In the span of 12 months, public markets went from celebrating their best year since the tech boom to a mess, as investors bemoaned how badly they had misjudged the potential for easy credit to cause massive mischief.
Now, U.S. public markets are about to end the most tumultuous year since recovering from the dot.com crash. And Los Angeles companies are feeling more than their share of the pain some of it of their own making,
Both Countrywide Financial Corp. and Mattel Inc. found themselves at the epicenter of two of the biggest business stories of the year: Countrywide for its loose mortgage lending practices and Mattel for its sale of lead-tainted toys manufactured in China.
In all, the combined market capitalization of the roughly 200 companies that comprise the LABJ Stock Index declined by around 17 percent to $435 billion, as the big names stumbled and others were taken private before the widening credit crunch slowed M & A; activity.
“Los Angeles is a microcosm for the overall market,” said Scott Adelson, senior managing director for investment banker Houlihan Lokey. “We were starting to wonder whether there was going to be any big public companies left here with all the private equity-funded acquisitions taking place. Then in August it all came to a screeching halt.”
Going into the last trading week of 2007, the LABJ Index was down more than 11 percent for the year. In comparison, the Dow Jones industrial average was up 7 percent as of Dec. 19. That’s a significant turnaround from 2006, when the local index ended the year up 17.5 percent, ahead of both the Dow and Nasdaq.
Part of that resulted from the loss of some of L.A.’s largest public companies after they were acquired by private equity firms. Standing out among them were Spanish language broadcaster Univision Inc., which stopped trading in March, and Hilton Hotels Corp., whose acquisition by Blackstone Group closed in October. But a bigger cause were the giant corporate missteps and market malaise stemming from the widening credit crunch.
Toymaker Mattel gained more than 44 percent in 2006 despite strong challenges to its Barbie franchise, but this year it was forced to make several product recalls after lead-based paints were found in several of its made-in-China product lines. Mattel so far is down 13 percent for the year.
And product safety concerns also took chunks out Amgen Inc., when its top-selling anemia drug was suspected of accelerating tumor growth when overused. The Thousand Oaks-based biotech’s market cap is down 33 percent for the year.
But even far more wide-reaching in its scope were the problems that beset Countrywide, Indymac Bancorp Inc. and other local lenders, as well as home builders such as KB Home. Those companies saw their market caps fall by more than half as home sales slowed and prices fell, causing the subprime lending market to virtually implode which started the credit crisis.
Fremont General Corp., a smaller yet potent player during the subprime frenzy, is now a shell of its former self. The financial services company retained its retail banks but was forced to shed its mortgage and commercial lending units to cover its subprime losses.
“Bank stocks in general are down double-digits, even among the community and regional banks that didn’t have significant exposure to sub-prime. People are just avoiding the entire sector right now,” said Joe Gladue, who covers the financial services industry for L.A.-based B. Riley & Co.
Recession’s Spectre
Of course, it wasn’t all bad news.
Occidental Petroleum Corp. and Northrop Grumman Corp, among others, rode the waves of higher energy prices and increased defense spending to enjoy a healthy appreciation for the year. Occidental is up a robust 47 percent, with Northrop gaining 21 percent; shares trade in the mid to high $70s for each.
L.A.’s apparel and entertainment sectors, both largely dependant on discretionary consumer spending, had more of a mixed year. Sketchers Inc. saw triple-digit growth last year by anticipating the latest casual shoe wear trend, but is down this year by almost a third. Mall retailer Hot Topic Inc. shed 59 percent as its goth-clad star faded among teens and a new, brighter look has yet to take hold.
Jeff Van Sinderen, B. Riley’s retail analyst, said the apparel and retail markets in general were running against an economic headwind in 2007 that likely will get worse next year. Retail chain consolidation, such as the demise of the Robinsons May chain in Southern California, also has resulted in fewer companies for apparel manufacturers.
The stock of nearly every local public apparel or accessory maker is down for the year, with premium denim maker True Religion Apparel Inc. and retailer-apparel maker Guess? Inc. among the only standouts.
“When you look at consumer sentiment and all the doom and gloom out there whenever you turn on the TV, that’s going to make consumers less likely to go out and splurge on premium denim,” Van Sinderen said.
Walt Disney Co., L.A.’s largest company by market capitalization, is down five percent for the year, which at least one analyst ascribes to Wall Street’s anticipation of at least a mild recession next year. In addition, both Disney and Dreamworks Animation SKG Inc. are being dragged down by the ongoing Hollywood writer’s strike.
“Both companies really have limited to no exposure to the strike right now, particularly compared to a company like CBS, yet you could say that Dreamworks is down in sympathy with the writer’s strike,” said David Miller, an L.A.-based entertainment industry analyst for SMH Capital.
But even among downtrodden public companies there is hope. Consider Amgen. It turns out that a hint of a recession could bode well for the company.
“Amgen becomes more attractive in a recession because they’ll continue to have strong sales. Health care in general holds up well in a recession,” said John McCamant, editor of the Berkeley-based Medical Technology Stock Letter, who is generally not a fan of Amgen stock.
Making amends
That sentiment might even apply to Mattel, which recalled almost 20 million toys made in China. Mattel appears to have contained much of the damage, with Chief Executive Robert Eckert stepping up oversight of its overseas factories and taking every opportunity to apologize for the incidents.
The bigger unknown, though, will be how it all turns out for Countrywide, the country’s largest mortgage issuer, and other local lenders. The Calabasas company rode the housing boom to Wall Street heights, and it’s learned that’s also a long way to fall.
Like Eckert, Countrywide’s co-founder and Chief Executive Angelo Mozilo has acknowledged his company made errors in judging the housing market, despite decades of experience.
But those admittances have only gone so far, and with Wall Street investment banks still writing off billions of dollars of mortgage-related bond debt, 2008 may play out little better.
