Earnings//mike1st/mark2nd
By JASON BOOTH
Staff Reporter
Los Angeles-based public companies reported strong earnings gains in the second quarter ended June 30, with retail, oil and financial services companies posting some of the biggest gains.
Among the 70 or so local public companies in the LABJ 100 Index that had reported second-quarter results as of late last week, the average year-over-year earnings gain was 15.5 percent.
That’s slightly higher than the average 15.0 percent gain that First Call Corp. has projected for the S & P; 500 companies.
“It is a very good sign for the local economy,” said Rajeev Dhawan, an economist at the UCLA Anderson School Forecast. “Not many U.S. companies are showing double-digit growth except blue-chip firms. And Los Angeles increasingly doesn’t have many blue-chip firms.”
It’s also another indication that the negative impact on L.A. from the Asian economic crisis, which came to a head in late 1998 and early 1999, has been less than originally expected.
“Overall it was a strong performance,” said Ross DeVol, a regional economist at the Milken Institute in Santa Monica. “If you had told me a year ago that L.A. firms would still be seeing nearly 16 percent growth, people would have said you were nuts, including myself. It shows the resilience of the local economy, especially in light of the Asian economic slowdown.”
Investors appear to be rewarding the improved earnings by pushing up the stock prices of local companies.
The LABJ 100 index, which reflects the aggregate market performance of 100 local company stocks from an array of industries, is up 8.14 percent since April 1, the start of the second quarter. Year to date, the index is up 12.4 percent.
While that performance lags the Dow Jones Industrial Average, which rose 13.5 percent in the second quarter and 18.3 percent year to date, it beats the S & P; 500, which gained 7.6 percent and 10.8 percent, respectively.
A prime contributor to the LABJ 100 uptick has been Atlantic Richfield Co., which has seen both its earnings and stock price rise over the last couple of quarters.
Arco’s net income was $302 million, compared with $220 million in the year-earlier quarter. Its stock has risen from around $70 a share at the beginning of the second quarter to $90 as of late last week.
Rising crude oil prices and accident-related shutdowns at the refineries of competitors contributed to Arco’s rising profitability. The irony is that Arco is becoming more profitable just as it is about to be taken over by British oil giant BP-Amoco Plc.
“They are having a surge of energy before their last gasp,” said Fadel Gheit, an analyst at Fahnestock & Co. in New York. “But it is too little, too late.”
Rising oil prices were not enough to boost profits at L.A.’s two other major oil companies.
Occidental Petroleum Corp.’s earnings fell 94 percent largely due to sagging chemical prices. The Asian economic slowdown has cut demand for chemical products, analysts said. At the same time, the devaluation of Asian currencies has cut into the margins of chemicals that Occidental produces in countries such as South Korea.
Meanwhile, the drilling of a string of unsuccessful oil wells sent Unocal Corp. profits skidding 69 percent in the second quarter.
Some of L.A.’s strongest earnings performances in the second quarter came from an unlikely sector apparel.
Guess? Inc., the downtown L.A.-based jeans maker, reported net income of $7 million, up from $3.4 million a year earlier. The company has posted solid year-on-year earnings gains for the last three quarters, while its share price is up more than 250 percent from a year ago. Sports-shoe maker K-Swiss Inc. also has boosted its earnings by focusing on its core product line.
Economists say that the strength of consumer-product makers like Guess and K-Swiss is an indicator of how consumer spending is fueling the economy, both locally and nationwide.
“Consumer spending remains very strong,” said Esmel Adibi, professor of economics at Chapman University in Orange. “Retailers have done extremely well because consumers with hefty incomes keep spending. Part of it is money from the stock market.”
Cash-flush consumers also helped the real estate developers, including Kaufman & Broad Home Corp. and Castle & Cooke Inc., to post strong quarterly earnings gains.
Stock market money, along with a recovering high-yield debt market, certainly has helped West Los Angeles-based securities brokerage Jefferies Group Inc., which racked up a 39 percent earnings gain in the second quarter. According to a survey of analysts by Bloomberg Financial Markets, the consensus estimate is for Jefferies to post a 164 percent increase in earnings in the third quarter ended Sept. 30.
Only a handful of L.A. public companies as of last week had reported a net loss for the April-June quarter.
Hughes Electronics Corp., the El Segundo-based satellite company posted a net loss of $92.3 million, compared with net income of $56.1 million in the like period a year earlier. While that was its first quarterly loss in more than two years, the share price has held its ground.
That’s because Hughes is trying to transform itself from a military defense contractor to a telecommunications firm with close ties to the Internet sector. (In June, America Online Inc. announced a $1.5 billion investment in Hughes as part of a plan to link Internet users via satellite.)
As such, some analysts say that Hughes’ stock should be valued the same as Internet firms, many of which are losing money.
“If you are a technology company and you are not losing money, your investors will likely complain,” said Dhawan. “They will say that you are throwing away future growth for current profitability.”
Most economists expect earnings growth to slow in the second half of the year. They worry that with personal debt levels continuing to hit record highs, interest rates edging up, and the market selling off last week, consumers will start to reign in their spending.
At the same time, growing demands by labor unions for pay increases will start to force up wages, in turn cutting into profitability.
A wild card is interest rates. Federal Reserve Chairman Alan Greenspan warned last month that that the central bank would move quickly to raise rates if there were signs of a resurgence in inflation. If rates do rise, it would likely bring about both a stock market downturn and a consumer spending slowdown and that would be detrimental to earnings.
“Most of us expect corporate profits to get softer,” said Adibi. “The economy is supported by four pillars government spending, exports, consumer spending and the financial markets. Government spending and exports are already weaker. The stock market looks shaky, and we expect consumer spending will slow as debt becomes more of an issue.”
