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Saturday, Jun 25, 2022

Worth a Look

With Los Angeles County’s unemployment rate stuck above 12 percent, the real estate market still in the tank and retail sales at historically weak levels, the fundamentals for local companies would not appear favorable.

You just wouldn’t know that looking at the local stock tables.

The year turned out surprisingly well for investors in area companies, as the LABJ Stock Index of local companies rose more than 11 percent. That’s not as good as last year’s 21 percent rebound, but it’s slightly more than the Dow Jones industrial average. What’s more, nearly every industry shared in the gains.

“There’s no question we’re seeing a dichotomy between the fortunes of Wall Street and what’s going on with Main Street,” said Rich Barnett, chief investment officer for the western region at Chicago-based wealth management firm Northern Trust Corp.

Low interest rates that made bonds less attractive, low valuations at the start of the year and the budding recovery all contributed to the rise of the broader markets. But other factors are at work in Los Angeles, especially the strength of the technology sector and the fact that many local companies aggressively pursue foreign sales.

“Relative to other states, California companies benefit from their ties to some emerging markets such as Latin America and Asia,” said John Ahn, the head of corporate finance at West L.A.-based B. Riley & Co. Inc. “These two regions have really had a large part in fueling growth in the world economy over the last year.”

Consider the fortunes of two local companies: Guess Inc. and J2 Global Communications.

The sharp pullback in consumer spending should have hammered Guess as it has many other apparel companies. But the clothing company opened 84 stores around the world in the past year, including in Asian countries with booming economies. The result: Guess recently reported revenue exceeding analysts’ expectations and shares are up more than 17 percent on the year.

“Guess is hitting it out of the park,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking company. “And a huge component of that is their international sales.”

Meanwhile, local tech companies have seen their cumulative share prices soar more than 40 percent this year as the sector has rebounded sharply.

Internet fax company J2 Global Communications is a typical example. Like a lot of large companies, it had been sitting on a substantial cash reserve. But as the sector has come alive, J2 has used that cash to buy up competitors. With its most recent $213 million acquisition of Ottawa, Canada-based Protus IP Solutions Inc., J2 Global has emerged as the dominant player in the Internet fax market. As a result, its stock has soared 47 percent.

“Los Angeles has a fair number of companies that just happen to be in the hot sectors right now. And hottest of all is technology,” Barnett said.

Other local companies riding the technology wave include El Segundo chip maker International Rectifier, which has retooled to focus on low-margin chips and new markets, especially for autos. That put the company in prime position to benefit from the recent global surge in demand for chips, leading to revenue that exceeded expectations and a 34 percent rise in share price. Calabasas-based Ixia, which makes equipment that tests the capacity of communication networks, has seen its share price more than double.

Other surprises

More startling is the success of local companies in industries that generally have not fared so well. A prime example is real estate. After a temporary stimulus of tax credits for home purchases expired, the residential real estate market went back in the doldrums. And the commercial real estate market remains moribund.

But shares of L.A.’s major real estate companies enjoyed a banner year as shareholders’ worst fears of another complete real estate collapse didn’t materialize. Full service commercial property companies fared quite well, including downtown L.A.’s Thomas Properties Group Inc., which saw shares rise 43 percent. Although slammed by the real estate collapse, Thomas Properties didn’t fold. The company restructured its debt and is now focused on two megaprojects: an $800 million office complex in Universal City and a $1 billion project on the site of the Wilshire Grand Hotel in downtown.

Of course, some local real estate companies are still hurting. Homebuilders KB Home in Westwood and Calabasas-based Ryland Group have seen their share prices continue to decline, with Ryland’s stock down nearly 19 percent.

Meanwhile, the shares of local manufacturing companies also fared well, despite the difficulties and downsizings that took place across the sector. A weaker dollar has helped manufacturers that export their products, making those products cheaper in foreign markets. Reflecting that are exports at the ports of Los Angeles and Long Beach, which are on a near-record pace this year.

But other manufacturers simply hit their stride. El Segundo toymaker Mattel Inc. came out with its Monster High line of teenage dolls that turned into a big hit among the teen crowd and was a key factor in driving up shares 27 percent. The company is still in litigation with Van Nuys’ MGA Entertainment over the disputed line of Bratz dolls. However, Mattel’s diverse product line and shrewd marketing decisions have fed investor confidence.

Big is better?

Other large cap companies also saw increases in their stock prices. Burbank-based Walt Disney Co.’s stock is up nearly 15 percent after the company sold its Miramax film unit; signed a TV-streaming deal with Netflix; and saw some of its releases turn into hits, such as current release “Tangled.”

The stock of Westwood’s Occidental Petroleum Corp. has risen 16 percent as oil prices have steadily increased in recent months. Shares of El Segundo’s DirecTV are up 19 percent as it has added more customers than forecast and solidified its position as the nation’s premier satellite TV provider.

“Larger companies have more cash to hand, can get credit more easily and have more exposure to booming international markets,” said Dennis McCarthy, president of West L.A. financial services firm Aries Management Inc.

Only one local large cap company has not fared well in 2010: Amgen Inc. The Thousand Oaks biomedical giant had a choppy year as some of its top drugs suffered sales declines and the company was forced to recall two of its drugs because of glass flakes found in vials. But last week, the Food and Drug Administration approved its bone drug denosumab for use in cancer patients and that led to a rebound in the company’s share price. By Dec. 15, the stock was only off 1.5 percent for the year.

Amgen’s huge market size helped drag down the rest of the biomed sector on the LABJ Stock Index, despite a strong performance by Monrovia implantable contact lens maker Staar Surgical. Staar’s share price rose 83 percent after settling litigation and regulatory issues, and paying down its debt.

Now, after two years of recovery and share price increases, can L.A.’s public companies sustain their momentum in 2011?

Local market watchers think so. They expect interest rates to remain relatively low and inflation to continue to be a nonfactor. Both of those fundamentals are viewed as key for growth in the equity markets. Analysts also expect the boom to continue in emerging global markets, which should benefit local companies that target those markets.

“Companies with significant markets overseas, especially emerging markets, will do quite well,” Northern Trust’s Barnett said.

The key question for the remaining companies is whether the recovery in this country will finally reach Main Street and whether companies that rely mostly on domestic sales will start seeing those sales pick up, which in turn would lead to better earnings performance.

“We’ve seen this dichotomy between Wall Street and Main Street go on for quite a while now,” Barnett said. “At some point, this has got to change.”

Howard Fine
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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