Hot Growth CompaniesLaurel Touby
While other executives in the health-care industry are quaking over what they're calling "the Hillary factor," Barrett Toan, chief executive of Express Scripts Inc., says he can't wait for the Administration's recommendations. That's because his $71 million mail-order pharmaceutical company is "part of the solution," Toan says. "We're going to grab new business because we save the consumer money."
Express Scripts, based in St. Louis, doesn't need a booster shot from Washington. Last year, the company's profits soared 61%, to $4.6 million, as its sales climbed 50%, to $70.9 million. Much of the gains have come from sales to small-business health plans and health-maintenance organizations that bigger competitors, such as $1.8 billion Medco Containment Services Inc., haven't bothered with.
It's the small contenders such as Express Scripts that often outmaneuver, outsmart, and just plain outperform their bigger brethren. While the rest of Corporate America muddled through tough economic times, sales soared for Express Scripts, as well as for 99 more such feisty operators on BUSINESS WEEK's 1993 Hot Growth list. Over the past three years, sales at these highfliers grew at an average annual rate of 55.4%, compared with a meager 4.2% for the 400 companies that make up the Standard & Poor's industrial index. Earnings shot up an annual average of 115.6% in the same period, while profits for the S&P group dropped 13.8%. Even better for investors, return on invested capital at the Hot Growth Companies was an average of 29.3%, vs. 9.3%.
TREND-DEFIANT. Even against such a strong field, some Hot Growth Companies were real standouts. No.1 on this year's list is Just Toys Inc. Toy industry veterans Allan Rigberg and Rose Evangelista founded the New York-based company in 1989, and quickly scooped up key licensing agreements with such heavyweights as Walt Disney, Marvel Comics, and Hanna-Barbera. Just Toys has manufactured dozens of popular products based on characters such as the Jetsons and the Little Mermaid. And their popularity made for one impressive bottom line. Earnings climbed by a staggering 110% in 1992, to $2.5 million, while sales ballooned by 137%, to $32.5 million.
Can these small companies maintain their momentum in the year ahead? There's reason to wonder. Slow spending by businesses and consumers means that the economy might limp along for the rest of 1993. And the Administration's plans for health-care reform and tax hikes may penalize small businesses.
Wall Street has already grown leery of certain growth stocks. Claudia Mott, director of small-cap research at Prudential Securities Inc., says investors have been pulling out of health-care stocks because of the political uncertainties. They also aren't keen on high-tech stocks, whose earnings haven't kept pace with expectations. Because of their strong three-year financial performance, such companies dominate this year's Hot Growth list. As a result, the shares on this year's list are trading at an average of 25% below their 52-week highs. Mott says investors are starting to turn to basic industries that have been overlooked. Trucking, manufacturing, and utilities are among the favored sectors, says Mott.
Of course, some small companies do well no matter what the economy does. "Growth companies often defy industry trends because they define or even create the industries in which they compete," says Mike DiCarlo, fund manager for John Hancock Special Equities Fund, which specializes in such stocks. If you're interested in scouting for some of these trend-defying highfliers, BUSINESS WEEK has a step-by-step guide on how to take up the hunt.
As in years past, software makers comprise the single biggest industry group on the Hot Growth list. In all, 14 appear on the rankings. Most benefited from higher personal-computer sales as manufacturers lowered prices. Platinum Technology Inc., based in Lombard, Ill., is the group leader, at No.21--but it's something of an exception. Surprisingly, the company excelled by making software for IBM mainframes. True, the popularity of mainframes is declining, but the switch to personal-computer networks takes time, and customers still need software to run their big computers. That's why Platinum's profits more than doubled to $9 million last year, as its sales soared 76%, to $49 million.One decidedly low-tech sector that's thriving is restaurants, thanks to stable food costs--and a certain amount of apathy about rising cholesterol counts. Five steakhouses and hamburger chains show up on this year's Hot Growth list. Lone Star Steakhouse & Saloon made it all the way to No.2.
DEEPER POOL. Despite the economic and policy jitters, there's at least one auspicious sign for growth companies: Money isn't as tight as it has been. True, banks remain stingy, but that could change. Clinton has named a banking task force to explore ways to relax lending standards to encourage more small-business loans. The panel's recommendations are expected in June. Meanwhile, the pool of venture capital has grown as institutional investors seek better returns than those available from the bond and stock markets. In 1992, $2.5 billion was raised to invest in new companies, compared with $1.3 billion in 1991, according to researcher Venture Economics.
What's more, small companies have been finding a warm welcome in the market for initial public stock offerings. Indeed, 26 of this year's Hot Growth Companies went public in the past 12 months. All told, there were a record 513 IPOs totaling $24 billion last year, according to Securities Data Co.
One of those newly public companies was Express Scripts, the mail-order drug retailer. Pulling off a successful IPO in the face of a Washington whipsaw of health-care politics is proof positive that Hot Growth Companies can make their own destinies.
HOTTEST OF THE HOT SALES Millions of dollars* $148.6 144.5 140.7 136.7 132.5 *Latest four quarters EARNINGS Millions of dollars* $30.7 29.6 22.2 20.7 20.2 *Latest four quarters MARKET VALUE Millions of dollars* $1477 735 645 562 488 *As of April 30 DATA: STANDARD & POOR'S COMPUSTAT SERVICES INC. SALES GROWTH Average annual rate* 298.2% 227.5 220.8 196.5 140.5 *Latest three years EARNINGS GROWTH Average annual rate* 822.4% 454.3 443.0 289.0 283.4 *Latest three years PROFITABILITY Average annual rate* 77.3% 72.8 67.5 67.4 63.6 *Latest three years' return on invested capital