Perennial Achievers Exemplify the Region’s Diverse Economy

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There’s a familiar look to the names at the top of the Business Journal’s list of most profitable companies.


Nine of the 10 entries that topped last year’s list finished in the top 20 this year, based on average three-year return on equity.


Together, these perennial achievers reflect L.A.’s steady performance in a variety of economic sectors homebuilding and mortgage lending (Ryland Group, KB Home, Fremont General Corp.); retail and consumer products (Avery Dennison Corp., Mattel Inc., Hot Topic Inc., K-Swiss Inc.); and health care (Davita Inc., Molina Healthcare Inc.).


“The breadth and diversity of the L.A. basin is very healthy,” said William K. Doyle, managing partner of Kerlin Capital Group.


This year’s list also has some new names at the top: No. 1 is Big 5 Sporting Goods Corp., delivering a whopping 222.2 percent average annual return on equity since its initial public offering in June 2002. (Return on equity is net income divided by shareholders’ common equity itself the difference between a company’s assets and its liabilities.)


El Segundo-based Big 5 reported net income of $34.3 million for all of 2004. However, the company has said it expects to restate earnings for the past three years, for lease-accounting and other adjustments. The restatements are expected to add 2 cents a share to its previously reported 2004 earnings while reducing earnings for 2002 and 2003 by 1 cent per share for each year.


DaVita, based in El Segundo, fell to No. 2 from the top spot last year. Still, the provider of dialysis-related services and supplies posted a three-year average return on equity of 107.9 percent.


For 2004, apparel marketing firm Cherokee Inc. posted the highest one-year return on equity, at 77.9 percent. Over the past three years, Van Nuys-based Cherokee posted average return on equity of 80.2 percent.


Other new entries to the top 10 include Santa Monica-based clothing label Mossimo Inc., Los Angeles-based legal publisher Daily Journal Corp. and VCA Antech Inc., the veterinary chain.


Homebuilders continue to capitalize on the skyrocketing real estate market. Calabasas-based Ryland reported a 29 percent average three-year return on equity, while KB Home, based in Los Angeles, reported 23.8 percent three-year ROE.


Maintaining a high ROE requires companies to keep improving on their earnings each year, because the shareholder equity the denominator in the equation gets larger.


For instance, shareholder equity at KB Home hit $2.06 billion at the end of 2004, up $781 million over two years. To keep up the same rate of growth, KB Home will have to generate much higher earnings.


Skyrocketing oil prices helped increase net income and common equity at petroleum companies. Occidental Petroleum Corp. reported a 2004 return on equity of 24.7 percent, raising its three-year average to 21.1 percent. Unocal Corp.’s ROE hit 21.9 percent for 2004, raising its three-year average to 16.5 percent.


Unocal, subject of a takeover battle between Chevron Corp. and China’s CNOOC Ltd., saw net income grow to $1.1 billion in 2004, compared with $330 million in 2002.


“If you look at the Fortune 500 companies that have been gobbled up, you don’t replace them easily,” said Doyle. “Financial services companies and companies with diversified manufacturing are growing up, but are not growing fast enough to replace what we’ve lost.”


Banks posted solid returns but not the scorching performance of previous years. Wilshire State Bank had a 20.9 percent three-year average ROE, while Nara Bancorp Inc. posted a 17.8 percent return.


Alliance Bancshares California, East-West Bancorp Inc., IndyMac Bancorp Inc. and City National Corp. all ranked with in the top 30 with three-year ROEs between 15.5 and 16.5 percent.


The biggest loser on this year’s list was also a repeat. Homestore Inc. reported a negative average return on equity of 4,872.7 percent for the past three years, after posting losses in each period.


But Homestore did better than 25 companies that didn’t make the list because they had negative shareholder equity. This means that the companies’ liabilities outweigh their assets, and makes an ROE calculation meaningless since there is no shareholder equity on which to post a return. It’s a situation that can’t go on for long before a company will fail.


Overall, 125 of the largest public companies in L.A. County reported positive return on equity. Excluding companies with negative shareholder equity, L.A. County-based companies had an 8.5 percent three-year average return on equity from 2002 to 2004.

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