Market pressures can drive companies to innovate, but corporate innovation can also drive market value. One of the biggest drivers in how the market rewards companies and drives their stock prices higher is how well they can sustain innovation and invest in that innovation. Across industries, as companies successfully innovate, valuations tend to move higher. By identifying the companies the market is rewarding for continued success in innovation, we might be able to understand what kind of companies the market will reward in the future.
The GIM Institute (GIMI) and Valens Research worked together on this piece, leveraging GIMI’s deep insights in innovation and Valens knowledge of the UAFRS framework and corporate performance and valuation to identify great innovators who the market is rewarding for their innovation. We’ve found 10 unique companies across the global corporate universe that are worthy of highlight.
We identified these companies using a multi-step process:
- Identified firms with an excellent history of innovation, in products, processes, creating new markets and other areas.
- Reviewed that universe of companies to see which companies have been able to generate value in terms of innovation based on their UAFRS-adjusted Return on Assets (ROA) being well above their required rate of returns for a multi-year period of time.
- Verified those companies continued to invest in innovation and to grow, as identified by rapid investment in UAFRS-adjusted Asset growth into high ROA businesses.
- Identified which of those companies the market was rewarding for their innovation with premium valuations.
To read more about GIMI and Valens and the processes we use to analyze companies, read at the bottom of the article.
Below are the 10 unique companies:
Industria de Diseño Textil, S.A. (INDITEX)
Inditex has been innovating for over 30 years in terms of both the brands they are creating and more importantly the processes they’ve created to manage their supply chain. Inditex is one of the originators of “Fast Fashion,” an effort to solve the issues of inventory glut and design risk that so many fashion houses and retail stores face. Inditex designs clothes not on a seasonal schedule but with much shorter windows, letting customer demand at stores dictate which products they increased volumes of. Inditex has been able to operate with substantially better asset turnover and higher ROA’ than peers, giving it a competitive advantage thanks to this supply chain and manufacturing innovation. Inditex has not just been a process innovator. Over time they have created a multitude of unique and brands which they have applied their process to, starting with Zara, but expanding with Tempe, Pull and Bear, Lefties, Bershka, Zara Home, Oysho and Uterque, and acquiring brands like Massimo Dutti. Thanks to this success, the company has consistently posted strong performance, trades at 4.57x its book UAFRS-adjusted asset values and the company’s stock is up 145% in the past 5 years.
The Priceline Group Inc.
You may ask how a company in an industry as fragmented as the online travel industry, with names like Booking.com, Priceline.com, Agoda.com, Kayak.com, Cheapflights, Rentalcars.com, Expedia.com, CheapTickets.com, Hotels.com, Hotwire.com, Orbitz.com, Travelocity.com and trivago.com, could truly have differentiated itself enough and innovated enough to beat its peers. However the space is truly a duopoly, led by Priceline and Expedia. They have tricked consumers in to thinking they have choice, but all of those websites listed above are controlled by Priceline and Expedia. Priceline has innovated in two ways. First, they have identified specific customer types and tailored an offering specifically for that kind of customer. Also, they have designed a back-end of their platform to be able to power each of those offerings, limiting their necessary invested capital for their strategy. By pursuing this strategy, and acquiring other companies to then have powered by their back end, they have been able to produce phenomenal returns, producing a UAFRS-adjusted ROA that was 500% last year, when the corporate average return in the US is close to 10%. The market has rewarded them, leading to the company trading at a multiple that is 103x their book UAFRS-adjusted asset values, and causing the stock to rise 145% in the past 5 years.
Fevertree Drinks Plc
Fevertree Drinks has not been around for long, but they’ve made the most of their time in the beverages industry to make a big impact. Growing revenues by over 40% for 4 years in a row in the stodgy fizzy beverage industry can make the competition look rather flat. After helping move the Plymouth Gin brand into the premium market, Fevertree co-founder Charles Rolls realized there was no real offering in the premium mixer space to pair with. Tapping into the consumer demand for a premium cocktail, and the move towards natural ingredients, Fevertree started innovating beverages to be used for mixers and consumption at a premium price point. Since creating their first product, Fevertree has continued innovating new products to take new markets in the premium beverage space, now offering 8 different products to pair perfectly in a premium liquor in a mixed beverage. Their success in innovating a new niche market and owning it has led to UAFRS-adjusted ROA that is impressive even for the high Adjusted ROA beverage industry, with a 92% Adjusted ROA. The market has rewarded this impressive performance, with the company trading at a 62x multiple of their UAFRS-adjusted book assets, and with the company’s stock up 800% since they IPO’d in late 2014.
Veeva Systems Inc.
The healthcare industry is a heavily regulated space, and the pharmaceuticals industry sales process is one particularly heavily regulated area. As this industry grew more regulated over the years, the risk/reward of pharmaceutical sales continued to skew more toward the risk side. Each time a sales person went out to contact customers, if there was any view of impropriety, the risk for the drug manufacturer was sizable. Also, with the proliferation of offerings and business models, the ability to properly target in a field of healthcare professionals that was growing more diverse in specialties and business situations was essential. Within such a challenging environment, Veeva saw an opportunity, an opportunity that has helped them drive annual revenue growth of over 30% over the past 6 years. If they could provide a customized customer relationship management offering tailored to this space, and all the regulatory requirements that are needed, they could reduce the risk and improve the returns for pharmaceutical and biotechnology companies. Identifying and profiting from this niche has helped them generate sustained +35% Adjusted ROA over the last 6 years. However, the company has continued to innovate. They’ve used their position inside these companies to expand to other industry specific pain-points, including their Veeva Network solution for drug master data management to track which customers are using their products. They also expanded to custom offerings such as Veeva Vault, to help management track their clinical data. This successful innovation of new products to solve their customers pain points has also led to the company continuing to grow UAFRS-adjusted Assets by +30% a year over the past several years. The market has rewarded this impressive performance, with the company trading at a 48x multiple of their UAFRS-adjusted book earnings, and with the company’s stock up almost 200% from trough levels in 2014.
The Human Genome Project was declared complete in 2003, but the market leader in genome sequencing didn’t wait for a whole new market to arrive before they started developing the tools needed. Illumina, the market leader in genome sequencing products, has seen revenue grow by 100x since the Human Genome Project wrapped. They’ve achieved this through consistently innovating on new solutions, investing more than 15% of their revenue in R&D each year over the past 19 years. This includes strategically partnering with academic institutions, and industry thought leaders to understand what customer needs were, and creating new product lines over and over to star at the front of innovation in their market. Thanks to this commitment to innovation and success in execution, the company has able to sustain a +20% UAFRS-adjusted ROA each year over the past 10 years, while consistently investing and growing by more than 15% a year. The market has recognized this innovation and continues to pay a premium for the company, with the company trading at a 29x multiple on their UAFRS-adjusted earnings, highlighting market expectations for continued expansion. The company’s strong innovation track record is also why the company’s stock is up from $1.20 in April 2003 when the Human Genome Project finished, to $177.31 today.
Douglas Dynamics, Inc.
Douglas Dynamics has successfully buried its competition in the snow they’ve helped clients remove from streets, parking lots, driveways, walkways and anywhere else. It’s hard to sustainably own 50% market share in your niche without understanding client needs and meeting them. Douglas has used several avenues of innovation to help them sustain a UAFRS-adjusted ROA of over 20% each year for the past 9 years. First, they have identified overlapping niches for their products, to be able to innovate around things like new products that meet two different customer goals, such as snow removal and ice removal, to meet customer needs and take market share. They’ve also been able to take new innovations they’ve had in one market, such as the commercial market, and expand them into different customer bases to drive growth and market share. Thanks to the company’s strategic innovation and acquisition strategy, the market has paid a premium for the company, with the company trading at 4.1x their UAFRS-adjusted asset base. The company has also been rewarded with 158% stock price appreciation since the company went public in 2010 thanks to their strong innovation strategy.
Self-driving vehicles are quickly becoming a reality of the present, as opposed to a hope for the future, and Mobileye is a major reason for this. Mobileye’s initial innovation centered around taking a complex system, where most innovators in the accident detection business had focused on complex multiple lense and radar solutions in their offerings, and identifying a way to provide better quality with a more simple (single lense) solution. Then Mobileye kept on innovating, expanding the functionality of their technology to facilitate features such as adaptive cruise control, lane detection, and other functionalities, continuing to innovate around their core offering. They continued to expand their innovation, as they partnered with Tesla to develop Tesla’s self-driving solution. Mobileye’s commitment to, and success in, investing has not just been clear in their products, but in their performance too. The company has consistently generated a UAFRS-adjusted ROA better than 25%, which has been better than 50% in the last 2 years, and has never seen UAFRS-adjusted Asset growth drop below 25%. The market has rewarded the company’s success in investing in innovation, as the company currently trades at a 55x UAFRS-based multiple to earnings, and Intel clearly has recognized the company’s innovation, as they have announced they plan to acquire the company for a 34.4% premium to the company’s stock price the day before the acquisition was announced.
Palo Alto Networks, Inc.
Palo Alto has been at the forefront of firewall protection innovation since the company was founded in 2005. Since then, they have consistently layered new innovation to solve incremental problems as security risks on the internet grow. The company has steadily expanded their suite of offerings from the next generation firewall they started with to the Mobile Security Manager to be able to apply firewall-level protection to mobile devices, down to TRAPS, a client end-point protection system. By taking a similar need, and finding new niches and thereby new needed solutions for that pain-point across different markets, Palo Alto has consistently been able to grow their business, with annual UAFRS-adjusted Asset growth of over 35% over the past 6 years. Their successful innovation has enabled them to produce growth and have stable UAFRS-adjusted ROA of better than 25%, even as many competitors, like Checkpoint, have steadily seen their returns compress due to competitive pressures.
IPG Photonics Corporation
IPG has successfully parlayed an expertise in lasers into global leadership in innovation for uses of lasers across end markets as broad as materials processing (cutting), entertainment, biotechnology and communications. IPG has taken their core expertise in lasers, and by working with their customers, they’ve identified new areas of need and new solutions they can offer. IPG’s success in innovating has enabled them to consistently generate a +20% UAFRS-adjusted ROA over the past 7 years, and to triple sales over that same time period. The market has recognized IPG’s excellent innovation and growth, and rewarded them with 739% stock appreciation since 2010.
Broadcom Limited (a combination of Avago Technologies and Broadcom Corporation post-merger in 2016) has successfully sustained robust +15% Adjusted-ROA and +10% Adjusted Asset growth over the past 10 years in the hyper-cyclical and competitive semiconductors industry by being committed to continuously innovating and recreating their business. The legacy Avago business has repeatedly sold mature businesses that could begin to fade to competitors over the past eight years, while continuously seeing revenues grow, because they have successfully identified businesses and products to grow into to fuel their growth. The company sold their I/O solutions business in 2005, to invest in optical and acoustic businesses and then identified the opportunity to move towards storage and data center solutions, and made more investments in that area through 2013. They subsequently sold their SSD business and began investing in integrated circuits before combining with Broadcom, who had a strength in mobile and Internet of Things. Legacy Broadcom had followed a similar path, steadily staying ahead of trends in the semi space through their investments to position themselves consistently for growth and strong profitability. Absent the company’s successful vision on innovation, they would have suffered the cyclicality the rest of the semiconductor space has faced. But thanks to their strong strategic vision and innovation, the company has seen their stock price appreciate by 1,351% since the company IPO’d in 2009.
Successful innovation is rewarded by the market
As this small subset of great innovators highlights, smart investment in innovation can drive growth, extend periods of superior profitability, and is rewarded by the market. Going forward, GIMI and Valens will continue to highlight successful innovators, focused across the market sectors, to highlight why innovation is so important to creating value for a company.
List of Top 10 Corporate Innovators The Market is Rewarding:
- Industria de Diseño Textil, S.A. (INDITEX)
- The Priceline Group Inc.
- Fevertree Drinks Plc
- Veeva Systems Inc.
- Illumina, Inc.
- Douglas Dynamics, Inc.
- Mobileye N.V.
- Palo Alto Networks, Inc.
- IPG Photonics Corporation
- Broadcom Limited
Business innovation has continued to gain meaningful significance in organizations as a way to grow. This is evidenced by the increasing number of publications on innovation, innovation management, business innovation strategy and the creation of diverse roles required to manage innovation. However, many efforts to date, to both certify and study innovation, have left the discipline of innovation fragmented and overly diverse.
Founded in 2009, the Global Innovation Management Institute, GIM Institute or GIMI (pronounced as \ˈji-mē\) in short, is the global nonprofit standard certification board for innovation and innovation management. GIM Institute was initiated by a group of chief innovation officers, innovation executives, academics and consultants from around the world. GIM Institute’s worldwide advocacy for making innovation a professional business discipline is reinforced by our globally recognized standards and certification program, extensive academic programs, communities of practice, and professional development opportunities.
Over 200 Fortune 500 companies have participated in developing competencies in innovation based on the innovation frameworks and processes of GIM Institute. Companies such as Johnson Controls, Cigna, Natura, Verizon, EmiratesNBD, BAE Systems, Bunge, P&G, Eastman Chemical, Alibaba and many others around the world have been trained. Additionally, over 10,000 MBA students worldwide have developed mastery of innovation through the structured courses and manuals of GIM Institute. We have delivered innovation training at top MBA universities such as Yonsei University, Rotman School of Management, Singapore Management University, Thunderbird School of Global Management and Hult International Business School.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that. As such, Valens has been a key adopter of Uniform Adjusted Financial Reporting Standards (UAFRS), and has leveraged it to help improve insights into corporate profitability, valuation and credit risk analysis.
UAFRS is an alternative set of standards for financial reporting aimed at creating more reliable reporting of corporate financial activity.
UAFRS does not require management teams to restate their financials. Instead, it adjusts the reported financial statements to create as consistent report of financial activity as possible, free of distortions from changing or inconsistent financial reporting policies from year to year or across firms.
The term “uniform” suggests that all financial reporting rules should be made consistent for analysis of financial reports. This desired uniformity reflects that GAAP and IFRS financials are an antithesis to uniformity in financial statement reporting.
This specifically highlights the extensive research and documentation of the inconsistencies, misclassifications of categories and terminology, and lack of reliability of as-reported financial statements under GAAP and IFRS. (Generally Accepted Accounting Principles in the United States and International Financial Reporting Standards.)
The term “adjusted” suggests that the process of achieving UAFRS is by adjusting the as-reported financial statements by disassembling and then re-building the financial statements with an entirely consistent set of accounting rules.
More detailed disclosure of financial activity by management is desirable, however it is not necessary to achieve significant benefits from simply adjusting the as-reported GAAP and IFRS financial statements into UAFRS-based financial statements.