By JASON BOOTH
Staff Reporter
If the Los Angles economy is enjoying such a great recovery, why have the stocks of its public companies underperformed the national stock indexes?
Since the start of the year, the Business Journal’s LABJ 100, an index of locally based public companies, has risen only 7.2 percent, compared with gains of 16.8 percent for the S & P; 500 and 12.8 percent for the Dow Jones Industrial Average.
The LABJ 100 includes a cross section of L.A. businesses, representing about one-third of all publicly traded companies in the county.
One explanation for L.A.’s lackluster performance is that the companies are heavily concentrated in industries that have been stumbling on Wall Street, while the industries that are performing well do not have a big presence here.
For example, oil and real estate stocks, heavily represented here, have lagged, and high-tech stocks, with little local presence, have thrived.
Another reason for the discrepancy is that L.A. has several engines of growth far more powerful than the area’s publicly held companies including public companies based outside of Los Angeles.
For example, Seattle-based Boeing Co. is the largest private-sector employer in Los Angeles County. And several of the major Hollywood studios, which have enjoyed tremendous growth in the ’90s, are part of public companies based elsewhere. Paramount Studios is owned by New York-based Viacom Inc., Warner Bros. is owned by New York-based Time Warner Inc., and Twentieth Century Fox Film Corp. is owned by Sydney, Australia-based News Corp.
The other economic component not accounted for when looking at locally based public companies is the growing base of privately held companies.
In recent years, the L.A. economy has become increasingly entrepreneurial and diverse. Factors driving that trend include the large influx of immigrants, laid-off workers starting their own companies, and successful companies spinning off divisions as independent operations.
Little of that vibrancy is noticeable when observing L.A.’s public companies.
Consider, for example, that while property prices are going through the roof, the prices of locally based public real estate investment trusts have fallen on harder times.
Arden Realty Group Inc. is down 13.4 percent from the start of the year. Kilroy Realty Corp. is down more than 14 percent.
Their share prices have been hit by a variety of concerns. With real estate prices hitting record-high levels across the country, investors are starting to worry that there are few growth opportunities left for REITs.
In addition, some believe that the Asian economic crisis could hurt U.S. office property markets. That would come as a result of cash-hungry Asian investors and mortgage holders dumping their U.S. holdings.
Another industry that has been a drag on local stock performance is energy.
For decades, oil companies were pillars of the local economy. Even today, Atlantic Richfield Co., Occidental Petroleum Corp. and Unocal Corp. each rank among the 10 largest public companies in Los Angeles. But with oil prices at a 12-year low, the share prices have floundered.
Atlantic Richfield remains little changed from the start of the year, and despite a major restructuring, Occidental is down more than 7.5 percent.
The decline in oil prices has resulted from overproduction in the Middle East. At the same time, economic problems in Asia have reduced demand for petroleum products in that region.
Even L.A.’s mighty entertainment behemoth, the Walt Disney Co., has been having trouble on Wall Street. It was flying high at $128.38 a share in mid-May, but then on June 30 suffered its biggest one-day drop in nearly a decade.
That drop of $8.25 a share, bringing the stock to $105.06, came when a group of financial analysts downgraded their ratings on the stock.
The downgrade came amid concerns that Disney’s films and theme parks have been drawing fewer people, and that the economic problems in Asia could hurt the company’s overall financial performance.
Disney’s stock as of late last week was on the rebound, gaining $1.75 on July 8 and another $2.69 on July 9, to close at $111 a share. But that mark, while improved, was still 13.5 percent below its mid-May peak.
Meanwhile, the industries that have enjoyed the greatest gains on Wall Street this year are under-represented in Los Angeles.
While Los Angeles has a growing number of small high-tech and biotech firms, few of them are public. One exception is Pasadena-based Internet service provider Earthlink Network Inc., whose stock is up sharply this year.
Of course, being in the high-tech sector has been no guarantee of success on Wall Street. The stock of Santa Monica-based software firm CyberMedia Inc. lost more than 72 percent of its value since the start of the year, largely due to management problems.
But there may be hope for the L.A.’s public companies in the second half of the year, as most of them remain highly profitable.
According to a Business Journal survey, 70 of the 100 largest public companies based in the county saw their earnings increase in 1997, compared with 1996. And the average earnings increase among the 100 companies was 51 percent.
