Tuesday, December 08, 2015

Why All of the World's Top 10 Companies Are American

All of the world’s 10 biggest companies as measured by market capitalization are American. While these companies have their roots in the U.S. and are the embodiment of “all-American” qualities such as innovation and industry, their reach is worldwide and their marketplace global. (see "Apple? Google? Tesla? Which will be the first to reach a $1-trillion market cap?").

As of Nov. 6, 73 companies worldwide had a market capitalization of at least $100 billion, making them "mega-caps." Of these, 44, or 60% of the total, are U.S. companies, while Europe accounted for 16 companies, or 22% of the total. China/Hong Kong contributed 10 companies, or 14%, while Japan, Korea and Taiwan had one each.

Eight years ago, at the market peak of October 2007, there were 76 mega-caps globally.

The U.S accounted for only 30 of the world's mega-caps then, while Europe had 28, and China/ Hong Kong had 10. Six other nations accounted for the other eight.

The disproportionate number of American companies in the ranks of global titans now can be attributed to a confluence of favorable factors in recent years. But such dominance also holds a disconcerting lesson, going by events over the past three decades. Before we delve into these points, here are the world’s top 10 companies (the markets caps are as of Nov. 17 and are based on Google Finance):

Apple (AAPL) – Market cap $634 billion. The world’s most valuable company continues to reap billions by selling millions of iPhones, iPads and other coveted gadgets. In October, Apple reported a quarterly net income of $53.4 billion – the biggest annual profit of any company in corporate history – as revenue rose 28% from the previous year to a record $234 billion. The company’s cash hoard at the end of October was $205 billion, or $36.77 per share. Apple’s market cap has declined 10% from a peak of $750 billion in April, but even so, it remains a leading contender to crack the trillion-dollar market-cap mark at some point in the future.

Alphabet (GOOGL) – Market cap $505 billion. New holding company Alphabet was created in August to separate Google’s main businesses such as search and advertising from a plethora of new projects that are riskier long shots. Those include such ventures as Life Sciences (whose projects include a glucose-sensing contact lens), Calico (focused on longevity), driverless cars and secretive lab Google X, plus investing units Google Capital and Google Ventures.

Google has grown to become the world’s No. 2 company in just over a decade as a public entity, and if one or more of its long shots turn into home runs, the company may usurp Apple as No.1. In the third quarter, Google’s revenue rose 15% from a year ago to $15.1 billion, while its cash balance swelled to $72.8 billion. The stock has traded at a record high this month.

Microsoft (MSFT) – Market cap $428 billion. Microsoft was the world’s biggest company at the turn of the millennium and continues to be a steady presence in the ranks of the giants. The stock reached a 15-year high this month after Microsoft reported fiscal first-quarter profit and revenue that exceeded analysts' estimates. The software giant continues to make a successful transition away from its traditional products that are purchased and installed on clients' computers, toward cloud-based products and services such as its Azure cloud services and the Office 365 subscription service, as well as newer products such as Windows 10 and Office 2016.

Exxon Mobil (XOM) – Market cap $334 billion. Exxon Mobil was the world's largest company in October 2007, with a market cap of $510 billion, but a 30% decline since then has pushed it down to the No. 4 spot among the mega-caps. The 60% plunge in crude oil prices since June 2014 has affected Exxon's revenue and profitability. In the third quarter, the company reported net income of $4.2 billion, down 50% from a year earlier, while revenue fell 37%.

Berkshire Hathaway (BRK.A) – Market cap $328 billion. Warren Buffett's holding company reported record net income of $9.43 billion in the third quarter, driven by a one-time investment gain in Kraft Heinz (HNC). Berkshire Hathaway became the largest shareholder in Kraft Heinz after Buffett helped finance the merger that created it.

However, 2015 has been an unusually challenging year for Berkshire as some of its biggest holdings such as American Express (AXP), IBM (IBM) and Wal-Mart (WMT) have significantly under-performed the S&P 500.

Amazon (AMZN) – Market cap $301 billion. Amazon's shares reached a record high this month as the stock surged 112.5% for the year, the best performance of the top 10 mega-caps. The stock has had a meteoric rise in the current bull market, having surged more than six-fold since 2009. The company's Amazon Web Services division, whose revenue increased 78% from a year earlier to just over $2 billion in the third quarter, helped the giant Internet retailer post an unexpected profit in the quarter.

General Electric (GE) – Market cap $308 billion. GE reached a seven-year high in November after reporting third-quarter results that beat expectations. The company is returning to its manufacturing roots and moving away from its financing activities, by selling $200 billion in assets from its GE Capital division and completing the split-off of its consumer-finance business Synchrony Financial. Although GE was among the world's biggest companies during previous bull cycles that peaked in the years 2000 and 2007, the stock now trades at less than half of its all-time high reached in August 2000.

Facebook (FB) – Market cap $293 billion. Facebook has the distinction of becoming the fastest company to reach $250 billion in market cap, having done so in about three and a half years since its initial public offering in May 2012. The stock reached a record high this month after the company reported better-than-expected revenue of $4.5 billion for the third quarter, as monthly users rose 14% to 1.55 billion and mobile-advertising continued to grow.

Wells Fargo (WFC): Market cap $281 billion. Most investors may be unaware that Wells Fargo is the world's largest bank by market value, ahead of such well-known U.S. banks as Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM). San Francisco-based Wells Fargo became the largest U.S. mortgage lender with its 2008 acquisition of Wachovia Corp in a $15 billion stock transaction. Wells Fargo traded at a record high in July, but has since retreated 5%.

Johnson & Johnson (JNJ) – Market cap $280 billion. J&J, the only health-care company in the top 10, reached a record high in November 2014, but has since pulled back about 7%. For the third quarter, the company reported net income that exceeded analysts' estimates, but revenue fell short of expectations. J&J is one of only three U.S. industrial issuers that have a AAA rating from credit-rating firms Standard & Poor's and Moody's.

Why the Top 10 Are All American

The U.S. accounts for a disproportionate percentage of the world's largest companies for three reasons:

(a) the relative out-performance of U.S. equities in this bull market;
(b) the strength of the U.S. dollar
(c) the premium valuations accorded to U.S. mega-caps.

Since March 2009, U.S. equity indexes have outperformed their global peers by a wide margin. The S&P 500 has gained 210% (from March 9, 2009 to Nov. 6, 2015), while the Dow Jones industrial average has advanced 173%. But even these impressive performances pale in comparison to the Nasdaq Composite's 305% surge over this period, which is the biggest reason technology titans comprise half of the top 10 list.

Europe and China, on the other hand, have under-performed U.S. indexes by a big margin.

Although the Swiss Market Index – home to giants such as Nestle, Novartis (NVS) and Roche Holdings - has gained 140% since March 2009, and Germany's DAX index is up 153%, the broad-based European index Euro Stoxx 50 is up only 63%. Asian equity indexes have also under-performed U.S. benchmarks, with Hong Kong's Hang Seng up 102% since March 2009, and the Shanghai Composite up 82%.

Another reason for the dominant U.S. presence in the ranks of the giants is the remarkable strength of the U.S. dollar. Since the beginning of 2014, the dollar has gained against all 16 major currencies, and has advanced almost 22% versus the euro and 14% against the Japanese yen. The relative weakness of their currencies depresses the market value of European and Japanese firms when expressed in dollars.

Finally, U.S. mega-caps trade at multiples that have expanded substantially over the past five years, and also at premium valuations compared with their global competitors. 

That means that a dollar of net income will probably fetch a higher market value for a U.S. mega-cap, compared with a European or Asian company.

Lessons From the Past

In the late 1980s, Japanese companies dominated the ranks of the biggest global firms as the yen soared and the Nikkei index reached stratospheric levels. But the deflationary spiral and market crash in subsequent years that resulted in Japan's lost decades lopped off hundreds of billions in market value of Japanese companies. As a result, the only Japanese company with a market value in excess of $100 billion is Toyota Motor (TM) (market cap $208 billion), which ranks No. 18 among the world's biggest companies.

In the late 1990s, the dot-com and technology boom resulted in U.S. companies accounting for a disproportionate share of the world's largest companies. The bear market that ensued from 2000 to 2002 resulted in the S&P 500 plunging 45%, while the Nasdaq Composite plummeted almost 80% at its lows. As a result, many former titans were worth a fraction of their peak value by the time the bear was vanquished.

In 2007, it was the Europe's turn. With the euro riding high by the time markets peaked in October 2007, Europe was challenging the U.S. for the most number of mega-caps; it had 28 companies with market caps above $100 billion, while the U.S. was only slightly ahead with 30. And then the Great Recession hit.

Does the fact that U.S. companies now account for 60% of the world's biggest companies suggest "irrational exuberance," to quote the immortal words of one central banker? Could this preponderance of U.S. titans presage an impending market top and perhaps even a savage market correction? Only time will tell.

The Bottom Line

The five biggest technology companies in the world are American. So are the world's biggest bank, diversified conglomerate, energy company, health care product manufacturer and industrial firm. History shows that such dominance in the ranks of global titans does not last for very long.

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