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Friday, Aug 19, 2022
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Lean Firms Go Toe-to-Toe with Corporate Giants

Size matters, but not when it comes to profitability. The top performers on the Business Journal’s annual list of the most profitable companies are not the greater Valley region’s largest corporate giants, but relatively smaller companies with streamlined business models that have been honed over time. Crown Media Holdings Inc. ranked No. 1 on the list, the same position it held on the previous year’s ranking, while Cherokee Inc. and Power-One Inc. placed second and third respectively. What these companies have in common is a thrifty system for generating profits. Crown Media, parent of the Hallmark Channel and Hallmark Movie Channel on cable TV, produces relatively little new content, preferring to broadcast reruns of evergreen TV shows and movies from its vast library. By avoiding the high costs of film and TV production, the Studio City company produced a return on equity of 95 percent last year. (See Crown Media profile on page 1.) Second-place Cherokee is a licensing company that puts its branded apparel into major retail chains. For example, the Cherokee label is a staple in stores run by Target Corp. and Tesco plc; its Carole Little brand sells in TJX Cos. outlets. Because the company doesn’t own manufacturing plants, warehouses or distribution systems, it avoids large capital investments and puts its money to work turning around inventory on store shelves. The Van Nuys company has placed first or second on the list of most profitable companies every year since 2005. “If you have a business that is not capital intensive, based on royalty or licensing income, it will show a very high return on capital,” said Alex Cappello, owner of investment bank Cappello Capital Corp. in Santa Monica. “It’s a great business if you can find a way into it and stay ahead of the competition.” Power-One Inc. in Camarillo, the third place company on the list, has found a lucrative niche in the cutthroat solar electricity sector. While the market in recent years has been flooded with low-cost solar panels from Asia, Power-One has focused on making inverters, the machines that convert direct current from sunlight to alternating current that runs in buildings. “The high return on equity is the result of Power-One’s positioning in one of the highest-margin elements of the solar industry’s value chain – the inverter market,” said Pavel Molchanov, an analyst in the Houston office of brokerage Raymond James & Associates. “In contrast to the hyper-commoditized solar panel market, an inverter is a sophisticated piece of electrical engineering and Power-One has developed a great deal of intellectual property that helps differentiate its products.” Some larger companies in the local economy are in the top 10 on the list. Teledyne Technologies Inc. turned in a 20 percent return on equity to place No. 5 on the list, while Amgen Inc. ranked fifth and ValueClick Inc. ranked seventh. Walt Disney Co., the largest company in the Valley by market capitalization, ranked No. 12 in profitability with a 12.9 percent performance. ROE losers Return on equity is defined as net income, or profits, divided by the shareholder’s equity in a company. Companies on the list are ranked by return on equity over a three-year period. Cappello said return on equity is one measure used to judge a company’s performance. He added that one benchmark to determine a good return on equity is to compare it to interest rates, which are currently in the low single digits. Yet even by this standard, some of the publicly traded companies on the list didn’t measure up. Fully 16 of the 50 companies had negative performance over the last three years. MannKind Corp., the Santa Clarita biotech research firm fighting a long battle for government approval of its inhalable insulin technology, reported the worst return on equity at -664 percent. The breathable insulin powder has twice failed to get FDA approval, and the company is preparing new data for a third attempt sometime in 2013. With low interest rates and many companies accumulating cash, Cappello said overall corporate balance sheets look good – a good indicator of profitability. But he’s cautious how long the upswing will last. “Eventually interest rates will go up and I’m not sure how the market will react. At some point the government will constrain its printing of money, and I’m concerned what will happen when the music stops,” he said. Download the 2013 VALLEY’S LARGEST PUBLICLY TRADED COs list (pdf) Download the 2013 VALLEY’S MOST PROFITABLE COMPANIES list (pdf)

Joel Russel
Joel Russel
Joel Russell joined the Los Angeles Business Journal in 2006 as a reporter. He transferred to sister publication San Fernando Valley Business Journal in 2012 as managing editor. Since he assumed the position of editor in 2015, the Business Journal has been recognized four times as the best small-circulation tabloid business publication in the country by the Alliance of Area Business Publishers. Previously, he worked as senior editor at Hispanic Business magazine and editor of Business Mexico.
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