Big Five
Top L.A. public companies, ranked by 2000 revenue.*
Walt Disney Co. $25.4
Occidental Petroleum 13.5
Edison International 11.7
Computer Sciences 9.3
Wellpoint Health Network 9.2
* In billions
Most of L.A.’s few remaining blue chips are stumbling on Wall Street, even as the mid-caps and small-caps that now dominate the local public company population are appreciating nicely, despite a slowing economy.
Those are among the trends revealed in this week’s list of the 100 largest public companies based in Los Angeles County, which begins on page 15. While L.A.’s few remaining corporate giants seem to be drifting, at best, their price-earnings ratios remain quite high by historical standards, making them vulnerable to further downdrafts. On the other hand, L.A.’s smaller-cap stocks, or red chips, are full of success stories.
Regardless of the company’s market capitalization, however, stock prices in the current market are hyper-sensitive to earnings-related announcements.
“At these (price-earnings) levels, money will flow out of any stock that has a disappointment,” said Bill Mason, finance professor at Pepperdine University. “An announcement of weaker earnings is enough to sink a stock.” With a makeup similar to last year, the list’s top 10 illustrates this. Once again, Walt Disney Co. is No. 1 on the list. On Wall Street, its stock is down 2.0 percent year to date, through July 3, and down 26.5 percent from a year ago. El Segundo-based Computer Sciences Corp. (No. 4) is off 53.4 percent from its year-ago level. Hughes Electronics Corp. (No. 9) is off 24.6 percent. Of course, Rosemead-based Edison International Inc. (No. 3) has traveled an especially rough road in the deregulated energy markets. Its stock is off 23.5 percent year to date, and off 41.7 percent from a year ago.
Meanwhile, many of L.A.’s smaller-cap companies are seeing steady gains in their market values.
Highlights among the list’s smaller-cap stocks are Commerce-based 99 Cents Only Stores Inc. (No. 56), up 61.1 percent so far this year; Glendale-based Public Storage Inc. (No. 36), up 24 percent, and pipemaker Ameron International Corp. (No. 49), up 69.4 percent.
Many small- and mid-caps are on the rise because they have been out of favor so long. And, of course, some of the changed picture is due to simple size a large, mature company is unlikely to suddenly double profits, in the manner of a growth stock. But the robust performing L.A. companies for the most part are slow, steady growers not the meteoric variety.
For the region, the rise of medium-sized companies on Wall Street amounts to more than mere bragging rights. Indeed, red-chip success may help spell better opportunities for workers and professionals in the local economy, which is now a vast sea of medium-sized enterprises.
That’s because when a company’s currency rises on Wall Street, it suddenly has better opportunities in seeking capital to fund internal growth or acquisitions, said Jeff Bailard, director of Ernst & Young’s Capital Advisers LLC in downtown Los Angeles.
“They (red chips) can use their stock as currency,” said Bailard.
That means red chips can act as little warriors, and go out on acquisition binges, tempting sellers with their stock. Obviously, a high-flying red chip could also simply issue more stock in a secondary offering, and thus raise capital to buy more plants or equipment. Either way, expansion probably means more jobs for local workers, and more business for the real estate crowd.
Better stock prices also help attract management executives at public companies today are almost routinely compensated with stock options or warrants. Going forward, the mid-cap companies may find themselves able to lure talent, as the prospects for a home run are better with a robust red chip, than with a mature blue chip.
The Los Angeles economy is full of ambitious managers, who if they can access capital, will choose to grow and expand, said Dan Flaming, president of the Economic Roundtable think tank in downtown Los Angeles.
“Our strength is that people move to Los Angeles to make themselves known, to become successful,” said Flaming.
In short, give an Angeleno business manager some fresh equity, and he or she will likely go out and use it and try to make a bigger mark on the world.
It should be noted that small caps are for stout investors; big losses are easily spotted among the winners. And the waters get particularly choppy for small caps that are too small to qualify for inclusion in the top 100 list. Burbank-based Dick Clark Productions Inc., for example, is off 21.5 percent on the year, while film distributor Team Communications Inc. is off 63.4 percent for the year (though rising of late), and software outfit Digital Lava Inc. is down 86.9 percent.
But overall, 2001 has been something of a banner year for the smaller-cap companies in Los Angeles, at least so far.
The pain seems heavily concentrated at the top of the list, and extends across virtually every industry.
Sickly health care firms
For example, L.A.’s two big health care companies Wellpoint Health Networks Inc. (No. 5) and Health Net Inc. (No. 6) are both down by serious double digits in 2001. Even El Segundo-based Unocal Corp. (No. 7), which might be expected to do well when gasoline eclipses $2 a gallon at the pump, is off 12.7 percent this year. Indeed, of the top companies on the list, nary a one has hit a home run on Wall Street this year.
Similarly, the Standard & Poor’s 500 index, a blue chip bellwether, is up a mere 6.5 percent over the past 24 months, while an index of small caps has surged ahead during that period at an annualized rate of 20.4 percent, pointed out Scott Leonard of Leonard Wealth Management in Manhattan Beach.
The picture gains more contrast in this year’s first half: The S & P; 500 is down 7.2 percent, while the small cap index has pushed up 22.7 percent, said Leonard.
