Titans for 2001

Will the stocks of the world's preeminent manufacturing companies beat the market this year? Analysts and manufacturing executives are saying "yes," and IndustryWeek editors, pulling insights from this group, constructed the Global Manufacturing Portfolio, 10 manufacturing stocks that this publication believes will be among the world's leaders in 2001-in the stock market as well as the marketplace. They are a Who's Who of global pioneers that have successfully gone where no one a decade ago could have imagined, let alone predicted: Finland's Nokia Corp. and Sweden's L.M. Ericsson Telephone Co., the dominant players in mobile phones and wireless communications infrastructure, respectively; Cisco Systems Inc., the premier manufacturer of the Internet's hardware backbone; software giants Oracle Corp. and Microsoft Corp.; Solectron Corp., No. 1 in contract manufacturing systems; fiber-optic pioneer Corning Inc.; EMC Corp., the master of computer memory; Enron Corp., the nation's biggest natural gas and wholesale power company; and Pfizer Inc., which last year absorbed Warner-Lambert as it jousts to overtake Merck as the world's leading pharmaceutical company. "It's hard to argue with anybody on that list," says John R. Brandt, IndustryWeek columnist and editorial director of the New York-based Chief Executive Group. "I think you can make a lot of money on that list." Brandt says the future of manufacturing is no less high-tech than the rest of the global economy and admits, "When people look at the technology sector, they don't think of manufacturing." But they should, he insists. No less a visionary than Intel Corp.'s Andy Grove has proclaimed that the Internet will be the greatest boon for manufacturing ever. IndustryWeek made an imaginary investment of $1,000 in each of these stocks at their closing price on Dec. 31, 2000. The goal for 2001 is to beat the Standard & Poor's 500 Index, the stock benchmark against which market-leading companies are best measured. Portfolio Characteristics Several things set the Global Manufacturing Portfolio apart from other stock "buy" lists. Most apparent is that, obviously, they are classified as manufacturing companies. Also, there is an exceptionally heavy concentration in high-technology companies. Last year tech stocks were among the market's worst performers; in late November 2000 the Nasdaq Composite index, a tech bellwether, was nearly 40% below its high reached on March 10. But tech stocks, the core of the IW portfolio, remain the favorites of growth-oriented investors. NewBridge Partners LLC, a $6.5 billion investment boutique in New York, invests in only about two dozen companies-and six of them are in the Global Manufacturing Portfolio. "We're looking for the best, most dynamic companies in the best industries, as defined by growth and addressable market size," says Erick Maronak, the firm's director of research. The Global Manufacturing Portfolio, he says, "reflects today's leading companies in their segments." Another distinct feature of the portfolio is that, on first glance, it may not look like a guide to actual, physical producers. "These are some strange choices," says Jeff Hooke, a private money manager in Tysons Corner, Va. "Most of them don't manufacture anything. The common theme running through here is high-tech communications and software." In reality, however, the overlap between mind and machine at these companies is considerable. True, net profit margins at Cisco Systems, to take one example, are 14%, reflecting the high degree to which its products benefit from intellectual property, rather than tools and dies. But it also spends billions on physically producing its routers, switches, and other gear at factories from Silicon Valley to the Far East. Indeed, it is the mixture of intellectual creativity and manufacturing that sets the Global Manufacturing Portfolio apart. For its customers it delivers products and services that contribute to a net increase in global growth. For investors, it delivers profits well above industry norms. "You're not buying a distant dream," says Jim Griffin, investment strategist for Aeltus Investment Management, Hartford. "Here you're buying optical switches and chips and software. You're buying something that's likely to be delivered." Knowledge, Power, and Manufacturing What nearly all these names have in common, as well, is the role they play in global communications. If knowledge is power, then they are manufacturers of power by making information more widely and immediately available. "How we do our computing and how we communicate with each other are the two fundamental drivers of technological change," says Michael Sandifer, an analyst at Amerindo Investment Advisors Inc., a New York money-management firm with a 20-year track record of investing in tech stocks. "Over the last 20 years we've moved from a mainframe-based computing world to a client/server world, each of us empowered with some intelligence on our desktop. The wave we're going through now is Internet-centric; the intelligence will be on the Internet." Enron, for example, might appear to be a strange duck among those that IndustryWeek put in a row-an Industrial Age giant in the seemingly ordinary business of moving natural gas thither and yon. With nearly 18,000 employees pushing not-quite-empty air along 32,000 miles of pipeline, and a miserly net profit margin of 1.7%, it would hardly appear to be a darling of Wall Street. But with gas prices soaring in 2000 the stock more than doubled, and analysts who follow it say it has a pack full of other aces up its grimy sleeve. "They are in the lead in some of the areas that haven't been exploited by other old-line firms," notes Hooke. Enron is, for example, a leading player in the energy-trading market. Under deregulation, power companies can sell electricity anywhere in the nation. Enron operates an online marketplace for electricity and natural gas (the latter is used mainly to generate the former). Everybody in the industry uses it, but Enron owns it-an information advantage. A subsidiary called Enron Broadband Services also is exploiting the company's pipeline right-of-way to build a national fiber-optic communications network. This is a trend throughout industries with extensive rights of way, such as railroads, but Enron's is unusually large and advanced. Info Infrastructure When investors think fiber optics they think of Corning, the company that invented it. Two decades ago it transformed glass from beakers to bandwidth carriers-fiber optics that can carry 100 times as much information as copper cable. Today it manufactures twice as much of the stuff as Lucent Technologies Inc., its nearest competitor. In the 12 months ended Sept. 30 Corning generated earnings of $619.8 million on sales of $6.38 billion-a net margin of nearly 10%. The pipeline along which this information flows is dominated by Cisco Systems. "Cisco started out as a router company in the early '90s and over the last nine or 10 years, through 60-plus acquisitions, they've grown to be what is essentially a communications conglomerate," says Maronak. The company produces switches, dial-up access servers, network-management tools-what the industry calls end-to-end solutions, or a seamless bundle of everything it takes to run the Internet. The happy result: five-year sales growth, ended Sept. 30, 2000, at the Internet infrastructure company of more than 47%, income growth of nearly 25%, and a net profit margin better than 14%. The stock has split four times in the last three years and, even amid last year's bear market for tech stocks, Cisco shares climbed 20%. Some of Cisco's biggest customers are Microsoft and Oracle, the two software giants that dominated the age of client/server computing and are leading the transformation to Internet-based computing. Microsoft has made its chairman, Bill Gates, the world's richest man-and among the most controversial. The company might be split down the middle in an antitrust case, but shareholders will then own separate companies that reflect Microsoft's client/server past-the Windows operating system-and its Internet future, which includes the powerful Internet Explorer browser, the MSN e-commerce portal, and a host of dominant applications such as Word and Excel. One of the biggest companies in the world, with nearly 40,000 employees and a market capitalization of $373.2 billion-roughly equal to the GDP of the Soviet Union at the time it collapsed-Microsoft has consistently defied the market axiom that big companies can't grow as fast as small ones. Sales have accelerated at a 27% clip in each of the last five years, ended Sept. 30, 2000, and profits have grown faster-38%. That is, net margins continue to increase to their current level of an astounding 40.4%. Oracle's chairman, Larry Ellison, is in a close race to overtake Gates' net worth, and he owns even more of his company (24%) than Gates (15%). Oracle developed the world's leading database-management software and is leading its migration to appliances, including wireless gadgets, that access information on the Internet. Ellison's company is less than half the size of Microsoft and, in line with that same axiom, its growth is even more stunning: a sales surge of 25% per year, but an earnings acceleration of 58%. Oracle's net margin of 63% is one of the highest in global commerce (five-year figures ended Sept. 30, 2000). Mobile Movers Among the mobile appliances benefiting from the products of companies like Oracle and Cisco are digital telephones, including Internet-enabled devices that expand digital beyond conversations. Nokia is the world's top manufacturer of mobile phones, which accounted for two-thirds of its 12-month sales of $22.5 billion for the year ended Sept. 30, 2000. "Nokia is the standout in its marketplace in terms of performance and market share, first at the expense of Motorola and more recently Ericsson," says Maronak. "A lot of what we do focuses on management, and our rating boils down to vision, execution, and consistency. That's what makes a company the best in its space." But if Ericsson manufactures fewer handsets than its Finnish rival, it has the lead in an even bolder technology-Internet connectivity. "They are the leader in wireless infrastructure," says Michael Ward, a portfolio manager with International Assets Advisory Corp., a money management firm in Winter Park, Fla. "In the future, you'll be doing a lot more than talking on your cell phone. You'll have the Internet and e-mail. Networks have to be in place to facilitate this transformation, and Ericsson is winning a lot of the contracts to put this infrastructure in place." Internet traffic in turn creates a huge demand for data storage, which has helped EMC, the No. 1 producer of storage hardware, grow profits at more than 25% annually for five years, ended Sept. 3, 2000. James Oelschlager, president of Oak Associates Ltd., an Akron, Ohio-based money manager, calls the company the "big horse" of that industry, which is one of his three favorites. The other two are fiber optics and Internet backbone, and Oelschlager also is an investor in Corning and Cisco Systems. Cisco, in turn, is one of the biggest customers of Solectron, which builds electronic systems for manufacturers, especially high-tech manufacturers. Analyst Shelby Fleck of Morgan Stanley Dean Witter & Co., New York, issued a strong buy on Solectron in late November, setting a price target of $60 on shares trading then at $35. "They are expanding rapidly in Asia," she says, noting the company is acquiring key assets from Sony Corp. and NatSteel Electronics Ltd. of Singapore. "Solectron is one of the premier companies in the electronics manufacturing services industry," Fleck says. She observes it has "an impressive track record of consistent earnings growth, a diversified roster of leading technology customers, global manufacturing capabilities, a broad range of services, and a deep bench of management talent." One of the world's leading drug makers, Pfizer wins plaudits for similar traits in its industry. It has merged Warner-Lambert into its organization successfully, demonstrated strong growth in existing products, and boosted its pipeline of drugs under development. Credit Suisse First Boston Corp., in a Nov. 27 report, says, "Recent prescription trends point to continued strong product momentum in core Pfizer operations, with Lipitor up 25% in October, Accupril up 23%, Norvasc up 12%, Zithromax up 15%, Viagra up 19%, Neurontin up 37%." Credit Suisse First Boston says it expects earnings to grow at a 25% clip this year. To some extent, the Global Manufacturing Portfolio recalls the infamous Nifty Fifty of the 1970s, the so-called "one-decision" stocks that everybody had to own because of their clear dominance of their marketplaces. The Nifty Fifty crashed in the bear market of 1973-74, and some of the companies in IW's portfolio were badly battered in the bear market of 2000. But Oelschlager, who in the '70s was the pension chief for Firestone Tire & Rubber Co., says today's giants are quite different. "In the early '70s the one-decision growth stocks traded for 100 times earnings, but their earnings growth rates were 13% or 14%," he says. "Today we have the same kind of multiple valuations, but the good companies of today are growing 40% or 50%." The Global Manufacturing Portfolio