US Equities: Does the 'Winner Take All' in the US Market?

In the ever-evolving landscape of the American economy the “winner takes all” concept has been a subject of considerable debate. Although the number of companies in the US has grown by 50% over the past 30 years, their growth has not been equal. This can be clearly seen by the so-called ‘Magnificent Seven’, which dominate the US market and have driven many of 2023’s investment-focused headlines. As figure 1 illustrates, since the 1930s the share of the US economy of the top 0.1% of companies has risen to approximately 87%, up from 47%.¹

Figure 1. Share of US assets held by top 0.1% of companies

However, there are many other dynamic companies to be found in the US market and in Comgest’s US Equities strategy. For Comgest, a key ‘quality’ characteristic of our portfolio companies is visible growth – their business models are strong and stable with competitive advantages and brand recognition. One way to determine if a company meets our rigorous criteria is via our quality growth S-curve, which allows us to view companies in terms of their maturity and competitive risk, which lowers as a company matures. Over our years of research, three leading franchises – Eli Lilly, Microsoft, and Cintas – have long stood strong against new market entrants.

NOT ALL GROWTH IS CREATED EQUAL

Within the US market, some companies experience exponential success and dominate their industries while others struggle to gain a foothold. Factors such as innovation, adaptability, and market dynamics play crucial roles in determining the trajectory of a business.

One example that exemplifies the dynamic nature of growth is the pharmaceutical giant Eli Lilly, which we’ve held since 2015. Founded in 1876, the company developed insulin to treat diabetes in 1923 and has remained a power player in the pharmaceutical industry by consistently innovating and adapting to changing market needs or patients.

The company’s success can also be attributed to its high investment in research and development, resulting in groundbreaking pharmaceuticals that address a wide range of health issues, as figure 3 illustrates. As the world faces a growing pandemic of obesity and with 40% of the American population affected, Eli Lilly is likely to benefit from its duopoly with Novo Nordisk in the promising area of GLP-1 treatment. In November, the FDA approved Eli Lilly’s latest obesity drug, Zepbound that will compete directly with Novo Nordisk’s widely popular brand, Wegovy.²

Figure 4. Microsoft: R&D / CapEx investment has paid off

In the technology sector, Microsoft rose from its roots in 1975 to become a dominant force in providing a wide array of software solutions and services. The forward-thinking company’s success can be attributed to its continuous investment in R&D and CapEx – which is estimated to be around $70 billion each by 2024 and brand recognition with customer loyalty.

Microsoft’s staple Office and Windows products remain the industry standard for personal computers, solidifying the company’s position as an industry leader. According to our S-curve, see figure 2, Microsoft is a mature company, which is why we’ve held it since 2009. What makes Microsoft exciting from a quality growth perspective, is its ability to continually innovate and adapt to meet the new needs of its clients and to expand into adjacent technology sectors such as gaming or social media, as seen in figure 5. Not a company to rest on its laurels, Microsoft’s promising growth story is particularly strong in cloud computing (Azure), where it now competes with pioneer Amazon in this area.³There remains a strong growth trajectory especially given a third of the world’s population is still not connected to the internet.

Figure 5. Microsoft: Sales by product area (2016-2026E; $bn)

Cintas is a century-old, Cincinnati-based, family company whose origins lie in the circus, which was shuttered by the Great Depression. Despite their misfortune, founders Doc and Amelia Farmer then saw a revenue opportunity in old towels tossed out by factories, which they would then launder and sell back to companies. Cintas, which is a newer position in the strategy, has since evolved into the US leader with a 40% market share for uniform rental services and expanded into diverse areas such as facility services, first aid and safety products.

Cintas’ success lies in its scale and ability to provide cleaning services that are cheaper even when compared to a company internalising the cleaning costs themselves. As the largest company in the market, it has the widest network of delivery services and clients, which enables it to generate better revenue and margins. Cintas has built a robust business model in which every facility operates as a separate profit center, incentivising employees through a generous profit-sharing program and company ownership. The thriving company continues to take market share from its competitors, as illustrated in figure 6.

Figure 6. Uniform Rental – Estimated Market Share (North America)

STANDING STRONG AGAINST NEW MARKET ENTRANTS

The hallmark of companies within the winner-takes-all paradigm is their ability to stand strong against new market entrants. These industry leaders not only establish themselves as dominant players but also create formidable barriers to entry for potential competitors. While the strategies employed by such companies may vary, they typically involve a combination of technological innovation, brand strength and expansion into adjacent industries.

As a major player in the pharmaceutical industry, Eli Lilly contributes significantly to the American economy and the country’s healthcare ecosystem. Despite the pharmaceutical industry’s risks associated with regulatory changes and market volatility, we believe Eli Lilly’s life-saving drugs in the areas of diabetes and obesity, which widely affects the American population, positions the company as an economic powerhouse and a key player in addressing public health challenges.

Figure 7. Microsoft versus Zoom and Slack: Relative Performance over 5 years.

Microsoft’s influence on the American economy is multi-faceted as its products and services are integral to various industries, from personal computing to cloud services. With its “as a service” model, Microsoft today is powering productivity for clients and needs which it previously could not serve, from front-line workers to heavy back-office IT loads.

Cintas’ growth from a small family-owned company to an industry leader in uniform rental services, plays a crucial role in supporting other businesses. By providing essential services such as uniform rental, facility services, and safety products, the company contributes to the smooth operation of a wide range of industries. The company’s business model has evolved to combine physical products with service offerings, better positioning its competitive advantages.

CONCLUSION

The concept of the ‘winner takes all’ holds true for certain companies that have not only survived but thrived in the face of competition. The stories of Eli Lilly, Microsoft, and Cintas highlight the multifaceted nature of success – a blend of innovation, adaptability and strategic vision.

While companies such as the ‘Magnificent Seven’ dominate their respective industries, the landscape is not entirely devoid of opportunities for new market entrants. The key lies in understanding that not all growth is created equal. Success is not just about entering the market but about continuously evolving to meet the changing needs of consumers.

Figure 8: Exposure to the Magnificent Seven: Comgest US Equities Strategy versus S&P 500

As investors navigate the stock market, the performance of companies like Eli Lilly, Microsoft, and Cintas can provide valuable insight. The winner may take a significant share, but the market itself remains a vibrant ecosystem where both new and venerable players can make their mark with the right blend of innovation and strategic thinking.

This is why Comgest’s US Equities portfolio is invested in a variety of sectors and a range of small-, mid- and large- cap companies driving growth in the US economy. As seen in figure 8, over three years, the performance of the Magnificent Seven is barely a quarter of our performance due to our diversification. Historically, it is this diversity that has helped us to reduce volatility and be resilient in a volatile market environment.

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Louis Citroën joined Comgest in 2019 and is an Analyst and Portfolio Manager specialising in US equities. Louis co-leads the management of the US Equity strategy and contributes strongly to idea generation, researching US companies across a broad range of sectors. Prior to joining Comgest, he was an Equity Analyst covering telecoms and media stocks at Arete Research in London for five years. Louis previously worked from 2011 as a Small Cap Equity Analyst at Financière de l’Echiquier and began his career in 2009 as a management consultant at Oliver Wyman in Paris. He holds a Master’s degree in Management from ESCP Business School (France, UK, Germany) and is a CFA^® charterholder.

Justin Streeter joined Comgest in 2015 and is an Analyst and a Portfolio Manager specialising in US equities. Justin co-leads the management of the US Equity strategy and contributes strongly to idea generation, researching US companies within a broad range of sectors. He previously worked at J. P. Morgan in San Francisco in 2013 as an M&A Healthcare Analyst and, prior to that, at J. P. Morgan’s London office in a similar role. Justin began his career with Macquarie Capital Partners (London) and Société Générale (Paris). Justin graduated from Emlyon Business School (France) with a Master’s degree in Management and Corporate Finance. He is also a CFA^® charterholder.

REFERENCES

1 Jacobs, Rose. Rising Corporate Concentration Continues a 100-Year Trend, Chicago Booth Review,15-Aug-2022.

2 https www nytimes com 2023 11 08 health fda tirzepatide obesity zepbound wegovy html

3 https www statista com chart 18819 worldwide market share of leading cloud infrastructure service-providers

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