Estimates for 2005 earnings rise for local companies.

With the 2004 reporting season largely over, local companies are poised for continued earnings growth through the rest of 2005, with oil, videogame and raw materials companies showing the most momentum.

Earnings estimates for roughly 25 percent of the companies in the Business Journal's LABJ 200 Stock Index have been on the rise in recent weeks, according to I/B/E/S, which tracks the projections of Wall Street analysts. Just 18 percent of companies tracked showed falling earnings estimates.

Estimates have increased the most for metals processor Reliance Steel & Aluminum Co., oil and gas exploration companies Unocal Corp. and Occidental Petroleum Corp., videogame maker THQ Inc. and toy manufacturer Jakks Pacific Inc.

Higher oil prices and increased demand for raw materials are a common thread. Another is consumer demand, as evidenced by rising estimates for THQ and fellow videogame maker Activision Inc., as well as nutritional supplements manufacturer Herbalife Ltd., online postage vendor Stamps.corn and footwear maker Skechers USA Inc.

Ian Corydon, an analyst at B. Riley Co., a Los Angeles-based research, trading and investment banking firm, said he was not surprised that both THQ and Activision had raised their earnings estimates for 2005, given the success of the two companies' games during the holiday season.

"Both companies are putting out a wider variety of games that are high-quality and that's caused big media firms to talk about getting into the videogame sector," he said.

Santa Monica-based Activision reported third-quarter net income of $97.3 million, compared with $77 million for the like period a year earlier. The company also declared a 4-3 stock split. Calabasas Hills-based competitor THQ posted third-quarter net income of $62.9 million, up from $30.4 million for the year-ago period.

With earnings season nearly over, many analysts are talking about the prospect of slower earnings growth in the current quarter and single-digit growth in the second half of 2005--if only because comparisons are getting tougher.

During the October-December period, U.S. public companies generated an average of 20.4 percent earnings growth, according to Thomson Financial (with 92 percent of companies reporting).

"We're still seeing very strong growth with companies throwing off profits of more than 20 percent in five of the past six quarters," said John Butters, a Thomson research analyst.

Investment textbooks maintain that stock prices will eventually follow corporate earnings over time. Long-term investors often prefer steady performers because the stocks of fast-growing companies often are unable to sustain double-digit growth rates.

"There's a lot of chatter about a slowdown in the growth rate because comparisons with last year are going to be tough on a percentage basis," said Wes Cummins, head of research at B. Riley. "Over the last couple of years, you had the downturn and a bunch of companies streamlined their operations and created a lot of operating leverage, which really hit their bottom line in 2004."

The boom-and-bust pattern is in boom phase at Reliance Steel, however, where fourth-quarter profit rose fourfold on soaring metal prices driven by demand from China for steel, aluminum and other metals.

One-time events also changed the outlooks for several companies.

Occidental raised its dividend and earnings outlook because of the increased book value of an acquisition. Another growing company, Teledyne Technologies Inc., which makes components for missile defense systems, raised its first quarter earnings because five acquisitions last year helped boost profits.

Among companies whose earnings estimates were falling, many either sell an unproven product or haven't yet brought a product to market.

Music downloading service Napster Inc. falls into the former category, while development-stage biotech company Mannkind Corp., falls into the latter. Others losing ground included Superior Industries International, a maker of custom automobile wheels facing growing competition from China, OSI Systems Inc., a provider of airport and other security systems, and Arden Realty Inc., the largest office landlord in Los Angeles County.

Rise and Fall

Hard industries like oil and steel lead the projections
for 2005 among local local companies.

                                           Change vs.
Company                           4Q EPS     Year-Ago

Winners
  Reliance Steel & Aluminum Co.    $1.31        $1.01
  Occidental Petroleum Corp.        1.64        +0.87
  Unocal Corp.                      1.00        -0.23
  Jakks Pacific Inc.                0.37        +0.29
  THQ Inc.                          1.58        +0.80

Losers
  MannKind Corp.                  -$0.65       +$0.28
  Arden Realty Group Inc.           0.52        +0.31
  PC Mall Inc.                      0.00        -0.09
  OSI Systems Inc.                  0.15        -0.05
  Napster Inc.                      0.36        +1.28

                                  2005 EPS   Recent
Company                           Estimate   Change

Winners
  Reliance Steel & Aluminum Co.      $4.22    $0.61
  Occidental Petroleum Corp.          6.48    +0.26
  Unocal Corp.                        4.22    +0.26
  Jakks Pacific Inc.                  2.15    +0.25
  THQ Inc.                            1.35    +0.25

Losers
  MannKind Corp.                    -$2.61    $0.62
  Arden Realty Group Inc.             0.64    -0.47
  PC Mall Inc.                        0.43    -0.31
  OSI Systems Inc.                    0.45    -0.29
  Napster Inc.                       -1.63    -0.23

4Q=Calendar 2004 4Q

Source: I/B/E/S