Barron's 500
By JACQUELINE DOHERTY
IN A YEAR WHEN ECONOMIC AND FINANCIAL CRISES DOMINATED the headlines, it's easy to forget that many companies -- including some on Wall Street -- delivered the goods for investors. Those smart or lucky enough to own shares in these winners often were amply rewarded, with returns of 20%, 30% or even 100%.
A good place to find such overachievers is at the top of the Barron's 500, a unique ranking of the 500 largest (by sales) publicly traded companies in the U.S. and Canada, which aims to identify those corporations most successful at boosting their sales and cash flow. Few would dispute that this year's winner, New York money manager
BlackRock, deserves to be so honored; its revenue, earnings and share price all have shown impressive gains under Chairman and CEO Laurence Fink.
No. 2 on this year's list is
Research in Motion, the Canadian wireless-communications company whose CrackBerry -- oops, BlackBerry -- handheld device has become an addiction among corporate types and, increasingly, regular Janes and Joes. In the past five years RIM's shares have rallied from the single digits to a recent 133, testament to the company's vision and success in defining and growing its market.
Matthew Furman
Laurence Fink, chairman and CEO of asset manager BlackRock, this year's top-ranked Barron's 500 company.
The Barron's 500 is prepared annually by Credit Suisse Holt, a unit of Credit Suisse Group. It compares companies on the basis of one-year sales growth and stock-price performance, three-year cash-flow return on investment, or CFROI, and one-year change in CFROI for the most recent fiscal year. It grades them A through F, using the percentage change in one-year cash flow to break ties and determine rankings. (A more detailed description of Holt's methodology is at the end of this article.) The Barron's 500 rankings don't reflect the views of Credit Suisse analysts.
With oil prices soaring above $120, it's no surprise to find a pair of petroleum plays --
National Oilwell Varco and
Schlumberger -- among the top five. Two more --
Smith International and
McDermott International -- are in the top 10. Likewise, the bull market in commodities has elevated companies such as
Freeport McMoRan Copper & Gold (No. 6) on the list.
This year's No. 5, discount broker
Charles Schwab, managed to prosper despite the turmoil in financial markets, or perhaps because of the resultant surge in trading. Like BlackRock, Schwab has no capital-markets operations, and therefore suffered none of the billion-dollar write-offs of bigger brokerages that made huge credit-related bets.
The shares of many highly ranked Barron's 500 companies have outperformed the market, and now sport valuations reflecting their success. For some, future gains could be harder to come by, at least in the near term.
Goldman Sachs, No. 1 last year and No. 2 in 2006, has seen its stock fall 17% to 187.72 in the past 12 months, though it ranks a respectable No. 19 this year.
Apple, No. 3 in 2007, is still on a tear, however. Its shares are up 76% to 185.06, and this year it's No. 11.
Just as the Barron's 500 identifies well-managed companies, it also pinpoints those that fail to generate sufficient returns on investment. Near the bottom of our latest ranking are home builders such as
KB Home and
Pulte Homes; chronic underachiever
Eastman Kodak, and
Fannie Mae, which lost $2.19 billion in the first quarter, just a drop in an ocean of red ink.
Table:
Barron's 500The Barron's 500 serves as a reminder of how difficult it was in 2007 to generate strong operating results and impressive investment returns. So here's a nod to those companies that achieved both, and a look at how they did it.
BlackRock
Asset manager BlackRock has bulked up in recent years via mergers, gaining expertise in equities and international and alternative assets to complement its core fixed-income business. In 2005 it acquired State Street Research & Management; in '06 it merged with Merrill Lynch Investment Managers, and last year it bought fund-of-funds manager Quellos Group. Today BlackRock's $1.4 trillion of managed assets are divided among fixed-income products (38%), equities (31%), money-market funds (26%) and alternative investments (5%).
The diversification reflects CEO Fink's view that clients want fewer, more comprehensive relationships, and the opportunity to invest in multiple asset classes. "We've had pretty good success at cross-selling products," he says, pointing to net inflows of $138 billion last year.
With losses piling up at many Wall Street firms, BlackRock reported a 131% jump in 2007 revenue, to $4.8 billion. Earnings more than tripled, to $995 million.
The company took no write-offs related to the subprime-mortgage meltdown; neither did its funds require bailouts. But some closed-end BlackRock funds sold auction-rate preferred stock, which has stopped trading amid an effective shutdown of the auction-rate-securities market. Until the situation is resolved, it will be tough for BlackRock -- and many other asset managers -- to sell new closed-end funds.
In this year's first quarter BlackRock's earnings missed expectations. The company netted $1.82 a share, up from $1.48 a year ago, but below analysts' targets of $2.01. "If global capital markets decline or there's a recession, we will feel that chill," says Fink, who helped found BlackRock in 1988.
Over a five- or 10-year cycle, however, the company is likely to grow faster than the markets, generously rewarding investors with a long-term view.
Research In Motion
Being in the right place at the right time turned Research In Motion into a technology titan and helped it earn second place in our rankings. The company's BlackBerry, introduced in 1999, has become the standard in handheld devices, delivering e-mail, Internet connectivity, music and video.
RIM's net income and revenue doubled in the fiscal year ended March 1. The Waterloo, Ont.-based company earned $1.29 billion on sales of $6 billion. Its shares have almost tripled in the past year. "We're fortunate to be in a leadership position in a really hot sector," says James Balsillie, Research In Motion's co-CEO.
IDC estimates the sector's growth will continue, compounding at a rate of 30% a year through 2011.
RIM's shares sold off sharply earlier this year amid fears that a consumer-led economic slowdown and competition from Apple's iPhone could crimp the BlackBerry's growth. But the company laid those fears to rest, for now, with a bang-up fiscal fourth quarter and a rosy estimate for the current period. "Smart communication technology has become a necessity in how people live," says Balsillie.
Clockwise from top left: Eric Millette; courtesy of Schlumberger; courtesy of Research in Motion (Balsillie, Lazaridis); courtesy of National Oil Well Varco
Clockwise, from top left: Charles Schwab, CEO, Charles Schwab; Andrew Gould, CEO, Schlumberger; Michael Lazaridis, co-CEO, RIM; James Balsillie, co-CEO, RIM; Merrill Miller, CEO, National Oilwell Varco
Once focused on selling just to corporations, Research In Motion has jumped feet first into the consumer market, which now accounts for 38% of its subscriber base. It also hasn't hurt that two major competitors,
Motorola and
Palm, have stubbed their toes.
Balsillie plans to stay ahead of the crowd and fight price declines by packing more and more capabilities into the BlackBerry. Offering more functionality "is the best antidote to competition," he says.
RIM trades for a rich 35 times fiscal '09 estimates of $3.80, and 26 times '10 projections of $5.05. Short-term-oriented traders might want to wait for a better entry point, says Susan Kalla, portfolio manager at KHX Investments, which owns the shares.
But over the longer term, the RIM's stock could still be a big winner. Someday, she says, "everybody will have a smart phone, and Research In Motion is a category leader." That day could come much sooner than many now imagine it will.
National Oilwell Varco
In the California gold rush, suppliers of picks and shovels fared far better than prospectors. The same might be said of the oil patch; just ask National Oilwell Varco, a supplier of oil and gas drilling-rig equipment, whose revenue more than tripled in the past four years, to $9.8 billion. The Houston company's earnings rose more than 500%, to $3.76 a share, and its backlog of business grew to $9.9 billion in the first quarter, up from $2.3 billion in 2005.
Some of that growth was due to acquisitions. In March 2005 National Oilwell purchased Varco for $2.59 billion in stock. The combined company bulked up even more this past April, when it completed the $7 billion takeover of Grant Prideco, adding drill bits and drill pipe to its product line-up.
National Oilwell's growth stems in part from improved manufacturing efficiencies. A factory that turned out 95 to 100 top drives (the part that turns the drilling pipe) three years ago now manufactures 365, with only a modest capital investment of $1 million to $1.5 million, says Merrill (Pete) Miller, chairman and CEO. The company espouses "quick response manufacturing," an approach to enhancing efficiency developed at the University of Wisconsin.
National Oilwell's stock has climbed 67% in the past 12 months, as oil has breached new highs above $120 a barrel. Yet the shares trade at only 13.5 times Wall Street's 2009 earning estimates. The concern, apparent in most oil-industry multiples, is that crude prices will peak, in which case the total number of industry drilling-rig orders -- which stood at 158 in January, up from 29 in April '05 -- will fall.
Oil's seemingly inexorable rise has sparked fierce debate, however. "Hundred-dollar-plus oil is a clear indication that worldwide demand for oil is continuing unabated," says Gary Russell, a senior equity analyst for the AIM Energy fund. "The industry is going to need many, many, many more rigs to find oil supply, to keep up with demand."
One sign of the company's confidence: National Oilwell has ignored pressure to buy back shares and instead has used its cash to expand its business. "The world needs more oil and gas," says Miller. "The worldwide rig count will climb in the next 10 years."
Schlumberger
No. 4-ranked Schlumberger, a leader in oil services, also makes Houston its home. The company's expertise in servicing rigs is in much demand right now, given the climbing rig count and Schlumberger's technological prowess in extracting hard-to-reach oil and gas, especially from older wells.
Schlumberger has been planning for today's sizzling market. In 2004 it studied the industry's supply and demand dynamics and saw more investment was needed, says CEO Andrew Gould. Demand for oil has soared due to the growth of China, India and other emerging markets, while supply growth has been constrained by the advancing age of many of the world's oil fields, some over 30 years old.
Schlumberger's bottom line has swelled as the good times have rolled. Revenue grew an eye-popping 21% in 2007, to $23.3 billion; net income jumped 40%, as did earnings per share of $4.20. Since Schlumberger's business isn't capital intensive, its cash flow tends to increase in step with revenue growth. Its shares jumped 42% in the past 12 months, to a recent 105. The company says it expects to grow revenue at a high-teens rate from 2004 through 2010. "We should sustain relatively high growth rates beyond the end of the decade," says Gould.
An increase in exploration, spurred by the need to find new sources of oil and gas in the next three to five years, will benefit the company. "The market is going to be surprised by the extent to which drilling is going to have to increase," Gould predicts.
Schlumberger typically trades in tandem with oil prices. "There's so much speculation in the [oil] market, it reminds me of the tech bubble," says Doug Lane of Douglas C. Lane & Associates, a New York-based money manager that owns Schlumberger shares but has been reducing its position.
Those who think crude is heading higher, however, may find the stock a bargain, even at 17.5 times 2009 estimated earnings of $5.90 a share.
Charles Schwab
Five years ago Charles Schwab was nearer the bottom of the Barron's 500 than the top. The company owes its comeback -- operationally and on our list -- in part to the efforts of Charles Schwab himself, the brokerage's 70-year-old founder.
The chairman regained the CEO title after the board ousted then-CEO David Pottruck in July 2004. Revenue and profits since have grown nicely, even though Schwab has shed some large business lines and had to weather a declining market.
The San Francisco-based company has slashed costs and sold its U.S. Trust and capital-markets units. As a result of cost cutting, its expenses as a percentage of client assets are 0.22 of a percentage point, compared with 0.23 of a point last year and 0.25 in '06, according to Richard Repetto, an analyst at Sandler O'Neill. The numbers are small but the impact isn't; last year the company grew revenue by 16%, to $4.99 billion, and earnings per share by 33%, to 92 cents.
Schwab has been successful in attracting new assets, partly because of the travails of competitors such as Merrill Lynch and Citigroup on the high end and E*Trade in the discount market. Yes, the Schwab YieldPlus Fund, a short-term bond fund, owned mortgage-backed securities, incurred losses and redemptions, and now faces investor lawsuits. But the company's earnings aren't expected to be dented.
"Ethics, integrity, consistency and the way we've treated our clients over many years has led people to understand this is a safe place to do business," says Charles Schwab.
If the market is flat this year and the targeted federal-funds rate stays at 2%, Schwab has warned earnings might only rise 7% to $1.05 a share, five cents below an earlier target based on a higher market and 4.25% fed-funds rate.
Longer term, Charles Schwab says the company, with $1.4 trillion in assets, has lots of room to grow. In the U.S. alone there are $25 trillion to $30 trillion of assets managed by people who could use Schwab's services, he notes, adding "there's still a very big opportunity left."
That's true, as well, for most of the Barron's 500.
Barron's 500 Methodology
Credit Suisse Holt, a unit of Credit Suisse, uses four equally weighted measures to grade and rank the largest companies (by sales) in the U.S. and Canada that trade on U.S. exchanges. For each company, Holt calculates stock-price performance relative to the Standard & Poor's 500 Index (for the 52 weeks ended May 2); the median cash-flow return on investment (CFROI) for the past three years, stripped of the effects of inflation and accounting practices; CFROI in the latest fiscal year, adjusted for divestitures. For financial companies, Holt calculates cash-flow return on equity.
Each company is graded in four categories; the top quintile in each category gets an A, the bottom quintile an F. Holt then calculates a total grade-point average, or GPA, for each company, with 4.0 the highest. In the case of the GPAs the "winner" is the company with the greatest change in cash-flow return on investment (or equity) in the past year. The Barron's 500 excludes any otherwise eligible companies that are restating financial data, operating under bankruptcy protection, have been acquired or are subsidiaries of foreign companies.