World's richest man Bernard Arnault has some giant competition

European stocks have rallied this year after the continent’s energy crisis proved less severe than feared and the region’s firms narrowed a profitability gap with the US. A cohort of Europe’s most valuable companies is dominating and now account for more than one fifth of the Stoxx Europe 600 benchmark by value, note Goldman Sachs Group Inc strategists.

Goldman dubbed these nifty European super-stocks “the Granolas” in 2020, and the crunchy acronym has stuck even though the ranks of Europe’s most valuable companies has shifted a bit since then.

US’s most valuable companies are pushing the boundaries of artificial intelligence, the cynics will say, while Europe’s cater to people who splurge on Hermes International handbags and binge on Nestle SA KitKat chocolate bars, only to then require Novo’s diabetes and obesity drugs.

Yet European luxury-goods companies are overflowing with creative talent, while its pharmaceutical companies are at the cutting edge of science and invest heavily in research. ASML’s engineering feats are every bit as impressive as an iPhone.

The Granolas boast several other attractive traits. For one, their sales are growing remarkably quickly considering how large they are already.

LVMH’s first-quarter sales increased 17 percent thanks to rebounding Chinese demand, while cosmetics maker L’Oréal SA last week reported a 13 percent like-for-like jump in first quarter sales.

Earlier this month, Novo predicted 2023 sales would expand around 27 percent (at the midpoint of its range) while ASML last week reiterated a forecast for sales growth of more than 25 percent this year.

Most of their revenue is generated outside Europe and many of them occupy valuable niches:  Novo controls almost one-third of the global diabetes treatment market by value and its Wegovy is the first new obesity drug in years. ASML is the only company capable of producing extreme ultraviolet lithography machines required to inscribe miniscule chip features.

With demand often outstripping supply, they can charge high prices – the long wait for Birkin and Kelly bags reinforces Hermes’ mystique — hence their profitability tends to be more than robust. Operating-profit margins at both Hermes and Novo exceed 40 percent.

Luxury and pharma groups should also be relatively recession-resistant: inflation doesn’t trouble the wealthy as much, and people get sick  regardless of whether the economy expands or contracts.      

Any sign of deterioration in their earnings power or a rotation toward more cyclical companies could cause these European giants to underperform, notes Goldman. ASML shares dipped last week on worries about semiconductor industry spending cuts. Nestle has struggled to pass on rising costs, and Roche has lagged due to concerns about its product pipeline. And the market cap of GSK Plc — the G in Goldman’s Granolas — has shrunk to just £60 billion ($75 billion) following last year’s spinoff of its consumer healthcare business and litigation worries pertaining to a heartburn drug.

For now, though, Europe’s world-beaters are mostly sitting pretty. Arnault is right to toast his success.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Views are personal, and do not represent the stand of this publication.

Credit: Bloomberg