Investing
10 Big Family Business Stocks That Beat the Market
July 9, 2015 8:20 am
Last Updated: July 9, 2015 9:17 am
Wall Street always looks for an edge when deciding what stocks to recommend. One of the most unusual angles that investors have likely never fully considered is family-owned companies. An outstanding and fascinating report from Credit Suisse takes an in-depth look at family-owned companies around the world. We have focused on the 10 top companies here in the United States.Source: courtesy of Wal-Mart Stores Inc.
The definition of a family-owned company may surprise people, but given the huge stock floats of large American corporations, the Credit Suisse benchmarks make sense. The analyst cites for inclusion into their global family-owned business database that the companies must be at least $1 billion in market capitalization and have a family own at least 20% of shares outstanding.
The Credit Suisse report points out that about one-third of family-owned businesses last into the second generation of ownership, 12% to a third generation and then the number shrinks to just 3% to a fourth generation.
One very interesting data point is that family businesses on many metrics tend to outperform. While they often trade at a slight premium to the index benchmarks of 12% on an EV/EBITDA ratio, which is made up of two parts. The EV part stands for “enterprise value” and is calculated by adding a company’s market capitalization, debt, minority interest and preferred equity. They also trade at 5% premium on a price-to-book ratio.
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While the premiums may seem large to some, the Credit Suisse team points out that, on average, family-owned businesses have a return on equity that is 4.3% higher than the benchmark and a cash flow return on investment that is over 9% higher. These figures certainly help to justify the premiums.
It also is interesting to note that U.S. family-owned businesses performed extremely well across the board compared with their foreign counterparts in almost every category, from return on equity to net debt as a percentage of equity and net debt to EBITDA.
Here are the 10 top U.S. family-owned businesses. Remember, these companies have a market cap larger than $1 billion and a family-owned shareholding of at least 20% of shares outstanding.
1. Wal-Mart Stores Inc. (NYSE: WMT) leads of the list and is probably no surprise to our readers. Started as what was called a five-and-dime by Sam Walton in 1962, the company revolutionized retail as consumers have come to know it. The Walton family’s stake in Wal-Mart has risen to about 50% as a result of share buyback programs, and the family is satisfied to control the company’s biggest stake without actually owning enough stock to give them actual control. The shares closed most recently at $73.06.
2. Oracle Corp. (NASDAQ: ORCL) is a technology company that is on the Credit Suisse top 10. Yahoo reports that co-founder and executive chairman Larry Ellison owns a staggering 1,113,634,580 shares of the software giant. Shares closed Wednesday at $39.77.
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