NEC Corp. (NIPNY ) could face a similar hammering from a stronger yen.
Overall, it's a bleak picture for the markets. So bleak that maybe it's time for a frosty one. Investors think so: They've moved the world's biggest brewer, Anheuser-Busch Companies Inc. (BUD ), to No. 80 in our rankings, from 120. Its market cap rose 15%, to $45 billion. With almost half the U.S. beer market, the St. Louis-based brewer boasts enviable pricing power and huge leverage with distributors. Anheuser-Busch registered a 10% increase in net income, to $1.7 billion, on sales of $12.9 billion in 2001. And the balance sheet looks surprise-free. "Our business is really fairly simple," says newly installed CEO Patrick T. Stokes, who took over from August A. Busch III on July 1. That's right: You brew beer, you sell it. In this addled market, the simpler the better.
By Cristina Lindblad in New York, with bureau reports