Besides raw size as way to survive inflation and higher interest rates, companies that are productive will have a higher chance of survival. Productivity can be measured in many ways, but in order to have a uniform measure that can be used across all industries we have looked at adjusted net income to employees. This measure can be plotted against the number of employees and will show a negative relationship. This means that the larger a company gets the lower its profits per employee get. In order words, there are diminishing returns to size, which should not be a surprise. If a company is trying to maximise profits then that will often naturally lead to sacrificing productivity; but what is lost in productivity is gained through economies of scale in its operations, and this allows for higher levels of aggregated profits. Companies that lie way above the regression line (see plot) are those that have significantly higher profit per employee (productivity) relative to what their size would suggest. The most productive company in the world relative to what its size would dictate is Apple (orange dot). The companies that are way above the regression line are doing something right. In our productivity and innovation table below, we show the two best companies in each industry group that have the largest spread above the regression line.
Saxo's productivity and innovation list
Productivity Name | Market cap (USD mn.) | | Innovation Name | Market cap (USD mn.) |
Apple Inc | 2,458,034 | | Amazon.com Inc | 1,443,622 |
Microsoft Corp | 2,072,434 | | Nestle SA | 349,014 |
Alphabet Inc | 1,670,339 | | L'Oreal SA | 201,736 |
NVIDIA Corp | 533,250 | | AT&T Inc | 163,501 |
Meta Platforms Inc | 507,996 | | Booking Holdings Inc | 81,773 |
UnitedHealth Group Inc | 459,084 | | Schlumberger NV | 58,711 |
Visa Inc | 433,615 | | Orsted AS | 52,330 |
Walmart Inc | 399,577 | | Synopsys Inc | 42,711 |
JPMorgan Chase & Co | 384,367 | | Dexcom Inc | 39,534 |
Procter & Gamble Co/The | 347,694 | | Cadence Design Systems Inc | 38,594 |
Home Depot Inc/The | 332,444 | | Ferrari NV | 35,469 |
Bank of America Corp | 332,272 | | Verbund AG | 35,130 |
Coca-Cola Co/The | 253,771 | | Experian PLC | 35,099 |
Costco Wholesale Corp | 233,114 | | Coinbase Global Inc | 33,622 |
Cisco Systems Inc/Delaware | 225,571 | | Electronic Arts Inc | 33,502 |
Verizon Communications Inc | 220,386 | | Deutsche Boerse AG | 32,236 |
Intel Corp | 180,797 | | eBay Inc | 30,604 |
McDonald's Corp | 168,184 | | Veeva Systems Inc | 26,261 |
AT&T Inc | 163,501 | | Las Vegas Sands Corp | 24,516 |
NextEra Energy Inc | 155,606 | | Beiersdorf AG | 23,696 |
Morgan Stanley | 150,912 | | CoStar Group Inc | 22,100 |
Honeywell International Inc | 125,642 | | Genmab A/S | 21,699 |
Lockheed Martin Corp | 119,692 | | Garmin Ltd | 21,083 |
Unilever PLC | 115,235 | | Kerry Group PLC | 18,875 |
Goldman Sachs Group Inc/The | 114,563 | | Novozymes A/S | 17,073 |
Rio Tinto PLC | 112,027 | | Incyte Corp | 15,977 |
Altria Group Inc | 91,844 | | Tenaris SA | 15,886 |
Booking Holdings Inc | 81,773 | | Continental AG | 14,070 |
Gilead Sciences Inc | 72,914 | | Hasbro Inc | 12,067 |
Cigna Corp | 72,600 | | Juniper Networks Inc | 10,745 |
AP Moller - Maersk A/S | 66,561 | | Elisa Oyj | 9,441 |
Moderna Inc | 60,481 | | Chr Hansen Holding A/S | 9,217 |
Hapag-Lloyd AG | 60,079 | | Synaptics Inc | 7,824 |
General Motors Co | 59,327 | | Lattice Semiconductor Corp | 7,024 |
Newmont Corp | 58,443 | | OSRAM Licht AG | 6,027 |
RELX PLC | 54,991 | | Leonardo SpA | 5,735 |
Bayerische Motoren Werke AG | 53,243 | | Ubisoft Entertainment SA | 5,271 |
Thomson Reuters Corp | 49,847 | | National Instruments Corp | 4,857 |
Aflac Inc | 39,538 |
Cheniere Energy Inc | 32,688 |
eBay Inc | 30,604 |
DR Horton Inc | 27,420 |
Lennar Corp | 24,011 |
Power Corp of Canada | 20,634 |
Chesapeake Energy Corp | 9,761 |
NRG Energy Inc | 9,369 |
Source: Bloomberg and Saxo Group
* Companies in the productivity category are chosen as those two companies with the highest productivity (adjusted net income to employee) relative to their number of employees measured against all companies in North America and Europe.
** Companies in the innovation category are chose as the two companies in each industry group with the highest R&D in percentage of revenue. Some industry groups such as banks and insurance have been excluded because companies in those industries are not recognizing R&D.
There’s a vast amount of academic literature linking research and development (R&D) intensity to future equity returns; many studies have found a positive relationship regardless of the intensity measure used. In our analysis we have chosen to use R&D in percentage of revenue as a measure of R&D intensity and as with our productivity ranking, we have selected the two companies from each industry group with the highest R&D intensity; certain industry groups with no R&D such as banks and insurance have been excluded. The productivity and innovation list should not be viewed as an investment recommendation but as an objective list highlighting companies that score the highest on our chosen metrics for productivity and innovation. These measures are not guaranteed to lead to outperformance in the future.
Europe’s seismic shift in security policy
For decades to come February 24, 2022 will mark the pivotal moment when Europe’s post-WWII security policy changed as Russia launched a full-scale invasion of Ukraine. In each decade following WWII, European countries inside NATO had lowered their military spending as a percentage of GDP to the point that it reached only 1.2 percent in 2019, compared to the US at 3.7 percent in 2020. This significant discrepancy—despite the NATO agreement in 2006 to commit to a minimum 2 percent of GDP—was the culprit behind the attacks by former US President Trump on NATO and European countries for doing too little. Europe had long argued that they spent money in non-direct military areas that had a security purpose inside NATO, but there is nothing like a black swan event to reveal that the emperor has no clothes.
Following Russia’s invasion of Ukraine all countries in Europe have said that the continent has changed, and it is clear that they must step out from under the US military umbrella. Germany has declared that it will indefinitely increase military spending to above 2 percent of GDP, signalling a major security policy shift. The 27 countries in the European Union spent €168bn in 2019, and if military spending is increased to 2 percent of GDP by 2030—and assuming GDP trend growth—then spending will increase to €346bn in 2030, translating into 8.4 percent annualised growth. In the event that military spending is accelerated, which is quite likely, the growth rate will be double-digit in the coming years. As stated in Moretti et al 2021, expenditures for defence-related R&D represents by far the most important form of public subsidies for innovation and it causes spillover effects in privately funded R&D, resulting in overall productivity gains. While increased military spending is happening in Europe due to the horrific invasion in Ukraine, it could cause long-term economic growth and innovation in all of Europe.
As a result, we are positive on the defence industry as a theme and our defence theme basket represents 25 defence contractors in the US and Europe. These companies provide exposure to military spending and should be viewed as an inspirational list and not investment recommendation.
Name | Mkt Cap (USD mn.) | Sales growth (%) | EBIT margin (%) | Diff to PT (%) | 5yr return |
Raytheon Technologies Corp | 145,733 | 13.8 | 7.7 | 9.6 | 66.3 |
Lockheed Martin Corp | 117,801 | 2.5 | 13.6 | 0.6 | 88.2 |
Boeing Co/The | 105,744 | 7.1 | -4.7 | 44.0 | 7.5 |
Airbus SE | 89,505 | 4.5 | 10.2 | 41.2 | 54.9 |
Northrop Grumman Corp | 68,914 | -3.1 | 15.8 | -1.1 | 99.2 |
General Dynamics Corp | 65,056 | 1.4 | 10.8 | 8.9 | 37.6 |
L3Harris Technologies Inc | 48,265 | -2.1 | 11.8 | 5.9 | 144.3 |
TransDigm Group Inc | 34,728 | 2.9 | 37.5 | 18.1 | 220.4 |
BAE Systems PLC | 29,523 | 1.3 | 11.5 | -0.6 | 37.4 |
Thales SA | 25,863 | -4.7 | 7.4 | 9.3 | 34.5 |
Howmet Aerospace Inc | 14,205 | -5.5 | 15.0 | 17.7 | 52.8 |
Dassault Aviation SA | 12,130 | 32.0 | 7.4 | 8.7 | 21.3 |
Rolls-Royce Holdings PLC | 10,188 | -3.9 | 4.2 | 33.1 | -63.5 |
Elbit Systems Ltd | 9,342 | 12.1 | 8.1 | -19.4 | 86.8 |
Rheinmetall AG | 7,331 | 2.4 | 9.3 | 10.3 | 132.0 |
Kongsberg Gruppen ASA | 6,537 | 7.2 | 10.4 | 0.0 | 235.3 |
Leonardo SpA | 5,717 | 5.4 | 5.7 | 12.2 | -31.3 |
Saab AB | 5,059 | 10.5 | 7.4 | -9.4 | 12.0 |
Ultra Electronics Holdings PLC | 2,976 | 0.0 | 13.9 | -5.9 | 67.1 |
QinetiQ Group PLC | 2,319 | 7.2 | 7.3 | 11.3 | 22.6 |
Babcock International Group PLC | 2,236 | 0.2 | -38.3 | 11.8 | -57.8 |
Chemring Group PLC | 1,236 | -2.3 | 12.6 | 8.5 | 84.9 |
INVISIO AB | 687 | 11.5 | 4.2 | 42.0 | 110.5 |
Avon Protection PLC | 515 | 0.7 | -11.7 | 12.4 | 44.6 |
Avio SpA | 281 | -17.7 | 1.1 | 35.0 | -3.5 |
Aggregate / median values | 811,892 | 2.4 | 8.1 | 9.6 | 52.8 |
Source: Bloomberg and Saxo Group
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