Wall Street ignores L.A.'s star players.

Even L.A.'s most profitable companies are having a tough time getting respect on Wall Street.

Of the 50 public companies with the highest return on equity in 1998, half saw their stock price decline last year, according to a Business Journal survey.

Despite all the excitement over L.A.'s increasingly prominent role in new media and the Internet, the local economy continues to be driven largely by mid-market companies in decidedly low-tech industries, such as apparel, retail and manufacturing. Most of these businesses have been cranking out steady profits year after year, providing the region's economic backbone.

But to many investors, they are just plain boring.

"They don't have 'dot-com' after their name," said Bruce Mandel, president of Oakwood Capital Management LLC in Century City. "The market has been very narrowly focused on Internet-related stocks.

"Only four of the top 50 companies are large," he pointed out. "The rest are small and medium-size companies, and the market is just not interested in that."

The faster-growing L.A. companies that receive the most attention on Wall Street tend to fare poorly when it comes to the bottom line.

One example is Pasadena-based Internet service provider EarthLink Networks Inc., which last year saw a 342 percent jump in its stock price. But EarthLink suffered a net loss last year of over $59 million, resulting in a negative 1998 return on equity of 34 percent.

"The Internet companies have all made statements to indicate that they are more interested in market share than profits," said Tom Weinberger, executive vice president and director of investment banking at Sutro & Co in West Los Angeles. "Investors understand that."

By contrast, the most profitable company in Los Angeles, based on 1998 ROE, was Hilton Hotels Corp., which shrugged off the economic turmoil in Asia and posted an ROE of 95.2 percent. Despite that handsome return, Hilton's stock price plunged 35.7 percent last year.

Hilton's bottom line has been boosted by strong business at its United States and European hotels. And its strong ROE is not limited to 1998; Hilton's average annual ROE over the past five years is 26.3 percent, a return bested by only seven other L.A.-based companies.

Return on equity is one of the most popular yardsticks used by investors to measure how effectively a company uses its investors' capital. The percentage is calculated by dividing net income by the average shareholders' equity over a given period. It demonstrates, in essence, how much net income earned in relation to the total amount of money investors have put into the company.

In general terms, an ROE of over 30 percent is exceptional, in the 20s is above average, and under 10 percent is sluggish.

By that measure, L.A.'s high-fliers are looking good. The average one-year ROE for the top 50 companies in 1998 was 25.1 percent, down slightly from 1997's top 50 average of 28.8 percent. For all 249 public companies measured, however, one-year ROE in 1998 was -5.5 percent, compared with -7.7 percent in 1997.

Aggregate net income generated by Los Angeles public companies in 1998 was $7.5 billion, a nearly 30 percent drop from $10.6 billion in 1997.

While the decline mirrors a slowdown in corporate profits nationwide, it also reflects the fact that several of L.A.'s few remaining major companies have fallen on hard times.

Atlantic Richfield Co. posted a net loss of $655 million in 1998. Times Mirror Co. saw its net income fall from around $250 million in 1997 to $93 million in 1998.

Further depressing local profits is the loss of several major companies.

SunAmerica Inc., for example, reported earnings of $500 million for the year ended Sept. 30, 1998. But because SunAmerica has been acquired by New York-based American International Group, those earnings are not included on the list.

Likewise, H.F. Ahmanson & Co., parent of Home Savings of America, was expected to generate nearly $500 million in 1998 earnings. But last year it was acquired by Seattle-based Washington Mutual Inc.

In future years, profits could be lower still, with such giants as Arco disappearing after this year. While the oil company lost money in 1998, in previous years it had posted net income of as much $1 billion.

Many of L.A.'s most profitable companies may seem surprising, given their track records and industries.

Herbalife International Group, the Century City distributor of personal health care products, ranked No. 8 with an ROE of 33.5 percent. Despite its history of volatility (it almost went out of business in the early '90s), Herbalife [TABULAR DATA OMITTED] has proved to be a solid profit generator over the last five years, with average annual ROE of 32.2 percent.

Herbalife's high ROE is partly due to the fact that as a distributor, rather than a manufacturer, it has relatively low overhead.

But Herbalife's stock price plunged 32 percent in 1998. Analysts attributed the downturn to fears over how the Asian and Russian economic crises would affect the company's earnings.

One company that did well both at the bottom line and on Wall Street was Tarrant Apparel Group, which posted a 1998 ROE of 31.1 percent and saw its stock jump more than 400 percent. Tarrant produces private-label clothes, mostly in Mexico, which are sold to department stores.

"It's ironic that everyone has been wringing their hands about Atlantic Richfield (being acquired by BP-Amoco PLC), and they are near the bottom of the list," said Jack Kyser, senior economist at the Los Angeles County Economic Development Corp. "But Tarrant is near the top of the list and hardly anyone has heard of them."

While only a handful of companies enjoyed such a strong showing, the diversity of the local public-company universe continues to be one of its strengths. "What you see is that profitability is spread across the entire industrial base," said Weinberger.

And though some of the companies near the very top are there because of one-time events such as spin-offs, stock repurchases or other forms of recapitalization - there are plenty of war horses that have been generating profits year after year.

Avery Dennison Corp., a leading manufacturer of office supplies, has been averaging a strong ROE of around 20 percent for five years.

Likewise, temporary employment agency On Assignment Inc. has been averaging 20 percent for the past five years. Legal newspaper publisher Daily Journal Corp. has been a similarly solid performer.

Despite mergers and acquisitions that have stripped Los Angeles of its major banking institution headquarters, financial services posted a strong showing among the top 50.

Jefferies Group Inc. ranked 25th with 1998 ROE of 25 percent - despite a slowdown late last year in the high-yield bond market in which Jefferies specializes. GBC Bancorp, which primarily serves the local Chinese-American community, and Beverly Hills-based bank City National Corp. also did well, as did mortgage lender Countrywide Credit Industries Inc.

Noticeably missing from the top 50 are representatives of L.A.'s flagship industry, entertainment.

Walt Disney Co. is ranked No. 116, with 1998 ROE of 9.5 percent. Metro Goldwyn Mayer Inc. staggered in at No. 196.

"Unless you look a long way down the list for some entertainment companies, this list could be from any city in the country," said James Heczko, a managing director at Duff & Phelps LLC, which compiled the list.

Analysts pointed out that because film productions require massive capital expenditures, it is not surprising that entertainment companies would post lower ROEs.