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Big-Small Divide for Public Companies

The Business Journal’s list of Public Companies contains a lot of the same familiar names from past years, but there has been movement as companies move up and down the rankings. Walt Disney Co. retained its No. 1 spot on the list ranked by market capitalization that starts on page 12. The next five companies also held the same positions that they did a year ago. But then there is human resources and employment services Asgn Inc., which dropped two spots to No. 9 on the list. Cheesecake Factory Inc. as well dropped a spot to finish at No. 11. The biggest drop on the list was Sienna Biopharmaceuticals Inc., which went from the No. 26 spot to No. 37 as its market capitalization decreased by 91 percent to $27.1 million. The Westlake Village biotech firm is still in startup mode and has no revenue. It will begin Phase 3 clinical trials on its psoriasis drug, known as SNA-120, later this year. A research report on the company by Gary Nachman of BMO Capital Markets said that Sienna had positive meetings with the U.S. Food and Drug Administration on the completion of Phase 2 trials on SNA-120 and reached agreement on the design of the Phase 3 trials. “(Sienna) will start enrolling the first of two planned Ph3 trials later this year,” the research report said. (Sienna) will enroll patients with mild-to-moderate psoriasis and at least moderate pruritus (or itching). The report forecast that Sienna will turn profitable in 2025. Another company that dropped was California Resources Corp., which fell seven spots to No. 19 on the list. Dave Meats, senior equity analyst at Morningstar Inc. in Chicago, characterized California Resources as having improved its financial health but that it was still poor. The company carries $5 billion in debt, all of which came from being spun off in 2014 from Occidental Petroleum Corp. “The firm will continue to chip away at its debt, but it will be several years before it can align its leverage ratios with peers,” Meats wrote in a research report in May. Two public markets The Business Journal’s list has two parts – massive corporations at the top, and a lot of middle and small cap companies throughout the region. Those two types of companies face different sets of issues Rodney Ramcharan, an associate professor of finance and business economics at the USC Marshall School of Business, told the Business Journal. ently licensed to other services.” One challenge facing newer companies is in getting investors to understand the business, the business model, the growth potential and the competition. That is a role that the IPO underwriter needs to take, whether it is Goldman Sachs Group Inc., JP Morgan Chase & Co. or some other investment banking firm, Ramcharan said. Sienna, for example, went public with its initial public offering just two years ago, making it among the greater San Fernando Valley area’s newest public companies. There were no companies that went public in the region last year. Industry consolidation is a significant factor that must be taken into account in explaining a business to potential investors, Ramcharan explained. It used to be that the top three firms in any sector would not really dominate the sector; they might control a market share of a third or a quarter of the total pie. Nowadays the top three firms in most sectors account for 60 percent of the market share, he said. “If you are looking at a smaller firm in the Valley, (it’s necessary to explain) to investors what are the comparative prospects for this firm in an economy where increasingly the bigger firms tend to have a lot more of the market power,” he added. That challenge is different from what large legacy public companies face – for example, Disney or Amgen Inc. in Thousand Oaks, the No. 2 company on the list. One of those is the disruption from technology, Ramcharan said. “That is the big battle these legacy firms are facing is how do you handle all the disruption coming from technical change,” he noted. A company like Burbank-based entertainment and media giant Disney is aware of the change technology brings to its businesses. For those reasons it acquired animation studio Pixar more than 10 years ago and is now poised to compete against streaming service Netflix Inc. and others with its direct-to-consumer Disney+ platform to launch later this year. “I think in the specific case of Disney, they are doing a really good job,” Ramcharan said. In addition to Disney+, the company also owns Hulu, the Santa Monica-based streaming service it became majority owner of after acquiring 21st Century Fox early this year. It took full control of the service after striking a deal in May with Comcast Corp. for its share. Neil Macker, senior analyst with Morningstar, said in a research note from May the deal appears to be a win-win for both Disney and Comcast. “Disney will … be able to share information between the platforms on users, viewing habits, ad impressions and other data,” Macker put in the note. “For Hulu specifically, operational control will also help Disney to expand the service internationally as the firm regains control of its own content that is currently licensed to other services.” Big issues Ramcharan, who has worked for the InRamcharan, who has worked for the International Monetary Fund and been a visiting scholar at the Dutch National Bank and the Federal Reserve Bank of Philadelphia, said there are several big picture issues that public companies are dealing with these days. One is the tax cut from late 2017. Depending on the industry they are in, the tax cuts were seen as a positive thing as in some cases it allowed companies to book a lot of profits they had offshore, he said. With profitability going up it has been reflected in their stock price, Ramcharan said. “The stock markets have done very well in the last six to nine months on account of the fact that the profitability of some big firms has gone up a tremendous amount because of the tax cuts,” he explained. Another issue is the whether the Federal Reserve Bank decides to cut interest rates after a cycle of raising the rates. “If that is the case, that is going to have an impact on stock prices and potentially on corporate profits as well,” Ramcharan said And, lastly, there is trade policy – although Ramcharan admitted that no one has any idea of what exactly is going on with it. Growth in China, for instance, is the slowest it has been in 28 years. If that pace continues in the next quarter and the Chinese banking system begins to crater because it is so leveraged, it may have an impact on corporate profits in the U.S. “It could be quite huge, but we don’t know what it is going to be,” he added.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.
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