Lenders, Homebuilders Prove Profitable Niches Remain

By RiSHAWN BIDDLE

Staff Reporter

Even in troubled times, there are places to make money.

Homebuilding, banking and some specialty retail segments were among the most profitable local industries over a three-year period, according to a survey of L.A.’s 200 largest public companies.

The survey, conducted for the Business Journal by Duff & Phelps LLC, showed that only 71 of the top 200 companies mustered an average return on equity of 10 percent or more for the three years ended in 2002, compared with 77 firms reaching that benchmark in 2001. (Only 179 companies were ranked; companies that have negative common equity for any of the three years were not included.)

Only 15 companies posted three-year averages greater than 20 percent; 17 did so last year.

Return on equity is earnings divided by shareholders’ equity the portion of company assets that would be left for shareholders after debt and other liabilities were subtracted. ROE is one way to measure how well a company is reinvesting its income to generate more earnings. An ROE less than 10 percent is generally considered poor.

Leading this year’s list was athletic gear retailer Big 5 Sporting Goods Corp., which went public last June after passing into the hands of a series of owners, including now-defunct drug retailer Thrifty Corp. and buyout firm Leonard Green & Partners.

El Segundo-based Big 5 displaced Newhall Land & Farming, the No. 1 for each of the last two years with a whopping 2002 return on equity of 592.7 percent. In 2000 and 2001, Big 5 posted negative return on equity.

For most companies, 2002 was a difficult year in terms of ROE. More than half of the members of the LABJ 200 Index posted 2002 return on equity below their three-year average.

A number of local companies that had posted strong ROE figures in the past faltered last year.

For example, 99 Cents Only Stores’ 14.9 percent return on equity in 2002 is below its three-year average of 16 percent, while shoe maker Skechers USA Inc.’s ROE of 18 percent in 2002 is more than 5 points below its three-year average of 23 percent.

Newhall Land, meanwhile, posted a 2002 ROE of nearly 30 percent, but that’s still nearly 25 percentage points below its three-year average return of 54 percent. Contributing to that decline: A 46 percent drop in industrial and commercial land sales and a four-fold increase in costs related to residential land sales, all of which cut into profits.

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One reason for Big 5’s strong performance was a 7 percent increase in sales, thanks to the addition of 15 new stores. Sales per square foot rose slightly to $227, the fourth consecutive year of such increases.

Debt and interest rate reduction also played a role. Last year, Big Five reduced its total debt by 18 percent, to $125 million, by redeeming its senior discount notes. With interest rates decreasing as well, interest payments fell by 10 percent, contributing to profits of $19.1 million in 2002, a 27 percent increase versus 2001.

Resurgent shoemaker K-Swiss Inc. boosted its place on the profits list, moving up to the No. 8 spot (from 14) with a three-year average return on equity of 23 percent.

Benefiting from an interest rate-fueled housing boom, two homebuilders ranked in the top 15. Ryland Group Inc. moved up to No. 10 from the No. 19 spot thanks to a three-year average return of 23 percent; for 2002, it posted profits of $186 million, a 40.5 percent increase over 2001.

Bellwether KB Home Corp (No. 12), whose 2002 profit rose 47 percent to $314 million, garnered a three-year average return of 22 percent.

Meanwhile, regional banks kept up their strong performance. While none made the top 15, banks were the largest group of companies that garnered double-digit returns.

Among the 12 banks (out of 71 firms) generating double-digit returns was Nara Bancorp Inc. (No. 23), L.A.’s third-largest Korean bank, with a three-year average return of 17.2 percent. East-West Bancorp Inc. (No. 26) saw a three-year average return on equity of 16.9 percent, while Pacific Crest Capital’s (No. 27) three-year average return of nearly 17 percent beats much larger firms such as Hilton Hotels Corp. (10.5 percent).

For most companies, last year proved to be a down one.

Defense firm Teledyne Technologies produced a 2002 ROE of 14 percent, far lower than its 43 percent three-year average return despite a four-fold increase in last year’s net income. The reason: The company’s 2000 ROE was a whopping 110 percent due to the sale of two businesses; the company took a $26 million restructuring charge a year later which slashed net income by 79 percent.

Then there’s biotech giant Amgen Inc. It generated a minus 7.6 percent equity return versus its 17 percent three-year average. Amgen took a $3 billion write-off of research and development costs when it acquired biotech firm Immunex last year. That led to a loss of $1.4 billion on sales of $5 billion.

Just 56 of the 200 largest L.A. firms posted annual returns on equity that was greater than the three-year average.

One of them was dialysis service provider DaVita Inc., whose 266 percent return helped bring its three-year average from a negative 4.4 percent last year to 82.5 percent last year. The company recovered from several years of wrenching restructuring after it went on an acquisition spree during the 1990s.