By David Bain - 16th January 2019
The Family Capital 750: Investors shun listed family businesses
Despite research showing listed
family businesses outperform non-listed family businesses over most periods,
investors aren’t convinced, preferring instead non-family companies,
particularly the big brand tech stocks.
Analysis of the market
capitalization of the biggest listed family businesses in the world as compiled
by Family
Capital in its World’s Top 750 Family Business Ranking (see
below) shows investors undervalue most of them.
The total market cap of the 379
listed family businesses in the 750 came to $5.4 trillion at the end of 2018 –
an impressive number, but only just over a quarter of the total market cap of
the S&P500, which stood at $21 trillion at the end of 2018. Many of
the 379 listed family businesses have strong revenue numbers, but much smaller
market cap than many of the new economy companies on the S&P 500.
Family-owned Walmart, which in
2017 made more revenues than any other company in the world at $495 billion,
had a market cap of $270.6 billion at the end of 2018. In contrast, Microsoft
had a market cap of $752 billion at the end of 2018, compared with revenues of
$90 billion in its fiscal year 2017/2018. Apple’s market cap was $737.2 billion
on January 15, 2019, with 2017/2018 revenues just over half of those of
Walmart’s for 2017.
Not all family businesses are
being marked down by investors, with Berkshire Hathaway the most obvious
example. Warren Buffett’s investment group had a market cap of more than $500
billion at the end of 2018. Pharmaceutical giant Roche and media and technology
group Comcast’s market caps were also high relative to their revenues.
But overriding evidence
suggests listed family businesses are bypassed by investors in favour of the
big tech stocks like Amazon, Apple, Microsoft, and Alphabet (Google). That’s even
though many listed family businesses outperform in terms of return compared
with their non-family counterparts. Last year, research by Credit Suisse found
1000 listed family businesses had outperformed their non-family listed peers
when it came to their sharemarket performance since 2006.
“The longer-term trend of
outperformance of family-owned companies is clear, with our ‘Family 1000’
universe having delivered cumulative excess returns in every region and sector
since 2006,” the Credit Suisse report said.
Another listed family business
index, the Euronext Family Business Index, also outperforms many indices of
European stock markets, as detailed here.
Of course, many other factors
need to be looked at to get a better idea of the performance of listed family
businesses like their price-earnings ratios. But one possible reason why
investors view these companies negatively could be because most of them operate
in old economy sectors. Perhaps they are perceived as being vulnerable to new
economy disruptive forces.
After all, so-called
Schumpeterian creative destruction is speeding up. In 1965, the average tenure
of companies on the S&P 500 was 33 years, according to consulting firm Innosight.
By 1990, it was 20 years. It’s forecast to shrink to 14 years by 2026.
According to these figures, around 50% will disappear from the index over the
next 10 years. And these trends are likely to be duplicated in most other
public equity markets over the same period.
If that is the case, old
economy listed family businesses might fall out of favour more with investors
in the years ahead, with their market cap shrinking further, even if their
revenues continue to hold up.
Top 750
Family Businesses
Password: Top750
By David Bain - 16th January 2019
Link: https://www.famcap.com/2019/01/the-family-capital-750-investors-shun-listed-family-businesses/