Earnings Rebound Generates Optimism About L.A. Firms
By KATE BERRY
Staff Reporter
If investors had any question about which direction earnings are going for L.A.-based companies, they only need to look at the stock prices of the 10 largest companies in the LABJ 200 index.
Since July, five of the 10 have seen their stocks hit 52-week highs, including Amgen Inc., Computer Sciences Corp., Hughes Electronics Corp., Univision Communications Inc., and Walt Disney Co.
For most of those companies, analysts have been raising their estimates for the second half of the year.
The pattern holds true when the list is expanded to the top 50 companies in the LABJ 200. More than half or 28 have hit new 52-week highs since mid-July.
Only 11 of the top 50 reported decelerating earnings in the second quarter.
“I believe that the economy is rebuilding and the securities markets are going to move in front of that,” said Ed Wedbush, president of Wedbush Morgan Securities in Los Angeles.
He remains particularly bullish on certain sectors, including technology firms doing business in China, furniture companies and the downtrodden pharmaceutical industry.
Nationally, economists are generally encouraged about the improving outlook, but many remain cautious about third quarter corporate earnings.
The significant run-up in the stock market since March has some of them optimistic that an economic turnaround is already underway. Yet, because Wall Street has seen so many false starts, others believe earnings are headed for a bumpy ride with only modest profit growth.
In the just-completed second quarter, earnings at companies in the Standard & Poor’s 500 stock index rose 9.6 percent compared with year-earlier results, according to Thomson First Call, which tracks earnings estimates.
Third-quarter earnings for the S & P; 500 are expected to jump as much as 14.1 percent compared with the year-earlier quarter.
“It’s really quite striking the improvement we’ve seen in most economic statistics in the last six weeks,” said Donald Straszheim, president of Straszheim Global Advisors in Santa Monica. “The bad side of the jobless recovery is there are no jobs. But the good side is that companies have their costs down so any pickup in earnings goes to profits.”
Pockets of strength
Still, a few local companies have been struggling with slow demand. That includes auto wheel maker Superior Industries International Inc., video game maker Activision Inc. and networking firm Tekelec. All three companies failed to meet second-quarter earnings estimates.
On the other hand, back-to-school sales during the summer have been the strongest in more than a decade, said Steven Schuster, a portfolio manager at Cramer, Rosenthal McGlynn in New York who focuses on small- and mid-cap stocks.
He expects retailers to show improved earnings in the third quarter because of stronger sales before Labor Day. “The beleaguered retail sector is showing signs of life primarily because of the back-to-school trend,” he said.
In particular, he likes Guess Inc., the Los Angeles clothing manufacturer that has struggled over the past few years. Guess stock is up 60 percent in the past year, to more than $8 a share.
Hot Topic Inc., the retailer focused on the teenage set, posted a 36 percent jump in second-quarter net income and has seen its stock more than double, to $35.40 a share, as of the Aug. 28 close.
One of the standouts in the second quarter was United Online Inc., the Internet service provider that recently introduced high-speed dial-up access for $14.95 a month.
The Westlake Village company has posted three consecutive quarters of double-digit earnings growth. Its stock has more than tripled in the past year, to $36.58 as of Aug. 28.
“We are the Dell computer of the Internet sector,” said Mark Goldston, president and chief executive, who noted that United Online now has a $1.7 billion market capitalization compared with just $72 million two years ago.
While economists believe that business continues to improve, particularly since the disastrous first quarter, the question is whether it has improved enough.
Luke Mazur, chief investment officer at HighMark Capital Management Inc., a unit of Union Bank of California, projects average year-over-year earnings growth of just 6 percent. Given that the stock market typically anticipates events six to 12 months in advance, “there is a heightened level of optimism that the turnaround is finally here,” he noted in a recent report. But he added, “We would not argue that the conditions are present for a sustainable turnaround.”
David Bain, managing director and senior analyst at Seidler Cos., said some market watchers are writing off California because of the budget shortfall and the gubernatorial election. But he believes the housing market will continue to sizzle and there are signs of a recovery in technology.
He also expects an improvement in the labor force, particularly in the hard-hit agriculture sector.
“In the near term, we see third quarter earnings looking at least stable if not better than what many analysts currently predict,” he said.
