The U.S. economy expanded at a much faster clip than expected in the third quarter — at an estimated annual rate of 2.8 percent, the strongest showing in a year — but few market observers found cause for celebration. The Department of Commerce attributed nearly a full percentage point of that expansion to businesses rebuilding their inventories. Consumer spending increased only 1.5 percent, down from 1.8 percent in the preceding three-month period, while demand for exports slumped to 4.5 percent from 8 percent.
With growth expected to remain sluggish overseas, particularly in emerging markets, and concerns lingering about when and to what extent the U.S. Federal Reserve will begin scaling back its $85 billion-a-month bond-purchase program, it’s easy to see why many corporate leaders remain anxious.
“Over the last two years, our biggest challenge has been navigating the weakening global economic conditions to continue to deliver strong results,” notes N. Thomas Linebarger, CEO of Columbus, Indiana–based Cummins, the world’s largest engine maker in terms of annual sales. “Since 2011 we have seen the global [real gross domestic product] growth rate drop from 4 percent to 2.5 percent. Rates in China and India in particular slowed significantly, with India’s GDP growth rate being the lowest in a decade.”
Those markets are major buyers of diesel engines and power generators; half of Cummins’s $17.3 billion in annual net sales last year came from outside North America.
“The company’s overall strategy has not changed despite the weaker conditions,” he adds. “Our work to successfully manage through volatile economic conditions includes prioritizing projects, managing costs and continuing to deliver strong margins while investing for the future.”
Money managers and sell-side analysts agree that the company has done an extraordinary job. Cummins captures top honors on the 2014 All-America Executive Team, Institutional Investor’s annual ranking of U.S. corporate leaders as seen through the eyes of investment professionals. This year’s results reflect the opinions of more than 1,400 buy-side analysts and money managers at 625 firms that collectively manage an estimated $7.2 trillion in U.S. equities and roughly 1,200 analysts at brokerages and independent investment firms.
The Honored Companies table lists the companies that received the highest scores; the Best CEOs and Best CFOs tables cite the top-ranked experts in each sector. Deeper data, including the most highly valued investor relations professionals, is also available.
Since 2010, Cummins has allocated more than $5 billion to acquisitions, capital improvements and research and development, reports Linebarger, who was named CEO in December 2011. “Our ability to make these investments, even in difficult global economic conditions, allows us to continue to provide the best products and technology to our customers, both now and into the future,” he says. “It also helps ensure that we are best positioned to grow our business profitably when market conditions improve.”
To generate robust operating margins in the meantime, the team has maintained “a relentless focus on reducing costs and driving efficiencies throughout the company,” adds Linebarger, 50. One example: In 2011, Cummins introduced a supply-chain initiative designed to improve gross margins by 100 basis points by 2015, primarily by seeking out lower input costs, and “we are on track to deliver that improvement,” he says. “We also have worked to improve warranty costs, which in 2012 were at the lowest level as a percent of sales in more than 15 years.”
Cummins also increased its quarterly dividend by 25 percent this year, to 62.5 cents, and repurchased $289 million worth of its shares in the first nine months, up from $231 million in the comparable period last year. In September the company hosted its annual Cummins Analyst Day at the New York Stock Exchange, an event in which Linebarger and other top executives outlined their growth strategy.
“We believe the opportunities presented by tightening emissions regulations in many parts of the world, the acquisition of our distributors in North America and our rolling out of a broad range of exciting new products will allow us to grow revenues at two to three times the rate of growth in global GDP over the next five years,” he asserts.
In the 12 months through November, Cummins’s shares soared 35.9 percent, to $132.36, far ahead of the S&P 500’s 28.2 percent advance over the same period. Those gains withstood a brief sell-off in late October after the company reported weaker-than-expected revenue growth in the third quarter and cut its full-year sales forecast. Even so, the stock earns buy or outperform recommendations from a majority of analysts polled by Reuters.
Sluggish economic expansion is also the chief concern at Honeywell International, a commercial and consumer products manufacturer headquartered in Morristown, New Jersey, that captures second place on the All-America Executive Team. “I have this senior leadership meeting that I do every year, and for the third year in a row, our title was ‘Growing in a Slow-Growth Global Economy,’” reports CEO David Cote. “I don’t see anything that changes that over the next three years.”
When macro conditions won’t change, he adds, then a company’s strategy must. “If you just assume your external circumstances — technology, markets, competitors — are changing 4 percent a year, you need to change at least 4 percent a year, or in ten years you’ll have to change 50 percent just to catch up,” Cote observes. “Now you have a revolution instead of evolution — and you never know exactly where revolution’s going to go. Why take that kind of chance? Instead, focus on how you can change, adapt and get better every single year.”
In the dozen years that Cote, 61, has served as CEO, Honeywell has spent $11 billion on acquisitions and made $6 billion worth of divestitures. The former involved expanding the company’s footprint in industries enjoying 5 to 7 percent annual growth, while the latter largely centered on exiting sectors with growth of less than 1 percent per year. “Altogether that’s about 130 transactions,” he points out. “That’s done a lot to change the profile of the company.”
In September, Honeywell completed its $600 million acquisition of Intermec, an Everett, Washington–based maker of bar code scanners and mobile computers. Earlier in the year it sold the last remaining component of its pharmaceuticals business, a specialty-chemicals manufacturing facility in Ireland, to Sigma-Aldrich Corp. of St. Louis; terms of that deal were not disclosed.
Cote says he plans to expand the manufacturer’s presence in emerging markets, where he believes the most growth will occur over the next two decades. When he took over the top job, 40 percent of Honeywell’s revenues came from outside of the U.S. Today that figure has risen to about 55 percent.
In October the company reported that year-over-year profits had jumped 4.2 percent in the third quarter, to $990 million, and earnings-per-share had risen from $1.20 to $1.24. It also raised its quarterly dividend by about 10 percent, to 45 cents a share — the fourth such increase in just three years. By the end of November, Honeywell’s stock had bolted 46.1 percent in the trailing 12 months, to $88.51.
Cote says his management style can be traced to an unlikely source: Charles Darwin, the 19th-century naturalist. “Darwin’s point wasn’t survival of the fittest, but survival of the most flexible,” he says. “That ability to adapt to however circumstances change is really what drives success over time.”
Carol Tomé would undoubtedly agree. The Home Depot CFO has overseen sweeping changes at the Atlanta-based home improvement retailer. In 2007 the company announced that it would spend $300 million to rework its supply-chain and distribution system even as it was coping with the departure earlier that year of embattled CEO Robert Nardelli, plummeting same-store sales and a residential construction market that was sliding into oblivion.
“This was a housing-led recession, and we felt it. Between 2006 and 2009 we lost $13 billion in sales,” she says. “We had to make some really hard decisions during that time, like exiting nonperforming businesses, closing stores and reducing head count. But we also made investments because we believed that when the economy started to turn, we’d reap huge benefits.”
Home Depot’s old supply-chain model required the majority of the company’s products to be shipped directly from manufacturers to the retailer’s more than 2,200 stores, a system that often meant some locations received deliveries from half-empty trucks. To improve efficiency, the company built what it calls rapid-distribution facilities that serve as hubs to receive products from manufacturers and sort them, so that trucks are full when dispatched to individual retail outlets. This approach has helped to lower transportation costs.
The new system has also helped the supply chain adapt to the company’s surging growth. “In the second quarter of 2013, we grew sales by $2 billion — that’s a lot of growth in any one quarter,” observes Tomé, 56. “But our supply chain operations were able to keep up with the growth because they could reallocate orders and move inventory to locations where it was necessary.”
As the system matured, productivity increased. “We’ve had this up and running now for a few years, and we’ve seen some good benefits [before this year],” says Tomé, who became CFO in 2001. “But it’s really kicking in now.” Indeed. The company lands in first place in six of the survey’s eight categories and secures the No. 9 spot overall.
Gregory Melich, who covers the Retailing/Hardlines sector for ISI Group in New York and is in his second straight year at No. 1 on the All-America Research Team, is among the analysts impressed by Home Depot’s efforts. This year’s success represents “a coming together of work they’ve been doing for five years,” he says. “They’ve been preparing for a normalization of the home improvement market, and since they were preparing for it, they’ve done well.”
They certainly have: Home Depot beat its guidance in each of the first three quarters of 2013. In November, when the company announced that year-over-year sales in the fiscal third quarter (which ended November 3) had climbed 7.4 percent, to $19.5 billion, it also raised its full-year outlook from 4.5 percent to 5.6 percent annual sales growth. By the end of that month, Home Depot’s stock had advanced 24.1 percent from one year earlier, to $80.67.
Melich says he believes the executive team deserves praise for the way it has handled the recent financial success: namely, by making returning cash to shareholders a priority. At the November earnings meeting the retailer reported that it had repurchased more than $6 billion in shares in the first nine months of the fiscal year and plans to buy back another $2 billion in the fourth quarter. Also that month the company announced that it would pay a third-quarter cash dividend of 39 cents per share.
“Capital expenditure is constrained, they’ve been willing to hike dividends consistently, and with a nice payout ratio, and also buy back shares,” he notes. “Not all companies do that. Some companies, as soon as things get good again, start figuring out global acquisitions to make. Home Depot hasn’t. They’ve been pretty clear: They’re going to improve their existing business and return capital to shareholders.”
Laying the foundation for future growth has also proved to be a winning strategy for CVS Caremark Corp., which captures first place in six categories and finishes in 11th place. It was formed in 2007 when drugstore operator CVS Corp. acquired Caremark Rx, a pharmacy benefits manager. Today the company operates more than 7,600 stores and is the PBM for upwards of 2,000 clients, with a total of some 63 million members within that client base.
Among the Woonsocket, Rhode Island–based company’s fans is All-America Research Team Hall of Famer Meredith Adler, now in her 12th consecutive year at No. 1 in Retailing/Food & Drug Chains. “CVS saw the future a long time ago — and way better than their competitors did,” the New York–based Barclays analyst says. “Buying Caremark was part of a strategy. In some ways it was a risky strategy because health care changes very slowly, but I think reform has moved in their direction. And they’ve been very nimble. They’ve leveraged the things they got in the acquisition and made acquisitions to help boost capabilities in certain areas. It’s all been very well planned.”
Yes it has, concurs CEO Larry Merlo. “In the early years there were many questions: ‘Hey, does this integrated model work?’” the 57-year-old recalls. “But over the past several years, we’ve demonstrated the value of bringing these assets together.”
In November the company reported year-over-year net revenue growth of 5.8 percent in the third quarter, to $32 billion — ahead of consensus estimates of $31.5 billion — and raised its full-year profit forecast from $3.90 adjusted earnings per share (on the low end of the range) to $3.98. CVS Caremark’s shares soared 44.7 percent in the 12 months through November, to $66.96.
The company will host its annual analyst day on December 18 in New York, at which time Merlo and other members of his team will outline 2014 growth targets and strategies for achieving those goals. One initiative is the expansion of its MinuteClinic division, which operates treatment facilities within select CVS Caremark stores. Some 800 walk-in clinics will be operational by year’s end; the company plans to raise that total to 1,500 by 2017.
“We think we have an opportunity to transform primary care,” says Merlo, who joined CVS in 1990 and became CEO in 2011. “More people are entering the health care system, but there is an existing and growing shortage of primary care physicians. We believe that there will be a growing demand for access to care, so we’re working hard in terms of not just expanding our MinuteClinic presence but working with key stakeholders and creating partnerships across the health care delivery system. Our goal is not to replace the role of the family practitioner or the primary care physician, but we certainly see us playing a collaborative role in that regard.” • •
America's Most Honored Companies will be feted at a dinner and ceremony on March 6, 2013 at the Mandarin Oriental in New York City. Visit www.iimosthonoredcompanies.com for additional information.
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