L.A.’s Largest Companies Manufacturing Modest Profits
By CONOR DOUGHERTY
In uncertain times, boring can be better.
While profits at L.A.’s 200 largest public companies slipped overall, good performances in the manufacturing, homebuilding, retail, defense and financial services sectors helped the region come through a weak national economy with a relatively light slap.
“At most companies, profitability is soft it shouldn’t be a surprise,” said Greg Range, a managing director at Duff & Phelps LLC, which prepared the profitability analysis for the Business Journal.
Of the 200 largest companies in L.A., 77 posted three-year return on equity averages greater than 10 percent. There were another 48 whose ROE was less than 10 percent but still remained profitable over the three-year period.
Return on equity, defined as net income as a percentage of book value, is commonly used to measure a company’s profitability trends. An ROE figure less than 10 percent is generally considered poor.
Still, last year was rough. Less than a quarter of the 200 largest public companies based in L.A. County had return on equity in 2001 that exceeded their three-year averages.
Nearly one quarter 47 companies had negative ROE over the last three years. Those companies either incurred losses or had negative stockholder equity more liabilities than assets. (A number of companies on the list have been public for less than three years.)
Banking on banks
One bright cluster was small-cap financial services, of which L.A. has plenty. In leaving speculative stocks with uneven earnings, many investors have fled to community banks largely because of their track record for profits.
“When you look at earnings growth compared to the rest of the market they’re very favorable,” said Lana Chan, an equity analyst with CIBC World Markets. “It’s become a safe haven.”
Among community banks, the so-called ethnic banks have stood out because of their steady customer growth and generally high credit quality. One example is Nara Bancorp, a Korean-American bank that in recent years has added several local branches in addition to acquiring Korean banks in New York.
Nara, the 23rd most profitable public company with a 19.3 percent three-year ROE average, reported net income of $10.8 million for the year ended Dec. 31, up 170 percent from 1999. Local Korean lenders Hanmi Financial Corp. and Wilshire State Bank also scored high, with ROE averages of 17.2 percent and 14.3 percent, respectively.
Retail also has become a darling of investors looking to tap into strong consumer spending trends. “Consumers are still out there buying stuff at places like Sport Chalet and Hot Topic,” said Joan Bogucki-Storms, an equity analyst at Wedbush Morgan Securities. “Because of that, (retail stocks) have generated good cash flow and been able to fund growth internally.”
Hot Topic Inc. was this year’s No. 15 with a 21.5 percent three-year ROE average. Sport Chalet Inc. came in at number 50 with a respectable 14 percent ROE.
Though homebuilding has been a hot sector, some analysts caution things might be moving too fast.
“The housing market has been strong for a decade and it continues to surprise everyone,” said Steve Percoco, an equity analyst with Lark Research. “I believe we will see a pullback, and there are significant risks that it will be a strong one given the strength of the last few years.”
Locally, Percoco covers real estate firms KB Home and Newhall Land & Farming Co., which again was the most profitable local public company with a three-year ROE of 67.9 percent.
“Low interest rates have helped to sustain sales,” he said, levitating earnings at KB Home, the 8th most profitable with an three-year ROE average of 24.5 percent, and Calabasas-based Ryland Group Inc., number 19 with 19.9 percent ROE.
Limited tech strength
Electronic components manufacturer Teledyne Technologies Inc. ranked second with an average three-year ROE of 44.5 percent. Third went to Chatsworth-based Optical Communication Products Inc., a designer and manufacturer of a line of fiber optic products.
Seven of the 10 most profitable companies on the list last year returned to the Top 10, with the top three spots unchanged. Among the Top 10, only three companies had market caps in excess of $1 billion: Avery Dennison Corp., Amgen Inc. and KB Home.
Among the largest firms in L.A., ranked by market cap, Walt Disney Co. (second largest) was No. 111 with 3.5 percent three-year ROE, Northrop Grumman Corp. (third) came in 69th with 12.2 percent, toy giant Mattel Inc. (seventh) was 88th with an 8.6 percent ROE average.
The compilation of L.A.’s most profitable is not necessarily a list of hot stocks. Optical Communication Products, for instance, hit 52-week low of $1.21 in early June, down from above $10 a year ago. This year’s number seven is Hemacare Corp., a Sherman Oaks company that customizes blood management programs for hospitals. With an $8 million market cap, the company is a virtual unknown and has seen its stock price fall more than 57 percent in the last year.