market cap European companies falling behind in valuations as US tech stars bulk up

Growing profits and rosy futures are helping US companies outpace outdated European peers
Bigger hitters.

More than half of the 100 most valuable companies in the world by market capitalization are American, and they are creating a new record. Only 21 European companies make it into a ranking by Handelsblatt of the top 100, down from 24 last year and compared with 54 US companies this year.

Not only are European firms lagging in profitability and digital innovation, but they also belong largely to the past with little to excite investors about the future – think margarine versus search engines that virtually read your mind. 

The three top US firms alone – Microsoft, Apple and Google parent Alphabet – are worth more than all 30 German blue chips in the DAX index put together. Much more – the €1.85 trillion market cap of the three US giants is €750 billion more than that of the DAX blue chips.

And only half as many German companies made it into the top 100 as did last year. Just three, to be exact: Global software giant SAP. Germany’s most valuable firm leads but comes in at only 57th in the ranking. Engineering conglomerate Siemens is 81, and insurer Allianz is 98.

Nor are the US companies overpriced. Apple is worth €612 billion, for instance, but it had a net profit of €50 billion, so its price-to-earnings ratio is a modest 12, compared to 16 for the top 100 on average and an average P/E of 20 last year. 

Even Warren Buffett, an infamous bargain hunter, overcame his aversion to tech stocks to buy more Apple shares. Apple is now the biggest position in his Berkshire Hathaway holding company at €34 billion. Buffett views Apple more like a consumer products company on the order of Coca-Cola, rather than as a tech company. Berkshire Hathaway, by the way, is the fifth-most valuable company in the world at €406 billion.

How come US companies are doing so well? They benefited this year from a $1.5 trillion tax cut thanks to the Trump administration, along with a robust economy and full employment. Plus, profit. That's up more than 20 percent over last year at the US companies, and two-thirds of the 54 US firms in the top 100 have a net return on capital above 10 percent. The US companies on average show a 15 percent return, more than double that of the 7 percent registered by the European companies. 

Germany, on the other hand, has its auto, chemical and machinery industries. All are anchored in the past, for all the talk the auto giants have of transitioning to e-mobility. Elsewhere in Europe, it is Unilever with its soap and margarine, Anheuser Busch with its beer, and LVMH with its luxury brands that take their place among the most valuable companies.

None of these provide much excitement about the future. The world’s biggest money manager, BlackRock, is underweight in European stocks because the firm doesn't see where profit or growth will come from. 

This correlates with the low level of digital innovation in Germany and Europe in general. Digital innovation is the biggest megatrend right now, according to Hubert Barth at the auditing and consulting firm EY. As he sees it, “European firms seem to belong more to the hunted than the hunters.”

Swiss bank Julius Bär fears German firms are at the limits of their capacity. They have invested too little in the recent past and now face a lack of skilled workers to keep the economy humming. On top of that, there are the current trade disputes and their impact on Germany’s export-oriented economy. 

The traditional argument that European stocks are relatively cheap no longer applies either, as stagnant or declining profit makes them relatively more expensive.

While these numbers reflect past performance, many tech stocks are boosted by the prospects of activity in the future. For a long time, Amazon ran losses as it built its market share. It now makes a profit, but still sells for a pricey P/E of 53 as investors expect even more from an online retailer.

As Europe and Germany, head into the New Year, it may be time to mull over some hefty changes. 

Ulf Sommer covers the intersection of industry and financial markets for Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Today. To contact the author: [email protected].