Don’t let modest sales figures fool you: Some of L.A.’s small public companies are among the area’s most profitable.
Take Impco Technologies Inc., a Cerritos-based company that makes components for alternative-fuel engines. It is ranked No. 5 on the list of most profitable L.A. public companies, with a five-year average return on equity of 31.56 percent.
That’s roughly twice the 16 percent ROE for Walt Disney Co. over the same period.
Yet Impco’s 1997 net income of $3.2 million is hardly noticeable on the radar screen, when compared with Disney’s 1997 net income of $1.97 billion.
Impco is evidence that size doesn’t necessarily matter when it comes to generating returns. That fact is especially important in Los Angeles, which has evolved into an economy dominated by small businesses, many of which are not well known.
Small companies are well represented on the Business Journal’s list of L.A.’s most profitable public companies: Forty-eight of the 100 companies listed have annual revenues of $250 million or less, and 16 have annual revenues of less than $50 million. By comparison, only 27 companies with annual revenues of $1 billion or more made the list.
To be sure, being a small public company has its advantages, including having the ability to pursue profitable deals that larger companies consider too small to be worthwhile.
For example, in 1993 General Motors Corp. announced that it was seeking a contractor to develop an alternative-fuel engine. The contract was comparatively small, and “under the radar screens of the big corporations, but it was attractive to smaller companies,” explained Dale Rasmussen, senior vice president at Impco.
Today, GM remains one of Impco’s largest customers, and the two companies formed a “teaming agreement” last July to continue the ongoing development of alternative fuels.
A small company also enjoys the advantage of being able to respond quickly to marketplace changes.
“When you are small and are a hands-on operation, you can feel the pulse of the business world more quickly,” said Roger Platten, vice president and general counsel of Unico American Corp., which through its operating unit, Crusader Insurance Co., insures very small businesses. “If there is a political or social change which affects the (risk) exposure of the insurance business, then you can react more quickly.”
That quick reaction has contributed to the success of Unico, which ranked 29th on the list of most-profitable companies with an average ROE of 17.15 percent. It was especially valuable a few years ago, when filling stations switched from full-service to self-serve and salaries went down as a result for station employees. Many insurers dropped their rates, but Unico did not follow suit.
“When we started seeing a large increase in claims, we immediately sensed something was wrong,” Platten said. “Service stations had become a much more hazardous business, because customers were getting out of their cars, which meant they could fall down and hurt themselves, or otherwise injure themselves.”
As a result, Unico raised its rates, and larger insurers did not react accordingly for up to two years, according to Platten.
Small public companies also often enjoy the advantage of being in industries that are comprised largely of privately held businesses.
Impco has grown by using its access to Wall Street capital to acquire several competitors, as well as several of its foreign distributors, said Rasmussen. Meanwhile, most of Impco’s remaining competitors are family-owned businesses with less access to capital.
One disadvantage of being a small company, on the other hand, is that it is harder to attract the attention of major investors. Also, small public companies do not have as much market liquidity as larger companies. “We don’t trade 100,000 shares in a day. We may trade that much in an entire year,” said John Tootle, chief financial officer for Dominguez Services Corp., a small Long Beach-based water company ranked No. 48 among L.A.’s most profitable companies. “When you invest in our company, you may not see it traded every day.”
When shares do sell, “we may have a wider spread between the bid and ask price for our shares,” he added.
Low trading volume and wide spread between bid and ask prices often act as deterrents to large institutional investors purchasing a stake. In addition, most institutional investors and mutual funds have minimum market-capitalization requirements for stocks they are allowed to invest in, effectively shutting off small companies from those sources of capital.
The ultimate fate of many small companies that become very profitable is that they cease to exist as independent entities, because larger companies gobble them up. Such is the fate of No. 22-ranked Angeles Mortgage Investment Trust, whose officials declined to be interviewed because the company is in the midst of being acquired. The Westlake Village-based real estate investment trust’s 1997 annual revenues were a mere $7.2 million, but its average ROE over the past five years was 19.9 percent.