July 3, 1995
Turn on a personal computer today and listen to the musical riffs, the revving of race cars and the volcanic explosions coming from within. It's hard to believe that just a few years ago the most impressive utterance a typical PC could make was a plain old beep. This new symphony of sound has been generated, in part, by a fast-growing enterprise named Creative Technology. Capitalizing on the roaring success of the multimedia PC market, the company invented an add-on device known as Sound Blaster, which gives personal computers new audio capabilities. The product helped Creative Technology's revenues jump from $24.8 million in 1991 to $657.9 million last year. To keep making noise in the marketplace, Creative Technology has rolled out Phone Blaster modems, which help people make long-distance calls by computer, and ShareVision, which enables videoconferencing to take place on PCs.
Most American companies have benefited from the economic expansion that began four years ago, but only a handful of businesses like Creative Technology have experienced staggering growth. In an effort to identify the biggest winners, U.S. News examined the financial records of more than 4,600 public corporations with data from Market Guide. The list of the top 25 performers since 1991 is dominated by eight companies involved in the information-technology revolution, including Creative Technology, which heads the group. Also ranked near the top are semiconductor giant Intel and software powerhouse Microsoft as well as Cisco Systems, which makes equipment that binds corporate computers in networks, and Micro Warehouse, a mail-order operation that ships vast quantities of PC products.
High-tech. The U.S. News list of fast-growing companies reflects the importance of technology in the American economy today. The production of information-processing equipment has soared by 46.7 percent since 1991, after adjusting for inflation, and now represents nearly 3 percent of the nation's gross domestic product, an all-time high. Corporate purchases are driving this growth, and capital spending on information technology has doubled over the past four years. As a result, the nation's productivity rate has sharply increased, given the pace of the current expansion, according to Morgan Stanley chief economist Stephen Roach. And the trend is not abating, even at this late stage of the business cycle. "Productivity gains and technology spending usually fade dramatically," says Roach, but this time "they are staying [strong]."
The U.S. News rankings also provide a window for viewing other sectors of the rapidly changing economy. The health care industry placed six firms on the fast-company list, including three health-maintenance organizations, which reflects the country's keen interest in medical care that costs less. And four companies specializing in leisure and recreation made their way into the top 25 as well. Among the most notable: Polaris Industries, which produces snowmobiles, and Marvel Entertainment, which publishes comic books. Key players in retailing, financial services and farm equipment round out the roster. The strong track record of the companies on the U.S. News list has caught Wall Street's attention and created shareholder value. If an investor had purchased one share of each of the top 25 firms' stock in the early part of the expansion and held on for three years, he would have chalked up a 151 percent gain, excluding dividends. The Standard & Poor's 500 grew just 39 percent over the same period.
But today, the companies on the U.S. News top-25 list find themselves operating in a business environment that has cooled off. After expanding at a 4.1 percent rate last year, the economy downshifted to a 2.7 percent pace in the first three months of 1995 and shows signs of slipping further (story, Page 46). Some forecasters still expect the economy to perk up later this year, if the Federal Reserve starts cutting interest rates. The companies on the U.S. News list have adopted a host of shrewd strategies to keep their winning streaks intact.
Farms. AGCO Corp., ranked fourth on the U.S. News fast-growth list, has focused on an aggressive acquisition strategy aimed at expanding its market share. Launched in 1990 after its leaders bought out a German farm-equipment maker that had lost roughly $300 million in four years, the Georgia-based firm quickly purchased a number of companies. Over a four-year period, AGCO acquired nine major enterprises for almost $600 million. In the process, it gained many new brands to sell along with an expanded North American dealer network. This helped boost sales from $274.5 million in 1991 to $1.36 billion last year. Today, AGCO is the world's fourth-biggest seller of farm equipment, and the company expects to get even bigger. With a recent European acquisition, it is plowing straight ahead into the world market. AGCO may purchase other farm-equipment makers in Europe because the fragmented continental market offers many opportunities. Prior to its most recent European deal, the company generated just 2 percent of its business overseas; today, it does 57 percent of its business in foreign markets.
Health care providers don't have the luxury of seeking markets abroad. Yet the domestic health business offers major growth opportunities because the government and private industry remain concerned about rapidly rising medical costs, which have been increasing at twice the general rate of inflation over the last several years. The innovative Homedco Group has seized this opportunity and made it onto the U.S. News fast-company list by turning in average annual-revenue gains of 33 percent from 1991 to 1994. The California-based company offers respiratory and drug infusion therapies to patients in their homes, with prices that are about half those of a hospital. Homedco is the leader in the $8 billion home-care industry, which has been expanding at roughly 12 percent a year. The company's position should only strengthen, thanks to a merger with Abbey Health Care Group, which enables Homedco to keep administrative costs down and underprice rivals by 10 to 15 percent. Despite tough competition, the company is expected to grow by 25 percent annually for the next three years. One reason: Homedco has sought contracts with managed-care companies and convinced them to add home health care services.
Footwear retailer Nine West has been able to boost its business by improving quality and raising prices commensurately. The Connecticut-based company purchased higher-grade leather and more-expensive linings and sole materials. It was then able to pass the extra costs on to consumers, who paid $7 more for an average pair of Nine West shoes. The strategy has helped the firm gain a new, sought-after upscale clientele and a place on the U.S. News fast-company list. Last year, Nine West's sales jumped to $652 million, after average, annual-revenue gains of 43 percent between 1991 and 1994; during the same period, overall women's footwear sales fell by 5 percent. Today, annual sales per square foot in Nine West's stores are close to $575, compared with the industry average of slightly more than $200. Despite nearly flat industry growth, analysts expect Nine West to bound ahead over the next three years. The momentum will come from the 100 new stores that the company plans to open this year and from its roll-out of stylish new handbags, belts and accessories designed to appeal to professional working women. Nine West should also grow from its recent purchase of a portion of U.S. Shoe.
Rates. Lower interest rates were the driving force behind Countrywide Credit's stunning performance in the early 1990s. But the company scored against the competition -- and appears on the U.S. News list -- because it was able to access capital and then generate vast economies of scale. This enabled Countrywide to originate and process loans at 85 percent of the cost of those of its rivals. The California-based mortgage banker, whose revenues grew seven times above the industry average, saw home-loan originations climb from $4.6 billion in 1991 to $53 billion in 1994. Countrywide's refinancing business also took off, growing from $23 million to $281 million between 1991 and 1994. To compensate for the run-up in interest rates last year, the company moved into the loan-service business, where it contracts with banks to collect borrowers' payments. This effort now generates two thirds of Countrywide's revenues. But with interest rates down from their 1994 peaks, the company is well positioned to take advantage of another refinancing wave. An uptick in housing, spurred by the recent drop in mortgage rates, also could provide Countrywide with new opportunities in home-loan originations.
Countrywide's good fortune is based on lower interest rates, but International Game Technology has made its luck by tapping into the nation's enthusiasm for gambling. The company, ranked eighth on the U.S. News list, operates jackpot systems in six states that are linked by a computer network. This combines the pots of many machines in order to dangle a giant payoff. Last year, the networked systems accounted for one third of Nevada-based IGT's $674 million in revenues. IGT excels in its basic business too, which is supplying casinos with slot machines and video poker games. The company controls 85 percent of this market.
IGT depends on the expansion of gaming for continued growth, but the fact that just one state added gaming facilities in 1994 will not deter the company. IGT is poised to sell slots to facilities in six states where casinos will be built over the next three years. And while it is waiting for new domestic opportunities, the gambling enterprise is looking abroad to new markets in Europe, Latin America and South Africa. IGT already has a leg up on the competition because it is the only company among its rivals that is licensed to operate in every legalized gambling market in the world. This broad geographic reach holds the key to IGT's future. Along with the other 24 businesses on the U.S. News fast-company list, its success depends on its ability to adapt to the rapidly changing conditions of the new economy.
The U.S. News top 25
According to an exclusive U.S. News ranking, the following companies have been peak performers during the economic expansion, excelling in sales growth, profit growth and average return on shareholders' equity.
|AVERAGE ANNUAL GROWTH RATE|
|RANK/COMPANY/LOCATION||INDUSTRY||SALES||NET INCOME||AVERAGE RETURN ON EQUITY|
|1 Creative Technology Milpitas, CA||Computer peripherals||198.37||126.76||32.29|
|2 Micro Warehouse South Norwalk, Conn.||Computer retailing||68.05||94.58||45.33|
|3 Cisco Systems San Jose, CA||Computer networking equipment||89.32||93.90||35.39|
|4 AGCO Duluth, GA||Agricultural machinery||70.43||133.00||22.93|
|5 Polaris Industries Minneapolis, MN||Recreation vehicles||40.54||72.97||46.36|
|6 Mohawk Industries Atlanta, GA||Rug and carpet manufacturing||72.73||84.75||24.37|
|7 Marvel Entertainment New York, NY||Comic books and sports cards||64.74||55.25||33.98|
|8 International Game Technology Reno, NV||Gambling equipment||42.52||67.70||27.12|
|9 Mid Atlantic Medical Services Rockville, MD||Health care||23.55||77.89||36.58|
|10 Cabletron Systems Rochester, NH||Computer networking equipment||49.07||49.17||27.78|
|11 Sybase Emeryville, CA||Computer database management software||62.87||113.28||18.77|
|12 Amgen Thousand Oaks, CA||Biotechnology||34.19||48.38||28.44|
|13 Gateway 2000 North Sioux City, SD||Computer manufacturing||62.73||34.62||44.35|
|14 Nine West Group Stamford, CT||Footwear retailing||42.84||35.10||47.72|
|15 Perrigo Allegan, MI||Pharmaceuticals and drug store supplies||33.51||64.94||22.54|
|16 Homedco Group Fountain Valley, CA||Health care||33.08||41.36||28.46|
|17 Countrywide Credit Industries Pasadena, CA||Mortgage banking, financial services||77.54||107.63||16.27|
|18 Microsoft Redmond, WA||Computer software||36.12||35.29||30.42|
|19 Landstar System Shelton, CT||Trucking||29.47||123.00||17.64|
|20 Franklin Resources San Mateo, CA||Financial services||38.03||36.77||26.24|
|21 Reuters Holdings PLC New York, NY||Printing & Publishing||16.32||82.32||29.25|
|22 PacifiCare Health Systems Cypress, CA||Health care||32.55||48.75||21.95|
|23 CML Group Acton, MA||Retailing||31.61||35.65||31.25|
|24 Intel Corp. Santa Clara, CA||Semiconductors||34.09||40.84||23.36|
|25 Columbia/HCA Healthcare Louisville, KY||Health care||34.14||27.67||86.17|
METHODOLOGY: The U.S. News computer analysis examined 4,635 public companies that had balance sheet data for the years 1991 through 1994. Rankings were computed based on a formula consisting of one-third compound sales growth, one-third compound net income growth and one-third average return on equity. Return on equity is a profitability measure derived by dividing net income over stockholder equity. Companies without sales in 1991 or 1994, without profits in 1991 and without shareholder equity in 1991 were eliminated from consideration. For purposes of the final rankings, only companies with more than $500 million in 1994 sales were included. All data reflect a company's end of year, whether fiscal or calendar.
NOTE: USN&WR computer analysis based on data provided by Market Guide Inc; Creative Technology headquarters is in Singapore.
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