High-quality companies often exceed expectations and offer greater long-term value, making them a more reliable investment than chasing short-term market trends. We’ve screened a selection of European companies for European investors that have the potential to succeed in the long term.
On our list, the industrial sector is the most strongly represented sector with 24 companies, but consumer staples and healthcare are also well represented. UK stocks make up the largest number of European quality companies, followed by France and Switzerland.
We have compiled a list of the European companies covered by our analysts that have created wide moats between themselves and their competitors in the industry—and which we expect to generate attractive returns over the next 20 years that exceed their expenses. These companies will be able to reliably generate returns for investors over a long period of time, even while investing in their growth.
A company’s longevity and competitive advantage are inextricably linked to sustainability. That’s why our analysis also considers environmental, social and governance (ESG) factors. The best companies have business models that allow them to effectively engage with evolving ESG issues that could significantly impact their business. Cutting costs or taking on excessive risk may work in the short term, but these tactics won’t deliver lasting success for a company.
The companies on our list also have predictable cash flows (the amount of money coming in and going out of a company), which allows our analysts to estimate the companies’ intrinsic values with relative accuracy. These companies also make smart decisions about how they manage and invest their money.
We’re not telling you to immediately buy shares in every company on this list. Even the best company can be a bad investment if you pay too much for your share of the company. The share prices of many companies on this list overestimate their true value, so it may not be the right time to buy. Nevertheless, we believe these companies are worth a look for any equity investor — and we’ll help you keep an eye on this watchlist.
We have grouped the companies on this list according to the sectors in which they operate:
The industrial sector is the most strongly represented sector with 24 companies. But consumer staples and healthcare are also well represented with 11 and 10 companies respectively. By far the largest number of companies are based in the United Kingdom (16), followed by France (13) and Switzerland (10). Only seven companies from Germany made it onto our list.
Commodity companies are companies involved in the extraction and production of raw materials that are important for industries such as manufacturing or construction. The performance of these companies is usually closely linked to the economic cycle, as the demand for raw materials generally increases when the economy is growing.
Companies in this sector produce goods and services that are considered non-essential, i.e. they benefit when consumers have extra income to spend. This includes companies in industries such as automotive, retail, leisure and hospitality. The performance of these companies is closely linked to the economic cycle, as their products and services tend to be in higher demand when the economy is strong. For example, you will find two French luxury brands on our list.
The financial-services sector includes banks, asset managers, financial research and data companies, credit services, investment brokerage firms, stock exchanges, and insurance companies. Just as the services they supply differ, the companies below fend off competition in distinct ways. The most common characteristic among them is that their customers face relatively high hurdles when they want to switch service providers.
Many companies in this sector are economically sensitive with interest rates, the level of the stock market, and financial health of consumers and businesses affecting results.
Companies in this sector provide services that consumers always need, so changes in the economy, like downturns, generally don’t have much impact on the sector. That’s where the “defensive” of consumer defensive comes in: The sector isn’t impacted by the ups and downs of the economy. Many of the companies below have strengthened their positions by developing a strong relationship with shoppers and offering either lower prices than their competitors or a strong brand identity that justifies higher pricing.
Healthcare is another sector generally seen as uncorrellated to the performance of the wider economy. The healthcare sector includes companies in the fields of biotechnology, diagnostics and research, pharmaceutical manufacturing and health information services.
This sector comprises companies that manufacture machinery, hand tools and industrial products. It also includes aerospace, defense, and transportation companies. More companies from the industrial sector have made it onto our list than from any other group.
Companies in the technology sector are involved in the design, development and support of computer operating systems and applications. This sector also includes companies that manufacture computer equipment, data storage products, networking products, and semiconductors. Two European technology companies have made it onto our list.
Best European Companies to Own: Methodology
The companies on this list are covered by Morningstar Research Services’ equity analysts and are based in Europe. Within that coverage list, the best companies meet the following criteria:
The Morningstar Economic Moat Rating summarizes the length of a company’s competitive advantages. An economic moat is really a structural feature allowing a firm to generate excess profits over a long period of time. If Morningstar Research Services believes that excess returns will persist for 20 years or more, that company earns a wide economic moat.
The Stock Capital Allocation Rating is an assessment of the quality of management’s capital allocation, with particular emphasis on the firm’s balance sheet, investments, and shareholder distributions. Capital allocation is judged from an equity shareholder’s perspective, considering companies’ investment strategy and valuation, balance sheet management, and dividend and share buyback policies on a forward-looking basis. A company can receive an exemplary, standard, or poor capital allocation rating.
The Fair Value Uncertainty Rating represents the predictability of a company’s future cash flows and, therefore, the level of certainty in the fair value estimate of that company. The uncertainty rating for a company can be low, medium, high, very high, or extreme. It captures a range of likely potential intrinsic values for a company based on the characteristics of the business underlying the stock, including such things as operating and financial leverage, sales sensitivity to the economy, product concentration, and other factors. The more predictable cash flows, the smaller the range of potential intrinsic values, the lower the uncertainty.
Exchange rates as of 24 September 2024:
EUR/CHF: 0.9412This article has been adapted for the European market and is based on The Best Companies to Own: 2024 Edition, which Margaret Giles has compiled for investors in the US.
The author does not own any shares in the securities mentioned in this article. Find out more about Morningstar’s editorial policy.
