STALWARTS–Only a Select Few Repeating Atop the List

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It’s one thing to report a high return on equity in a single year; accounting flukes and one-time events can seriously skew a public company’s numbers. The real cream of the crop is made up of companies that, over a long term like three or five years, continue to post strong profits.

One such L.A. County stalwart is jeans maker and retailer Guess Inc. Though the company suffered a couple of lean years in the mid-1990s, when its sales slumped and its share price fell into the single digits, it has since become one of L.A.’s most consistent performers. It is one of only four companies that place among the top 10 in the county in one-year, three-year and five-year ROE.

Last year, Guess reported net income of $51.9 million ($1.20 per share), more than double the $25.1 million (59 cents per share) in 1998. Revenues rose to $599.7 million, vs. $471.9 million in 1998.

Now the company’s shares are trading in the high $20 range, a far cry from the bargain-basement price of $7 in the mid-1990s.

“They had made some mistakes a few years ago and were coming out with too many products,” said Darren Barker, an analyst with Wedbush Morgan Securities. “Since then, they have refocused their product line and they have been able to draw people into their stores.”

Solid performer

Guess’ five-year average ROE is by far the highest among L.A.-based companies. This is partially due to the very low net worth of the company in 1995 and 1996, which exaggerates the company’s return on equity because the statistic is calculated by dividing net earnings by shareholders’ equity.

Nevertheless, Guess’ earnings were solid even when its sales were declining, and its annual ROE never fell below 25 percent during the last five years. The company cut costs in recent years by outsourcing to low-cost manufacturers in Mexico and by setting up new warehousing and distribution facilities in Louisville, Ky.

Like Guess, the other local companies that have been consistently profitable have a strong product and know how to sell it.

Biotech giant Amgen Inc. has been making huge profits on sales of its Epogen and Neupogen drugs. Last year, the company reported net income of $1.1 billion ($1.02 per share), up sharply from $863.2 million (82 cents per share) in 1998.

Over the last five years, Amgen’s ROE has been consistently above 30 percent as its revenues and earnings increased year after year.

Likewise, Gemstar International Group Ltd., the Pasadena-based developer and licenser of the VCR Plus software that allows technology-challenged people to program their VCRs, has been reporting record results over the last five years. In 1999, the company earned $73.9 million (33 cents per share), vs. $38.7 million (19 cents per share) in 1998.

However, unlike Guess, whose stock performance pretty much matches the company’s strong growth, shares of Amgen and Gemstar have followed the general ups and downs of the Nasdaq.

Thus, in spite of the company’s strong results, Gemstar’s stock as of last week was off 60 percent from its $107 peak early in March.

“It’s totally industry-related and sector-related,” said Tom Burnett, president of institutional research firm Merger Insight in New York. “There are plenty of other companies that are making a lot of money too, and their stock is down too. Nobody’s immune to these fluctuations.”

Gemstar’s shares have also suffered from worries on Wall Street that its $9 billion merger with TV Guide Inc. has run into scrutiny by the Justice Department. Earlier this month Gemstar reiterated that, in spite of rumors to the contrary, the TV Guide deal is on track to be completed by the second quarter of this year. According to industry analysts, the Justice Department is studying whether the merged company would have a monopoly on interactive program guides.

Street ignores Newhall Land

Valencia-based Newhall Land & Farming Co. has also shown solid returns over the last five years, but its shares have created very little interest on Wall Street. As of last week, Newhall’s price/earnings ratio was a lowly 9.7. By contrast, even when trading at a relatively pedestrian $40 per share last week, Gemstar’s P/E ratio was a hefty 90.9.

“Newhall is not valued on its earnings,” said Brett Hendrickson, an analyst with B. Riley & Co. “It’s valued on basis of its breakup value, its assets.”

According to Hendrickson, Newhall’s strong earnings come from selling off its real estate holdings, which can’t be sustained over the long term because its assets will ultimately be exhausted.

Newhall owns more than 20,000 acres in northern L.A. County, in the Santa Clarita Valley. Last year the company announced it would sell off a $175 million chunk of its commercial real estate portfolio to finance a share-repurchase program. Ostensibly, Newhall looks to take advantage of the strong real estate market and the low price of its stock in order to boost the value of outstanding units.

Hendrickson believes that the repurchase program may be a preamble to a breakup of the company, though he said that could happen anywhere from a year to 10 years from now.

Meanwhile, Newhall is sitting on some of the last pieces of practical developable land in L.A. County, with more than 30,000 housing units entitled to be developed. And because demand for new homes is growing fast, the company is expected to remain strong for the time being.

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