Numbers strong in first half but caution urged for future.

The San Fernando Valley's largest public companies turned in a gangbuster performance in the first half of the year, with many firms increasing earnings as a result of revenue growth, not cost-cutting.

The Valley's 25 largest publicly owned companies increased earnings by an average of 65 percent in the first half of 2003 and revenues rose an average of 18 percent for the period.

The results were stronger yet for the most recent quarter, which ended June 30 for most of the companies reposing. On average, net income more than doubled for the largest area companies and revenues rose by an average of 77 percent.

But anyone waiting to exhale may want to hold off for now.

While the economy has moved two steps forward in the first half, it is also likely to take at least one step back come next year, economists say.

"I think what's shaping up here is slow, gradual growth drawn out over a longer period," said Chuck Hill, director of research at Thomson FirstCall. "I don't think we're going to have that earlier-in-recovery surge that we usually get."

Despite the generally positive news, both locally and nationwide, a number of sectors continued to perform poorly and for others, real growth, excluding such things as the effect of the weak dollar, was not nearly as strong as the bottom line numbers reported, Hill pointed out.

"Business spending isn't picking up to any degree," Hill said. "There's some going on, but it's mainly replacement demand, not expansion."

That, coupled with a slowdown in consumer spending expected to accompany rising mortgage rates, portends what Hill called "choppiness" in the recovery.

"I think we may get enamored with growth in the third and fourth quarter and think things are starting to look like the normal recovery," Hill said. "Then I'm afraid it may soften beginning next year when some of the stimulus will run its course."

Although the especially high Valley averages are skewed by the small sample of companies involved and triple digit percentage increases reported by some of those firms, die local pattern nevertheless reflects trends that emerged nationally.

Second quarter earnings for the S&P 500 are expected to come in at nearly 10 percent above the comparable period last year and revenues are projected to rise about 7 percent, according to Thomson FirstCall.

In the Valley, 21st Century Insurance Group, Zenith National Insurance Corp., K-Swiss Inc. and Countrywide Financial Corp. turned in the strongest performances. These companies more than doubled earnings compared to the second quarter of last year.

Zenith, which registered a 183 percent increase in the quarter, saw net income soar 223 percent for the half year period, thanks largely to recent increases in workers' compensation premiums.

The company reported earnings rose to $18.4 million or $0.97 per share for the second quarter on revenues of $211 million. That compares with earnings of $6.5 million or $0.34 per share on revenues of $140.3 million in the second quarter of 2002.

For the half year, net income at Zenith soared to $30.1 million on revenues of $397.7 million, versus earnings of $9.3 million on revenues of $273.4 million in the same period last year.

Countrywide registered a 101 percent increase in net income in the quarter and a 98 percent boost for the six month period. Countrywide reported that earnings for the quarter increased to $382.9 million or $2.74 a share on a 74 percent revenue increase to $1.7 billion.

For the six months, Countrywide reported net income of $709.2 million, versus $358.4 million in the like period last year. Revenues jumped to $3.3 billion from $1.9 billion in 2002.

21st Century rises

Earnings at 21st Century increased 195 percent for the quarter and 23 percent for the half year.

21st Century reported second quarter earnings of $29.2 million or $0.34 per share on revenues of $287.2 million. For the half year, 21st reported earnings rose to $22.4 million on revenues of $558.7 million, compared to net income of $18.2 million on revenues of $435.3 million for the like period last year.

Nationally consumer products companies were dragged down by a decrease in auto sales for the most recent quarter, but the Valley, with only a tiny number of consumer goods companies, did not feel the effects of those dynamics.

K-Swiss, one of the few large consumer goods manufacturers in the region, recorded a 108 percent earnings increase in the quarter to $12.6 million or $0.67 per share on a sales boost of nearly 50 percent. K-Swiss earnings rose nearly 70 percent for the half year to $26.3 million, and the company raised guidance for the full year based on a backlog of orders.

The athletic footwear maker expects to report full-year earnings per share between $2.20 and $2.30 and revenues between $395 million and $405 million.

As happened across the country, the Valley's population of real estate, health care and insurance companies helped prop up the economic news.

Earnings at homebuilder The Ryland Group Inc. rose 21 percent for the quarter to $54 million or $2.03 per share on revenues of $840 million. For the half year, Ryland's net income rose 30.4 percent to $92.2 million or $3.46 per share.

"Ryland's second quarter has been one for the record books," said R. Chad Dreier, president and CEO, "with our highest ever quarter-end backlog."

Ryland raised its fiscal year guidance to more than $8 per share as a result.

Wellpoint Health Networks Inc. saw a 32 percent earnings increase to $224.5 million or $1.49 per share on revenues of $4.9 billion. For the six months ended June 30, Wellpoint reported earnings of $417.5 million, an increase of 34 percent over the comparable period last year, on revenues of $9.8 billion.

The quarterly performance also led Wellpoint to increase its full-year guidance to between $5.60 per share and $5.65 per share. Previous guidance was $5.50.

Health Net Inc. recorded a 15 percent earnings increase for the quarter to $74.5 million or $0.63 per share and raised its guidance for the full year to an earnings per share range of $2.63 to $2.67. Previously, Health Net had projected earnings per share in the range of $2.56 to $2.60.

Dismal tech sector

But despite the preponderance of good news, the tech sector, with few exceptions, performed dismally, both locally as well as across the country.

I don't have a good estimate for the technology area," said Hill of the first half, "but basically you're talking about no revenue growth. It's all coming from cost-cutting.

The exceptions locally were Digital Insight Corp. developers of Internet banking services, and United Online Inc., the Internet service provider.

At Digital Insight, earnings rose to $3.6 million or $0.11 per share on a 16 percent increase in revenues to $37.3 million. That compares with a net loss of $300,000 or $0.01 per share on revenues of $32.1 million for the second quarter of 2002. For the six months, Digital Insight recorded earnings of $6.4 million on sales of $72.8 million, compared with a loss of $35 million on sales of $62.2 million in the comparable period last year.

United Online improved its earnings picture measurably, thanks in part to a large increase in its paid subscriber base this year. The company's net income rose to $14.6 million or $0.32 per share for the quarter, compared to a loss of $2.7 million or $0.07 per share last year. United Online, which ended its fourth fiscal quarter on June 3, registered a 46 percent increase in revenues for the period, to $79.6 million.

But the performance of most tech companies in the Valley was more consistent with the national trend.

Net income at Tekelec, the Calabasas-based telecommunications company, fell to $1.2 million or $0.02 per share in the quarter from $4.5 million in the second quarter of 2002. Revenues, $62.9 million for the second quarter, declined against the prior year period, although the company noted sales were up sequentially compared to the last quarter.

Video game developer THQ Inc. lost $3.6 million loss, or $0.09 per share, for its first quarter ended June 30, 2003 on revenues of $98.1 million.

Unova lost $15.7 million in the first six months of 2003, compared to earnings of $4.1 million for the comparable period last year.

While no one is projecting significant growth for the tech sector anytime soon, the real wild card may be manufacturing, which is showing continuing signs of weakness across the country.

Capacity utilization, a key measure of manufacturing strength, has been flat for the past 18 months, far longer than past recessions, Hill said.

The good news, is fears of a double-dip recession or deflation have, by and large subsided. But while things are not expected to get much worse, they are also not likely to get better for some time to come.

"Barring any major geopolitical upheaval, I think we can sit back and count on a gradual recovery," Hill said, "but gradual is the operative word, and don't get too carried away with improvement in the third or fourth quarter."

Big Winners

Some of the strongest performers in the second quarter

                        Earnings
Company                  '03               02           Change

Countrywide         $382.9 million    $190.9 million     101%
K-Swiss              $12.6 million      $6.1 million     108%
21st Century         $29.2 million      $9.9 million     195%
Zenith National      $18.4 million      $6.5 million     183%