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THE TIMES 100: THE BEST COMPANIES IN CALIFORNIA : THE BOTTOM LINE : TOP PROFIT : Leaders Found the Winners in Niche Markets

April 24, 1988|VICTOR F. ZONANA and DOUGLAS FRANTZ | Times Staff Writers

The smell of old money pervades the corporate headquarters of mutual fund manager Franklin Resources in San Mateo. The armchairs are leather and the desktops mahogany. "We want people to feel their money is safe with us," says Charles B. Johnson, president and chief executive.

Apparently, they do. With $33 billion under management and a stellar two-year average return on equity of 80%, Franklin Resources emerged on top of The Times 100 as the most profitable publicly traded company in California.

Franklin was far ahead of the next three companies on the list. No. 2 tape drive maker Rexon Inc. posted a two-year average return on equity of 53%; No. 3 Neutrogena had an ROE of 41%, and specialty lubricant manufacturer WD-40 posted a 36% return.

In general, small companies in niche markets were the stars of The Times 100, and service companies tended to outperform manufacturers.

FOR THE RECORD
Los Angeles Times Sunday May 8, 1988 Home Edition Business Part 4 Page 2 Column 3 Financial Desk 2 inches; 58 words Type of Material: Correction ^H
FirstFed Financial Corp., holding company for First Federal Savings Bank of California in Santa Monica, qualified for inclusion in the Times 100 list of California's best-performing companies published April 24. FirstFed would have placed 32nd in the Times 100, with a two-year average return on equity of 19.8%, and fifth on the list of most profitable banks and savings and loans, with a return on assets of 0.95%.

"A manufacturing company, even if it is terrific, generally won't do as well as a service company," notes Franklin's Johnson. "An investment advisory firm like ours doesn't need a lot of fixed assets."

The Times 100 is the result of a carefully screened, computer analysis of every publicly traded company with its headquarters in California, a universe of more than 900 companies. Return on equity over a two-year period was used to come up with the 100 most profitable companies.

ROE, which is expressed as a percentage, is calculated by dividing net worth into net income minus preferred stock dividends. The figure provides a key measure of how effectively a company is using its shareholders' money. A 15% ROE means that for every dollar shareholders have invested in a company, the firm has earned 15 cents in profit.

Overall performance, of course, is more complex and multidimensional. But ROE is considered by financial professionals to be one of the most accurate measures of profitability.

"ROE is as good a single truth as you can get, but there is no single measure," says Steven Kerr, a finance professor at USC and interim director of its program for entrepreneurs.

In compiling the list, companies with more than twice as much debt as equity were deliberately excluded; ROE is not regarded as providing an accurate measure of strength for such highly leveraged concerns.

Additionally, to be ranked on The Times 100, a company had to have revenue of at least $50 million in 1987 and it had to have been public for at least three years and profitable for the past two years.

The first billion-dollar company on The Times 100 was disk drive maker Seagate Technology, whose ROE of 34% ranked fifth. Seagate was one of seven high-tech companies among the 25 most profitable companies in the state, evidence of the rebound in that sector as technology exports boomed and a new generation of vastly more powerful desktop computers won wide consumer acceptance.

"We've always had a pretty good ROE," says Alan F. Shugart, chief executive and founder of Scotts Valley-based Seagate. "We didn't borrow a lot of money, and we didn't sell a lot of stock. If there are any other secrets, I'm not going to tell them."

It is no secret that the state's big banks failed to post strong ROEs or much of anything on the plus side of the ledger last year, chiefly as a result of billions set aside to cover expected losses on Third World debt.

The only banks on The Times 100 were Beverly Hills-based City National, which has no foreign debt and represents a classic example of niche marketing, and mid-sized Central Bank in Walnut Creek.

Despite the big banks' absence from The Times 100, Joseph J. Pinola, chairman and chief executive of First Interstate Bancorp, argued that "the basic earnings power of the bank" was unchanged from the year before. He said he expects much better performance from most big banks in 1988.

With their lack of investment in expensive factories, retailers tended to fare well on The Times 100 list, garnering four spots among the top 25.

The ROE standout among the group was The Gap, which placed seventh on the list by posting a two-year average ROE of 33%. The San Bruno-based clothing retailer made the list despite the hard times that have afflicted it and other specialty clothing sellers in the last couple of quarters.

Another retailer with a strong ROE was Anaheim-based Clothestime, the fast-growing specialty retailer of women's apparel. Leasing space for its stores and turning over merchandise quickly helped keep overhead low and contribute to an average ROE of 31% during the past two years, good for 11th on The Times 100 list.

Yet Clothestime's figure was less than half the return posted by the leader, Franklin. The mutual fund manager has been on a profit roll since 1980, when high interest rates lured investors to the single-state tax-free municipal bond funds that Franklin pioneered. Since 1980, Franklin's assets under management climbed to $33 billion from $500 million, including $7.5 billion in Cal Tax-Free, the largest tax-free fund in the country.

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