-1-

Excellent Companies

The notion of thinking about excellence for companies and corporations grew out of Peters and Waterman's book, "In Search of Excellence" published in 1982. Underlying the book is the concept that some companies are able to manage in such a way as to create success. How they chose to define success is not clear. However, this whole idea that broadly defined, some companies are better than others and identifying those attributes which define excellent companies goes to the heart of what the financial analyst does. Peters et al's work has produced a great number of imitators with lists of all sorts. Outlined below are the Peters et al list and two other very well known lists of excellent or "hot" companies.

Peters and Waterman, "In Search of Excellence"

Peters and Waterman (P-W) put together a sample of 62 firms, which they defined, as excellent. The sample was constructed to reflect a list of companies that were considered to be innovative and excellent by an informed group of observers of the business scene. It also reflected the industries in which that the authors had an interest. In one sense, P-W initial selection was based on perceptions of prestige. On top of this they imposed 6 measures of performance.

  1. Compound asset growth from 1961 through 1980.
  2. Compound equity growth from 1961-1980.
  3. The average ratio of market value to book value, 1961-1980.
  4. Average return on capital, 1961-1980. (net income divided by total invested capital, where invested capital consists of long-term debt, nonredeemable preferred stock, common stock and minority interests.)
  5. Average return on equity, 1961 through 1980.
  6. Average return on sales, 1961-1980.

In order to qualify as a top performer in an industry, a company had to have been in the top half of the industry in at least four out of six of the above measures for the full twenty-year period. Of the original 62 firms identified, 43 met the performance criteria. See Exhibit 1 for a list of the P-W sample.

Based on their studies of the companies, P-W identified eight attributes that they felt characterized excellent companies.

  1. A bias for action.
  2. Close to the customer
  3. Autonomy and entrepreneurship
  4. Productivity through people
  5. Hands-on and value driven management
  6. Operate businesses they know
  7. Simple organizational structure and lean staff
  8. Excellent companies are simultaneously centralized and decentralized.

Fortune Magazine - "America's Most Admired Companies"

For over 15 years Fortune has annually produced a list of the most admired companies in the US. Fortune asks senior executives to rate the ten largest companies in their own industry on a scale of zero (poor) to 10 (excellent) on eight attributes. The attributes were:

  1. Quality of management
  2. Quality of products or services
  3. Innovativeness
  4. Long-term investment value
  5. Financial soundness
  6. Ability to attract, develop and keep talented people
  7. Responsiveness to the community
  8. Wise use of corporate assets.

The implication of this list is that companies that perform well on these attributes are excellent and ones that do not are not good companies. Exhibit 2 lists the ten most admired and the ten least admired for certain years. Overall, there is a certain persistence in the firms that appear on the most and least admired corporations. Again, the implication is that the attributes listed above are good measures of excellence.

Business Week-Hot Growth Companies 1996.

Every year in the May issue of Business Week, the magazine provides a list of the 10 hot growth companies. While not quite a list of excellent or admired companies the list does highlight companies that Business Week considers to excel. The list (See Exhibit 3 for list of the top 10 companies) is constructed as follows. The sample starts with the 10,000 publicly traded firms with financial information on the Standard & Poor's Compustat data base. To qualify a company had to have had annual sales of more than $10 million and less than $150 million, a current market value greater than $1 million, be actively traded and had a stock price greater than $2. Banks, insurers, real estate firms, and utilities are excluded. The remaining companies are ranked according to their three year results in sales growth, earning growth and return on invested capital. A company's composite rank is the sum of 0.5 times its rank in return on capital, plus 0.25 times each of the other ranks. Sales and earnings are the latest available through the most recent 12 months. Earnings include net income form continuing operations, before gains or losses from extraordinary items. Increases in sales and profits are based on least squares estimates. Return on capital was estimated as earnings plus minority interests and tax-adjusted interest expense expressed as a percentage of total debt and equity.

-1-

Exhibit 1

Peters and Waterman's Sample

Structured Interviews plus 25-year Literature Review
High Technology / Consumer Goods / General Industrial / Service / Project Management / Resource Based
Allen-Bradley**
Amdahl*
Digital Equipment*
Emerson Electric*
Gould
Hewlett-Packard*
International Business Machines
NCR
Rockwell
Schlumberger*
Texas Instruments*
United Technologies
Western Electric
Westinghouse
Xerox / Blue Bell
Eastman Kodak*
Frito-Lay (Pepsico)**
General Foods
Johnson & Johnson*
Proctor & Gamble* / Caterpillar Tractor*
Dana Corporation*
Ingersoll-Rand
McDermott
Minnesota Mining & Manufacturing* / Delta Airlines*
Mariott*
Mcdonald's* / Bechtel**
Boeing*
Fluor* / Exxon
Limited Interviews plus 25-year Literature Review
Data General*
General Electric
Hughes Aircraft**
Intel*
Lockheed
National Semiconductor*
Raychem*
TRW
Wang Labs* / Atari (Warner Communications)**
Avon*
Bristol-Myers*
Cheesbrough-Pond's*
Levi Strauss*
Mars**
Maytag*
Merck*
Polaroid
Revlon*
Tupperware (Dart & Kraft) / General Motors / American Airlines
Disney Productions*
K mart*
Wal-Mart* / Arco
Dow Chemical*
Du Pont*
Standard Oil (Indiana)/Amoco*

* Passes all hurdles for "excellent" performance, 1961-1980

** Privately held or subsidiary: no extensive public data available, but estimated to pass all hurdles for "excellent" performance.

Exhibit 2

Fortune's "America's Most Admired Companies

Most Admired
1996 Rank (1995 Rank) / 1991 Rank (1990 Rank) / 1988 Rank (1987 Rank)
1 Coca-Cola (1)
2 Mirage Resorts (7)
3 Merck (6)
4 United Parcel Service (25)
5 Microsoft (7)
6 Johnson & Johnson (4)
7 Intel (5)
8 Pfizer (12)
9 Proctor & Gamble (2)
10 Berkshire Hathaway (17) / 1 Merck (1)
2 Rubbermaid (2)
3 Wal-Mart Stores (4)
4 Liz Claiborne (10)
5 Levi Strauss Assoc. (20)
6 Johnson & Johnson (8)
7 Coca-Cola (6)
8 3M (6)
9 Pepsico (5)
9 Proctor & Gamble (3) / 1 Merck (1)
2 Rubbermaid (2)
3 3M (6)
4 Philip Morris (7)
5 Wal-Mart Stores (9)
6 Exxon (21)
7 Pepsico (14)
8 Boeing (19)
9 Herman Miller (12)
10 Shell Oil (11)
Least Admired
1996 Rank (1995 Rank) / 1991 Rank (1990 Rank) / 1988 Rank (1987 Rank)
431 TWA (417)
430 Standard Commercial (408)
429 K mart (415)
428 Canadaigua Wine (-)
427 Morrison Knudsen (416)
426 Flagstar (401)
425 USAir Group (414)
424 Beverly Enterprises (399)
423 Amerco (411)
422 Cal Fed Bancorp (407) / 307 Crossland Savings (304)
306 Continental Air. Hold. (301)
305 HomeFed Corp. (272)
304 Wang Laboratories (303)
303 Unisys (299)
302 LTV (298)
301 Dime Savings Bank (-)
300 Cal Fed Bancorp (266)
299 JPS Textile Group (294)
297 Glenfed (269) / 305 Financial Corp of Amer. (306)
304 Gibraltar Financial (296)
303 texas Air (301)
302 Maritor Financial Group (294)
301 BankAmerica (304)
300 LTV (303)
299 Goldome Savings and Loan(-)
298 Control Data (298)
297 Manufactures Hanover (291)
296 Kaiser Tech (299)

Exhibit 3

Business Week's "Hot Growth Companies"