Tide May Rise in 2002, But It Won’t Lift All Ships

Tide May Rise in 2002, But It Won’t Lift All Ships It turns out that the holiday retail season was not as bad as was first feared. The studios turned in a boffo performance and are getting back to business, inventory levels have fallen and the manufacturing sector is improving, all strong signs pointing to improvement ahead. But the real question is, will it be good enough? Good enough to restore faith in investing, good enough to resume spending, good enough to get unemployment rolls shrinking? Much like 2001, the economic outlook for 2002 is a mixed bag of prognostications, but one thing is certain. If a recovery is at hand, it will not touch down in all sectors and it will not affect all companies in the same sector equally. Most analysts are arguing for a telescopic approach to the year that requires close scrutiny of each company’s fundamentals and dynamics, regardless of the industry in which they operate. Here, a look at some of the largest San Fernando Valley companies representing most of the industries that do business here, and how they are likely to fare in the year ahead. Shelly Garcia Countrywide Credit Industries Over the past five years, Countrywide Credit Industries Inc. has seen its earnings per share jump an average 10.7 percent, a decent showing by any standard, but a mere pittance compared to its latest results. Thanks to a strong home buying market and record low mortgage rates, the Calabasas-based financial services company funded more than $100 billion in loans so far in its current fiscal year, a volume that helped Countrywide to outperform industry estimates. In its most recent quarter ended November 2001, the company recorded earnings per share of $1.32 on a diluted basis, a 59-percent increase over the same period last year. Analysts expect that stellar growth to slow somewhat in the coming year. Earnings per share for Countrywide’s fiscal year, which ends in February 2002, are expected to fall between $4.47 per share and $4.80 per share, or a mean average of $4.63 per share. For the company’s fiscal year ending February 2003, consensus estimates project earnings per share between $4.30 and $4.88, or a mean estimate of $4.59 per share, according to First Call/Thomson Financial. But Countrywide is banking on a more diversified range of services to augment its mortgage banking business as the year unfolds. The company has expanded into a full range of insurance services through its Balboa Life and Casualty, Second Charter and Countrywide Insurance Services Inc. divisions. It has added securities services through its Capital Markets group and it provides mortgage banking internationally through a joint venture called Global Home Loans. Most promising, analysts say, is Treasury Bank N.A., a banking and mortgage warehouse lending operation. In addition to increasing Countrywide’s business potential, the unit will allow the company to fund certain of its operations internally, reducing the need to borrow funds, and increasing the loans it can service. “The company expects, by 2005 or (200)6, that will comprise 25 percent of its consolidated earnings,” said Richard Eckert, equity research analyst with Wedbush Morgan Securities in Los Angeles. Countrywide has also won accolades for its customer service, winning the number one spot in a recent J.D. Power and Associates survey, and in technical support operations, making InfoWorld Media Group’s top 10 list of the most technically innovative organizations last year. In spite of its financial results, Countrywide’s stock has underperformed the industry average, falling by about 18 percent in the first 11 months of the year and, at about $40.62, trading at less than 10 times earnings. The reason, say analysts, is the continued interest among institutional investors in finding “the next hot thing.” The Cheesecake Factory The Cheesecake Factory’s modestly aggressive expansion plans in 2002 may seem risky in the current economic climate, but the moderately priced, casual dining chain could be well-positioned to withstand the downturn in consumer spending. For one thing, analysts point out that restaurants have historically been least affected by recessions in the early 1990s, restaurant sales were barely off from prior year levels the idea being that, whatever the economy, folks have to eat. And analysts say that restaurant stocks often lead the way to recovery, outperforming the market as the economy begins to improve. Although the uncertain climate ahead makes any consumer-dependent business seem risky, analysts say that Cheesecake Factory, a 48-restaurant chain with moderate pricing and varied menu, is perhaps best positioned to withstand the potential turmoil ahead. Thomson Financial/First Call consensus sales estimates forecast sales of $145 million in the final quarter of Cheesecake Factory’s fiscal year 2001, up from $126 million in the prior year, and $148 million in the first quarter of 2002, up from $120.5 million in the comparable period of 2001. First Call projects earnings per share of $0.97 for the full fiscal year in 2002, compared with estimated earnings of $0.77 for the company’s current fiscal year ending in January 2002. While Cheesecake Factory executives have expressed some caution about the coming months, the company is going forward with its expansion plans. In 2002 the Calabasas-based company said it expects to open about 12 new restaurants in Chicago, San Jose, Austin and San Antonio, Texas, Minneapolis, Ft. Lauderdale and Orlando, Fla. and Boston, among others. The moves follow a six-restaurant expansion in 2001. While Cheesecake Factory did see sales drop off in the immediate aftermath of the Sept. 11 attacks, its most recent public comments indicate its restaurant revenues are back to pre-Sept. 11 levels, and sales in the first two weeks of Cheesecake Factory’s fourth quarter were averaging increases of about 2 percent, the company said. For its most recent quarter ended Oct. 2, 2001, Cheesecake Factory recorded earnings per share of $0.20 on a diluted basis, up 18 percent over the comparable period last year. Revenues in the quarter increased 24 percent to $137 million. The company’s stock has been on an upward trend, trading near its high in the mid-$30 range. First Call consensus rates the shares a buy and, in November, US Bancorp Piper Jaffray rated Cheesecake Factory a strong buy. Wellpoint Health Networks Wellpoint Health Networks closed 2001 with several acquisitions, and those additions, along with the company’s track record of staying nimble in a volatile health care environment, are expected to hold it in good stead in 2002. The acquisitions of Cerulean Cos. of Georgia, completed in March, and RightCHOICE Managed Care Inc., expected to close later this month, along with a planned merger with CareFirst Inc., will likely enhance the company’s product development efforts as well as its market penetration, analysts say. A report released earlier this month by Morgan Stanley cites the Thousand Oaks-based company for its innovative pricing and product programs and tiered provider plan designs. It predicts these programs, along with similar steps in managing drug costs, will help Wellpoint to rein in costs and achieve profit margins that outperform the industry. Among the plans cited by Morgan Stanley researchers are the company’s Employee Elect product group, which will be expanded in 2002, and the One Plan PPO due to launch this summer. For fiscal 2002, Thomson Financial/First Call projects earnings of $7.73 per share. Wellpoint recently was rated the best health care company in 2001 by Forbes Magazine and landed in the No. 53 position on Forbes’ list of the “400 Best Big Companies” for its five-year stock performance and other measures. The company’s share price, currently at $124.79, has risen by 244 percent over the five-year period, and the stock is rated a strong buy by Morgan Stanley, Merrill Lynch and others. The Walt Disney Co. The coming year is certain to bring challenges for the Mouse House on a number of fronts. Advertising revenues are down throughout the television sector, and Disney’s weak performance in prime time has not earned it any breathing room. A downturn in travel and tourism comes at a time when Disney needs to begin seeing a payoff from investments in its new Tokyo theme park, California Adventure in Anaheim, and Disney’s Grand Californian resort hotel, not to mention its ongoing theme park operations. Most analysts believe it will be 2003 before the company begins to see an upturn in television ad revenues and theme park attendance. Added to that, Disney is embroiled in a dispute with EchoStar Communications, which is threatening to drop its ABC Family Channel, and a management shakeup that began at ABC Entertainment Television Group in recent weeks with the departure of co-chairman Stuart Bloomberg, a 22-year veteran of the network. On the plus side, Disney enters 2002 with a trimmed down staff. The company slashed $600 million from its operating budget for live action films, and it closed 51 under-performing Disney Stores with another 50 set to close this year. Jill Krutick, an analyst with Salomon Smith Barney, lowered earnings-per-share forecasts for 2002 to $0.60 from $0.73, a drop of 39 percent over 2001. Most analysts are still rating Disney a buy, but there’s a caveat. The company is not expected to make significant upward progress until 2003, when Krutick projects the stock, now trading at $21.20, will reach a target of $28 per share. 21st Century Insurance Group Selling auto and home insurance directly to consumers has helped 21st Century Insurance weather intense competition in the industry. By eliminating the middleman insurance brokers and agents the Woodland Hills-based company has been able to pass savings along to consumers and keep up with the ferocious discounting pressure that has taken hold of the industry. But the strategy has not been as successful in the homeowner insurance sector. In recent months, 21st Century discontinued writing homeowner policies, after trying unsuccessfully to get approval for rate hikes in that business. The competition has also hurt the company’s earnings-per-share performance. 21st Century’s income has been on a steady decline over the past four years, with EPS plummeting to $0.15 per share in its most recent full year ended Dec. 31, 2000, compared to $1.00 per share in the prior year. A somewhat improved picture does appear to be on the horizon, however. 21st Century is expected to report earnings per share of $0.32 for fiscal 2001 and $0.51 for 2002, according to Thomson Financial/First Call consensus estimates. With its share price fluctuating within the $15 to $19 range, 21st Century is considered a stable stock with relatively low risk. But as the company’s earnings have deteriorated, its price-to-earnings ratio appears high at 58.8 projected by First Call for the full year, and analysts rate the stock a hold. Superior Industries International Prospects for auto and truck parts suppliers appear pretty gloomy these days, what with layoffs and closures announced at some of the big auto manufacturers, but Superior Industries International Inc. is expected to fare rather well in the coming year. The Van Nuys-based company entered into a number of contracts to supply aluminum wheels to auto makers like DaimlerChrysler, General Motors and Ford Motor Co., and the wheels have turned out to be a hot commodity. Superior has already opened two new factories to manufacture aluminum wheels, prized because they are lighter than steel equipment, and it continues to win new contracts to supply them. While estimates are less than sanguine for Superior’s fiscal 2001, analysts are projecting strong increases for the company this year. Earnings per share are expected to rise to $2.31 in 2002, up from anticipated EPS of $2.06, according to Thomson Financial/First Call estimates, leading many analysts to assign a buy rating to the stock. Ironically, the one drawback for Superior’s coming performance on the street may be its success over the past year. In the last 12 months Superior’s shares, trading between $28 and $45, have outperformed the market substantially, analysts say. Since Jan. 1, shares have trended downward from about $41.50 to a closing price of $36.47. Another question is the near-term outlook for auto manufacturing. Superior was stung in 2001 by unexpected plant closures at auto makers. Amgen Last November, when Amgen predicted its earnings per share would rise by more than 20 percent in 2002, a number of analysts raised their forecasts for the company. A month later the Thousand Oaks-based biotech company reached an agreement to acquire Immunex, creating the largest merger to date in the biotech industry, and the company’s star rose even higher. While the acquisition is expected to impact Amgen’s bottom line somewhat in the short term, some analysts say it also puts the company on track to see earnings-per-share growth of 25 percent and more beginning in 2003 and likely continuing until 2005. Thanks to new products that entered the pipeline in 2002, Amgen is forecasting significant revenue growth for the year, excluding the Immunex deal. The company expects combined sales of EPOGEN and Aranesp, two anemia drugs, to rise in the low 20-percent range over last year and sales of NEUPOGEN, a drug used to decrease the incidence of infection associated with cancer chemotherapy treatments, to grow in the mid-single digit rate. Kineret, a treatment for rheumatoid arthritis patients, is also expected to contribute to the company’s 2002 revenue growth. Consensus estimates from Thomson Financial/First Call predict Amgen’s earnings per share will reach $1.4l in 2002, growing to $1.67 in 2003 and $2.14 in 2004. For its fiscal year ended Dec. 31, 2000, Amgen earned $1.1 billion, or $1.05 per share on a diluted basis, on revenues of $3.6 billion. Although the company’s stock price has been volatile, ranging from the mid-$40 to the mid-$70 range, First Call consensus rates the stock a strong buy and Merrill Lynch in December forecast a 12-month target price of $75. Health Net Health Net Inc. hit some rough patches of road in 2001, but with the divestiture of some unprofitable businesses, the company is expected to see its fortunes rise considerably this year. The Woodland Hills-based HMO has provided earnings guidance of $1.83 per share for 2002, an increase of 16 percent over expected earnings in 2001, and analysts have followed Health Net’s lead, projecting earnings of $1.65 to $1.86 per share for fiscal 2002. The health care sector has generally fared better than many other industries in the current recession, but parts of the industry have felt the sting of the weakened economy, particularly in enrollments. Nearly all managed care companies continue to grapple with mounting pressure from medical costs. Analysts say Health Net is better positioned than many of its counterparts. The earnings increases projected for the HMO are right in line with industry averages of 16 percent for the full year. Nevertheless, Health Net’s stock performance has underperformed the industry, falling 17 percent in 2001. On Jan. 18, the stock closed at $22.02, down from its 52-week high of $24.90. Perhaps more problematic is that the company’s earnings growth has weakened somewhat in the past year while some counterparts have exhibited a strong upward momentum. Although analysts rate the stock a buy, they are not as enthusiastic about Health Net as they are about some other managed care companies such as WellPoint Health Networks, which has been rated a strong buy. THQ The second half of 2001 pumped up sales and earnings for video game software developer THQ Inc., and this year is likely to be even better. The new video game consoles that drove third and fourth quarter results for software makers will be rolling out to an even broader market in 2002, driving business for software developers like THQ. One of the top three video game software developers, Calabasas Hills-based THQ is expected to see earnings per share jump to $1.86 in 2002, according to Thomson Financial/First Call consensus estimates, up 26 percent from the $1.47 per share the company is expected to announce for the 2001 fiscal year. Revenues, which grew by 10 percent from October 2000 to November 2001, should see a more dramatic spike this year, more than doubling to $480 million from $190 million in 2001. The upward momentum is due to the introduction of new video game consoles Microsoft’s Xbox and Nintendo’s Game Cube in the fourth quarter of 2001 and the launch of Sony’s PlayStation2 earlier in the year. Those game players, faster and more visually appealing than their predecessors, have already met with strong consumer acceptance, and will be rolling out in even greater volumes in the coming year. Sales of software for the new consoles are sure to follow. “01 was the first year of a five-year cycle,” said Michael Wallace, managing director with UBS Warburg. “So yeah, THQ will have a real good year in ’02.” THQ owns several important licenses and franchises including WWF and games based on Nickelodeon programming for the kids’ market. This month, the company reached an agreement to develop games for Motorola’s mobile phones and for Sprint PCS wireless units. THQ’s stock has recently been trading in the mid-$40 range, down from a 52-week high of $65.10. But analysts say the softness in the stock price is seasonal, waning in the months immediately after the holiday selling season. First Call rates the stock a buy and Warburg, which is rating it a strong buy, set a price target of $70 by the end of the year. MRV Communications MRV Communications Inc., a maker of computer networking products and fiber optic components, continues to fight a downward trending market, but even against its peers, the Chatsworth-based company has not performed well. After losing 70 percent of its value, MRV’s stock performance ranked in the fifth percentile in 2001, with 99 being the best possible score, according to a report by Multex Investor. Shares in the company were trading at $4.17 on Jan. 18, down from a 52-week high of $21.68. With its stock price so low and the sector in the doldrums, analysts have steered their attention away from the stock, making it difficult to get a consensus on 2002 performance or a rating on the stock. Thomson Financial/First Call projects earnings per share of $0.32 for fiscal 2002, however the estimates are based on projections from just one analyst. Company officials have expressed considerable optimism in their outlook for the company, recently revising revenue guidance for 2002 upward. MRV projects that its revenues will be in the range of $220 million to $260 million for fiscal year 2002, excluding revenues from its Luminent unit, which has been merged back into the company. The company previously gave revenue guidance in the range of $180 million to $210 million for fiscal 2002. With Luminent factored back into the year, MRV said it expects revenues to be in the range of $300 million to $350 million this year. For the third quarter of 2001, MRV reported a net loss of $1.16 per share on a diluted basis, compared to a net loss of $1.06 per share in the year earlier period. For its most recent full fiscal year ended Dec. 31, 2000, MRV reported a net loss of $2.23 per share. After spinning off Luminent, MRV, which has been its major shareholder, in December folded the division back into the company, and cited the group as a major cause of its performance weakness in the fourth quarter of the year.