The Best European Performers
Name an economic malady and Europe has it in abundance right now: sluggish economic growth, lackluster consumer spending, currency swings that hurt exports, and depressed stock markets. For that reason, BusinessWeek could not have picked a better time to launch its first annual ranking of Europe's 50 best-performing companies. You won't find any frothy flavor-of-the-month outfits or dot-com hangers-on among these stalwarts. The BW Europe 50 is instead studded with companies whose managers know how to make money in good times and bad. What do corporations such as British bank HBOS (No. 1), Belgian utility Electrabel (No. 4), and Swedish apparel retailer H&M Hennes & Mauritz (No. 8) have in common? All have made singular progress in boosting sales, increasing profits, and delivering superior returns to investors in these worst of times for much of Europe. "Such top performers excel mainly because of good management that knows what to do in a difficult environment," says Robert Parkes, a European analyst at HSBC Bank in London. "They're doing well because they've kept in touch with what their customers and shareholders want."
Most of the companies that powered to the top of this inaugural list are top-notch names with the size, stamina, and savvy needed to thrive in turbulent times. Energy companies like Total and financial-services companies such as Royal Bank of Scotland Group figure prominently. So do retail and consumer-staple giants such as France's Carrefour and Switzerland's Nestlé. Notable by their absence are Europe's big technology and telecom companies. Only three made it onto our top 50 list: France's Bouygues, Italy's Telecom Italia Mobile, and Finland's Nokia. Absent from the top 50 are powerhouses such as Germany's SAP, Geneva-based STMicroelectronics, and France's Alcatel. Blame the poor tech showing on three years of weak revenue growth, poor profitability, and, most of all, sagging stock market valuations.
As investors know all too well, companies can manage impressive profits one year, only to disappoint the next. That's why the BW Europe 50 rewards those with staying power. To generate our ranking we used a series of criteria that judge the performance of the companies in the Standard & Poor's Europe 350 stock index over both one and three years.
The turmoil in the markets over the past year means that today's darling can become tomorrow's dog almost overnight. That's why it's important not to see the BW Europe ranking as an all-knowing investment guide. Even stellar performers have their ups and downs from year to year. Take German pharmaceutical firm Altana and Spanish construction and engineering company Grupo Dragados. They beat all comers with total returns of 160.2% and 140.6%, respectively, between June 30, 2000, and June 30, 2003. However, both companies have delivered lower returns in recent months and neither Altana nor Grupo Dragados would appear in the top 50 if the ranking was based simply on the returns generated over the past 12 months.
There's a definite British tilt in the European BW 50: British enterprises dominate, accounting for 17 of the 50 and 6 of the top 10. In part, that's because Britain has the most publicly traded companies of any European nation. That automatically increases the odds for British companies. Other elements are at work, though: The British economy has outperformed the 12-member euro zone in each of the past three years, and British companies have benefited from more buoyant domestic demand. France and Spain are also well represented. By contrast, although the German economy is the biggest in Europe by far, there isn't a single German company among the top 20. "Many German companies, such as car manufacturers, are well managed," says Paul Strebel, a professor at the IMD-International Institute for Management Development in Lausanne, Switzerland. "But the environment is more difficult there in terms of the macro background and structural rigidities."
What's the secret of Anglo-Saxon corporate prowess? British companies operate in a freer environment than many of their Continental competitors. They do not suffer from the same labor restrictions, heavy social-security burden, and other structural impediments that hold back enterprises in many countries. It would have been much more difficult for HBOS, Royal Bank of Scotland Group, and HSBC Holdings to cut costs and exploit synergies as aggressively as they have done over the past three years if they had been headquartered in Germany rather than Britain. Yet structural reforms now wending their way through the German parliament may give Teutonic companies a competitive jolt. Also, notable absentees from this year's list, such as Deutsche Bank, could well make it next year, thanks to their belated cost-cutting efforts.
The European BW 50 also provides proof that, despite the long-standing argument over whether mergers generate shareholder value, they can and do create powerful, successful companies. HBOS and Royal Bank of Scotland, the two top-performing banks on the list, both British, prove the point. HBOS, which heads the overall ranking, was created in 2001 when Bank of Scotland joined forces with Halifax PLC, a mortgage specialist. A year earlier, Royal Bank of Scotland, No.3 on our list, acquired National Westminster Bank PLC. The merged entities now not only outrank British arch-rivals HSBC (No. 48) and Barclays PLC (No. 52), but also every bank on the Continent. "We have the financial strength and flexibility needed to sustain growth and manage risk in an uncertain world," says HBOS Chief Executive James Crosby. "Our merger continues to exceed expectations."
Meanwhile, ongoing consolidation within the global pharmaceutical industry has produced some of Europe's biggest mergers. The 1999 union of Sweden's Astra and Britain's Zeneca gave birth to Europe's third-largest drug company -- and No.35 on our list. A year later, rival British drugmakers GlaxoWellcome and Smith-Kline Beecham joined forces, to form the global No. 2, behind Pfizer of the U.S.
With a market value of 105 billion euros, GlaxoSmithKline PLC also ranks No.2 in the BW Europe 50. Glaxo boosted net income 27% last year to produce an astounding 62% return on equity in 2002. Despite shareholder criticism of the size of senior executive pay-packages, CEO Jean-Pierre Garnier told shareholders in May that the group's "effective cost control" and "promising early-stage R&D pipeline" give it an edge over its competitors.
One of the most striking things about the BW Europe 50 is the presence of so many energy and utility companies. In all, there are 13 producers, refiners, and distributors of oil, natural gas, and electricity. Some want to extract the energy and avoid the costly business of selling the end product. Oil giant Total, for example, is making a major bet on finding new acreage. "We are benefiting from a very clear long-term strategy of giving priority to the upstream," said Christophe de Margerie, president of exploration and production.
Total benefited from a rise in world oil prices, but those companies in power generation and distribution had to combat three years of stalled demand for power by consumers and companies. Plus, privatization, deregulation, and mounting competition have limited the ability of these companies to push through rate hikes. To make matters worse, many European energy outfits temporarily fell out of favor with investors following the collapse of Enron Corp. in 2001 on the other side of the Atlantic.
Despite the tough odds, European power producers such as Belgium's Electrabel (No. 4) and Italy's ENI (No. 28) managed to assert themselves. Both have a commanding presence in their domestic markets. And, as a result of collapsing borders and deregulation, they have been able to push deep into markets elsewhere in the European Union. Electrabel has made significant breakthroughs into France, Italy, and Spain, and now chalks up 37% of its sales abroad. All told, Electrabel increased sales by 18% over the past year. Its success sends an important message to the rest of Europe: Companies that exploit opportunities stemming from deregulation and the single currency are poised to excel.
Then there's retail. Stagnant economies and rising joblessness have caused consumers in many parts of the Old World to pull in their horns. At the same time, fierce competition and deflationary pressures have forced down prices for many goods. That's hardly an optimal climate for retail chains. Yet seven retailers of one sort or another made it into the European BW 50. British supermarket operator Tesco PLC (No. 10) shows that grocers can sparkle even in tough markets. The group, headquartered in Hertfordshire, England, spent 300 million euros last year in a successful bid to wrest market share from rivals such as J. Sainsbury PLC, slashing prices and opening 62 new stores in Britain. Whereas many retailers saw profits plunge, Tesco's surged 14% in 2002. Tesco also runs the world's most successful online supermarket, which it is now replicating from Korea to Central Europe to the U.S., via a partnership with its American peer, Safeway.
Giving customers what they want at a reasonable price is also paying big dividends at Swedish apparel retailer H&M Hennes & Mauritz (No. 8). The chain has 893 stores in 17 countries and plans to open another 110 this year, including 20 in the U.S. "We've halved the time it takes to open new stores, to an average of four to five weeks," says CEO Rolf Eriksen. "This doesn't reduce start-up costs, but it does help accelerate sales."
H&M has long been an investor favorite. On the flip side, companies that investors shunned just 12 months ago are back in favor. France Télécom, for example, generated a jaw-dropping 161.6% shareholder return over the past year, thanks to the appointment of turnaround whiz Thierry Breton as CEO and investor enthusiasm for his plan to slash the company's massive debt load and trim operating expenses. Despite its improved outlook, though, France Télécom didn't make it into the top 50 because its performance in the previous two years was so dire. The same goes for other telcos such as Deutsche Telekom and Britain's BT Group, which are rebounding but still dealing with post-boom excesses.
Despite their strengths, many of the companies in the BW Europe 50 face new challenges. Although there are some signs that the euro- zone economy is finally beginning to recover, consumers are still reluctant to splurge on big-ticket items. According to the European Automobile Manufacturers' Assn., European car sales were down 2.6% in unit terms during the first six months of 2003. Notwithstanding cheap financing deals and special offers, demand for autos could drop further in the coming months. Innovation, expansion into new markets, and deft control over manufacturing will set the winners apart from the losers, and likely continue to benefit the four carmakers on our list: France's PSA Peugeot Citroën (No. 15), Renault (No. 19), Germany's BMW (No. 21), and Porsche (No. 27).
Luxury carmakers Porsche and BMW are expected to boost revenues and outmaneuver rivals, even in the stagnant Western European market. As the U.S. and European car markets went into a tailspin, Porsche moved quickly to trim production of its classic 911 and Boxster models. It also introduced the Cayenne, a racy new sport-utility vehicle that is powering sales and more than offsetting the decline in sportscar sales. The Stuttgart-based carmaker has returned 39% in value to shareholders over the past three years.
It does help that global consumers have demonstrated a willingness to spend more of their income on luxury cars. The premium auto segment is growing at nearly twice the annual clip of the mass market. "The outlook for German luxury brands in the U.S. is extremely bright in sedans and SUVs," says Stephen B. Cheetham, auto analyst at Sanford C. Bernstein & Co.
Meanwhile, the strong euro is giving headaches to many European companies -- and that could eventually include the luxury carmakers. Most vulnerable are exporters and those with large dollar revenues. If, as some currency traders predict, the euro hits $1.25 by year end, BMW, Carrefour, Sanofi-Synthélabo, and other companies with large sales outside the euro zone could see their revenues crimped.
Yet for every euro loser there will be a euro winner. Companies that source a large portion of their products outside Europe stand to gain, as wages and other production costs decline when measured in euros. H&M's Eriksen says his company has already reaped some benefits. "As the euro strengthens," he says, "so does our purchasing power. That enables us to pass on those gains to consumers through lower prices."
Falling interest rates could also spell relief for European businesses. With the benchmark European Central Bank rate at 2%, interest rates for most companies in the euro zone are at their lowest level in a generation. And the consensus among economists is that the ECB will cut rates again before the end of the year. On the Continent, cheap money is changing the dynamics of corporate performance. For starters, it makes it easier for heavily indebted enterprises to refinance themselves, which is one reason why many telcos have been able to stage a recovery in recent months.
The biggest impact of low interest rates could be to underpin the recovery of the equity markets and create an environment in which managers are once again willing to assume big capital-market risks, such as mergers and acquisitions.
The process has already started. In June, Italy's Banca Generali acquired compatriot Banca Privamera for 50 million euros in cash and 202 million euros in shares. A return to the go-go days of the late 1990s is probably still a long way off, however. And despite all the uncertainties about the euro, interest rates, and the economy, the European companies that are likely to thrive over the next year will be the ones that can do what the winners have done over the past three years: cut costs, widen margins, develop a more intimate and lucrative relationship with customers, and generate more profits.
By David Fairlamb, with Jack Ewing and Gail Edmondson in Frankfurt, Kerry Capell and Stanley Reed in London, and Andy Reinhardt in Paris, and Frederick F. Jespersen in New York