Among the best-managed companies of 2022, some warning signs
8 min read . Updated: 19 Dec 2022, 02:32 AM IST
PremiumThese companies score well overall in the WSJ Management Top 250. But there are red flags in at least one area.
Some of the companies in this year’s ranking of the 250 best-managed companies have a weak spot that may be worth paying attention to.
When the Drucker Institute compiles the ranking, it gives companies a red flag if they put up a showing below the 25th percentile in one Gap stores have hit the company’s balance sheet, of five categories: financial strength, customer satisfaction, innovation, social responsibility, and employee engagement and development. The red flags serve as a warning that a company—even one that scores highly in every other aspect of the ranking—needs to address an area of weakness before it has a broader effect on its business.
This year, nine of the top 100 companies have red flags, and seven of those nine have red flags in financial strength and nothing else. Drucker believes a company needs to be well-rounded and do well across all five categories to be effective and sustain itself over the long term.
Rick Wartzman, head of the KH Moon Center for a Functioning Society at the Drucker Institute, which creates the model used to rank companies in the Management Top 250, says a global pandemic can do that.
“It doesn’t surprise me that we saw a proliferation of red flags in the financial-strength category this year," he says, “given the lingering effects of the pandemic in some industries, tremendous market volatility and historically high inflation."
Here’s a look at the nine companies in the top 100 with red flags:
Allstate
Overall rank: 21
Red flag: financial strength, 21.5th percentile
Allstate faced a challenging year. Meyer Shields, an analyst at Keefe, Bruyette & Woods, says the company has been hit by the rising cost of claims, as car repairs have gotten more expensive, thanks to inflation and supply-chain issues. He says there has also been an uptick in the number of auto claims, as things opened up after Covid lockdowns and restrictions.
The good news for Allstate, he says, is that it is taking the right step to fix the problem: raising rates. But that will take time to work, he says.
“If you wrap all that up, yeah, Allstate is having a really, really tough year," he says, “but I do think that the passage of time will prove that their response is appropriate."
In a statement, the company said: “Allstate is financially strong, has a history of consistent profitability and is executing on a comprehensive plan to address the inflationary pressures affecting the industry."
Baxter International Inc.
Overall rank: 65
Red flag: financial strength, 15th percentile
Casey Lea, director of quantitative research for ISS EVA, a division of Institutional Shareholder Services, says profit margins for Baxter, a medical-technology company, have been pushed down since it closed the acquisition of medical-equipment maker Hillrom at the end of last year. But Mr. Lea says that it is still a profitable company.
“Baxter falls into that bucket of sales growth being positive and relatively strong but expenses growing a little faster," he says.
Lauren Russ, a Baxter spokeswoman, said in a statement: “While we are navigating a challenging macroeconomic environment, we remain confident in our ability to realize the potential of the Hillrom acquisition. The acquisition is helping us accelerate innovation around connected devices and expand our reach geographically and across healthcare settings."
Biogen Inc.
Overall rank: 73
Red flag: financial strength, 9.6th percentile
Biopharmaceutical company Biogen took a hit because of tough competition. Karen Andersen, an analyst at Morningstar, says Biogen’s cash flow has dipped over the past couple of years largely because of new drugs that are similar to its sclerosis and cancer drugs. But she believes the company’s financial health is solid.
“Biogen remained profitable, and as of the end of the third quarter, had net debt of only roughly $0.5 billion," Ms. Andersen says. The firm has the capacity to take on more debt if it wants to make an acquisition, she adds, and Morningstar thinks Biogen’s growth prospects will turn the corner as the Alzheimer’s drug Lecanemab is poised to launch in 2023.
In a statement, the company said: “Biogen has faced increased competition for a number of our products, which has pressured revenue and profits. However, we remain in a very sound financial position with over $5 billion in cash as of Sept. 30, 2022, modest leverage, and significant free cash flow generation." The company also said that potential new product launches could help return it to growth over time.
Exxon Mobil Corp.
Overall rank: 20
Red flags: customer satisfaction, 11.5th percentile, and employee engagement and development, 24.8th percentile
One of the facts Drucker takes into consideration when putting together a customer-satisfaction score is a quality-gap score—the difference between what customers say they expect from the company and what they receive—provided by wRatings. Gary Williams, chief executive of the research firm, says that for a company like Exxon Mobil, which doesn’t operate its own gas stations in the U.S., their quality-gap score is being hurt by experiences customers are having at stores owned by franchisees. But he says that is still a reflection of Exxon Mobil, which establishes expectations with how local operators do business under their brand.
The company “strives to build strong, long-term relationships with customers," Exxon Mobil said in a statement. “Consumer feedback is vital to our success and drives our work with station owners and operators to provide a positive experience."
Gap Inc.
Overall rank: 97
Red flag: financial strength, 7.7th percentile
Janet Joseph Kloppenburg, an analyst and president at JJK Research, says the retailer’s balance sheet has been hit by slowing sales. The problem, she says, is that brands like Old Navy and Gap that did so well selling sweats and fleece at the height of the pandemic didn’t pivot fast enough when customers were ready to go out and wear fancier clothes. Banana Republic, she says, has fared better, but it had a smaller impact on total results, because it represents less than 15% of total company revenue.
Ms. Kloppenburg says that she still considers Gap to be a strong company, financially, thanks in part to its low level of debt and high free cash flow. “They’re in a crunch," she says, “but it’s not a bad crunch."
Gap declined to comment.
Illumina Inc.
Overall rank: 91
Red flag: financial strength, 3.1st percentile
Julia Qin, an analyst at JPMorgan Chase, says the main factor currently weighing down the finances at Illumina, a maker of genetics-sequencing products, is its acquisition of cancer-test maker Grail. The business isn’t profitable, she says, and isn’t doing much to boost Illumina’s revenue.
“That said, it’s expected that the European Commission will mandate Illumina to divest Grail due to antitrust concerns, and the separation of Grail from Illumina would improve the company’s financial profile," Ms. Qin says. But it isn’t clear how much money Illumina will need to invest to sustain Grail, she says, and how the company will be able to recoup that investment.
Illumina declined to comment.
Salesforce Inc.
Overall rank: 37
Red flag: financial strength, 10.5th percentile
Brent Thill, an analyst at Jefferies, says Salesforce’s issue isn’t that there is a fundamental flaw in their business model or that they are losing market share. However, he says, Salesforce’s margins have consistently been lower than those of peers like Oracle, Adobe and Microsoft, due in large part to the company’s culture of excessive spending.
“Put it this way," he says, “I think they could cut expenses by 15%, 20% and still have the same outcome on the revenue side."
A Salesforce representative declined to comment beyond pointing to comments that President and Chief Financial Officer Amy Weaver made in the company’s most recent earnings call. Among other things, Ms. Weaver said that the company is committed to an operating margin above 25% by fiscal 2026—a step up from the 22.7% the company posted in the quarter ended Sept. 30.
Stanley Black & Decker Inc.
Overall rank: 90
Red flag: financial strength, 15.6th percentile
Stanley’s financial strength was challenged this year by supply-chain issues and inflation, which put pressure on margins and free cash flow, says Longbow Research analyst David MacGregor. But the company has put a number of cost-reduction programs in place, he says, and accelerated its plan to trim down its portfolio to make it “a much more narrowly focused power-tool and outdoor-power-equipment company."
“Longer term, it’s still a very well-managed company that has a quality management team," he says. “They’ve got some very well-defined internal operating systems that they use to run the business—their algorithm, so to speak—and so I expect over time it’s going to continue to be just as strong a business."
In a statement, Debora Raymond, a company spokeswoman, said that the company is No. 1 in the tools and outdoor category globally, and it intends to invest in programs to drive growth. To fund the push, the company will slash overhead and improve its supply chain, among other things.
“We are working at speed and taking all the necessary actions required to position the company for a wide range of economic scenarios to be successful and improve our financial performance," she said.
Walmart Inc.
Overall rank: 23
Red flag: employee engagement and development, 19.4th percentile
Drucker builds its employee engagement and development score by evaluating sources that track things like how employees feel about compensation, the direction of the company, its culture and career opportunities. Drucker’s Mr. Wartzman, the author of a recent book on the company, says that this result comes despite the company’s considerable investments in front-line workers. Along with higher wages—now an average of $17 an hour—the company offers training and improved scheduling for employees, he says.
“Nonetheless," Mr. Wartzman adds, “many of its workers still struggle to make ends meet, and it’s hard to have much job satisfaction when you’re barely scraping by."
Anne Hatfield, a Walmart spokeswoman, said in a statement: “We’ve built one of the largest private-employer training programs in the country, giving associates the training and pathways to move to higher-paying jobs." Entry-level associates receive their first promotion to a higher-paying role within seven months, on average, she said, adding that a number of top Walmart executives started as hourly associates, including Chief Executive Doug McMillon.
