March 22, 1999
The Barron's 500
Introducing a ranking of companies that deliver for
investors
By Jay Palmer
So much of what moves individual stocks nowadays is hype and hot air, not
substance. Among the roster of the market's top performers are dozens of
companies that have never earned a penny of profit and are, even in the best of
all possible worlds, unlikely to do so for years to come. Any number of Internet
phenoms come to mind, with Amazon.com as the poster child for this mania.
That's one reason why we put together the new Barron's 500, a list of the 500
largest publicly traded U.S. companies in terms of revenues, ranked according to
a combination of their stock-market returns and profitability.
The result is a list of companies ranked by their achievements in two areas that
should be closely related over time, but haven't been in recent years. To begin
with, these companies have performed impressively in the stock market. And
indeed, given the massive moves that have been commonplace in this bull run,
stock returns dominate the rankings. But to make sure those market gains were
based on a solid operating business, we also incorporated a measurement of their
profits as a percentage of the debt and equity invested.
snip..........
Among those that did well in the ROI rankings but failed to make the top five are
such familiar names as MediaOne Group, Ford Motor, Avon Products, the
Limited and ITT Industries. To be sure, some of their outsized numbers reflect
extraordinary events. Still, if the stock market works the way it should,
companies with robust ROIs should see their share prices rewarded.
Atop the Barron's 500 is America Online, perhaps the firm most associated with
electronic online services. Following AOL's recent acquisition of Netscape
Communications, with its popular Navigator World Wide Web browser, AOL
stands to become even more of a powerhouse on the Internet.
The No. 2 company on our list was Dell Computer, and it stood out not only for
its stock-market gains, but for its extraordinary 59.4% ROI, an impressive
measure of strength. Dell also is something of an Internet play, at least in the
sense that it now generates sales of $10 million worth of personal computers via
the 'Net, and in that regard is one of the few Internet companies that actually
makes money.
Third place went to Best Buy, the consumer-electronics retailer, in large part
because of the public's appetite for PCs and digital electronic gadgets. As for
fourth-place EMC, the 'Net is again a factor, at least in the sense that it is
sparking strong demand for the firm's data-storage hardware devices and
software. Apple Computer took fifth spot, primarily because of the turnaround
that followed its launch of the new iMac last year -- which, like AOL, offers an
easy and nonthreatening avenue to the online world for the less-experienced
computer user.
"Our goal is to be the most valuable and respected company on earth," asserts
Steve Case, founder and chief executive of America Online. "I don't believe there
is any company better-positioned to continue to grow over the coming years."
That's no hyperbole. Last year, in the
stock market at least, it was quite clearly
the year of the Internet, with investors
rushing to snap up stock in hundreds of
small and medium-sized companies with
diverse and different kinds of stakes in
cyberspace and the ever more real
electronic commerce revolution.
In the circumstances, it is entirely apt that
AOL, a company many regard as the
backbone of the Internet, has dreams
about the future. Certainly, it was the top
ranked performer in the new Barron's
500 for 1998, outscoring every other
company thanks to a 13.8% return on investment and a stock that returned a
staggering 586%.
But as Case would argue it, there is a lot more to AOL than just the Internet. To
be sure, the company's 16 million-odd subscribers can plug into the 'Net through
AOL, but they also get a lot more, from chat rooms, electronic magazines and
newspapers to special e-commerce sites and a lot of unique content, notably its
personal-finance information. The cost is typically $21.95 a month, just a couple
of bucks more than the cost of a plain-vanilla Internet service provider. But that
doesn't seem to put off users or slow the increase in new members, many of
whom are going online for the first time and so need and like AOL's extra degree
of hand-holding.
snip......
"Each deal is different," says Case. "Some are exclusive and some are not
exclusive. Some get prominent visibility on the service, others get modest
visibility. We'll sometimes guarantee a minimum traffic but we don't guarantee
sales. The best evidence it is working is the expanding relationships we have with
most corporate customers. Most are happy paying more going forward than they
paid in the past." Among the companies with such AOL marketing agreements
are Amazon.com and 1-800-FLOWERS.
AOL stock continues to rise, climbing to a new high over 120 last week, more
than a 50% rise already this year. With its deal to buy Netscape for $10.2 billion
now complete, AOL's Internet position is further strengthened. The market
clearly buys Case's bullish arguments.
As one of the best-performing stocks of the decade, rising more than 600-fold
over the past nine years, Dell Computer ranked high in the Barron's 500. It
posted a 1998 ROI of 59.4% and a market return of 251%, thanks to a stock
price that jumped from 10 to 36. The returns were well based: revenues in the
year to January 31 were up about $6 billion, or 50%, with earnings nearly
doubling to over $1 a share.
The secret of Dell's success is hardly a
secret. The Texas company is the world's
largest direct seller of personal
computers, selling 90% of its output to
businesses and government agencies while
taking consumer sales over the phone
and, increasingly, the Internet. Dell's
build-to-order PCs mean lower
inventories, lower costs and higher
margins, while giving the firm the ability
to offer customers the newest and latest
technologies more or less as soon as they
become available. Dell stands out for
having annual sales and net profit
increases of more than 40% for the past
three years -- and with Internet sales now topping more than $10 million a day
and still climbing, that growth shows no sign of slowing.
"We are an old-fashioned kind of Internet company," says CEO Michael Dell,
needling the growing number of loss-making cyberspace highflyers. "We actually
make money."
Still, there is a catch in that: With more and more homes already equipped with a
PC, the historically high industry growth can hardly continue unabated forever.
"I think there is no question that the overall growth rate for the industry and for
Dell is sort of gently declining," notes Dell. "We will continue to grow, but in
percentage terms, the growth has got to tail off. Last year, we lifted revenues
from $12 billion to $18 billion, a 50% gain. This year we hope to lift revenues
by the same $6 billion or so, but that advance will be only 33%."
To combat this "declining" growth, Dell is looking to utilize its ferociously
efficient Internet selling machine with other products. But unlike Amazon.com,
which talks big of trying to add everything from pharmaceuticals and CDs to its
book inventory, Dell is staying close to home. It has just opened an online store
with the Web address of Gigabuys.com to sell direct all the accessories that PC
owners need and want, from memory chips and printer cartridges to digital
cameras, software and Palm Pilot hand-held computers. "If someone buys a PC at
CompUSA," says Dell, "they typically load up their shopping cart with a couple
of pieces of software, some games, a printer and maybe some spare cartridges
plus some mouse pads and who knows what else. That's a significant part of the
order and, up to now, we haven't been getting as much of this as we want. Now
we will."
Margins on this new business will almost certainly be a bit lower, but Dell still
reckons it will be incredibly profitable. "I doubt it will earn as much but that
doesn't really matter as long as it contributes to the bottom line. Remember, it
will have virtually no assets since we will not hold the inventory." Rather, orders
from shoppers will be passed on by Dell to distributors to pack and ship, freeing
Dell of the processing effort or cost.
Street analysts look for Dell to earn about 74 cents a share in the year ending next
January, up from 53 cents in fiscal '99. That kind of growth has helped the stock
rise more than 10% over the course of this year.
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