Professor Mike Lord Comments on the Performance of Triad Companies

1.28.2011 Article, Faculty News, General

Market capitalization for Triad companies continues to improve
Reposted from Triad Business Journal | by Owen Covington , Staff writer

During 2008 when its market capitalization was in the process of dropping $1.5 billion, Greensboro-based VF Corp. launched an aggressive strategy to boost ad spending and focus on acquisitions. Now, two years after the stock market plunged, taking VF Corp. and the Triad’s other public companies with it, the apparel company is surging. Others local companies are, too.

VF has recovered the lost market cap value from 2008. Winston-Salem-based BB&T has topped its 2007 value by more than $1.8 billion. When you consider the 27 other public companies based in the Triad, based on Business Journal research, the group posted a second straight year of market capitalization growth.
“The fact that (market cap growth) did sustain for a two-year period leads us to think less and less about a double-dip recession,” said Tony Plath, banking and finance professor at UNC-Charlotte.

A continued increase in market cap may bring a sigh of relief for local executives, but it doesn’t remove all fears about the economic future. Hiring remains anemic. And state and local government budget shortfalls have escalated dramatically.
Still, market capitalization, defined as the stock price multiplied by the number of outstanding shares in a public company, can be a leading economic indicator. Generally speaking, a rising market cap means revenues and cash flows of companies are increasing, which breeds more confidence among investors and the companies themselves to invest in growth — and eventually, start hiring again, Plath said.

“We’re not out of the woods,” he said, “but we’re walking through it.”

During 2010, the Triad’s public companies saw their collective market cap value grow 13.8 percent — roughly on par with the 15 percent growth in the S&P 500 and outpacing the 10 percent increase in the Dow Jones Industrial Average. That positive growth follows a 27.7 percent gain during 2009.

Of the 27 companies for which four years of data are available, 11 have exceeded their market caps from the end of 2007, which is all the more remarkable given the $6.1 billion in losses they posted as a group during 2008.

Two companies that lost roughly half their market cap values in 2008 — Targacept, a Winston-Salem biotech, and Krispy Kreme — have come back to more than double their market cap values from the end of 2007.

Strength in diversity
VF credits its comeback to increased sales at its own retail outlets, a spike in international sales and the increasing diversity of its apparel lines. Since VF’s acquisition of The North Face in 2000, the company has expanded its activewear and outdoors clothing offerings so that they now make up the largest portion of its business — a spot held five years ago by jeanswear.
In a Jan. 5 report on VF, analyst Mitch Kummetz with Milwaukee-based Robert W. Baird & Co. noted that the outdoor segment “still has lots of growth ahead of it as well.” Sales of those brands were up 14 percent in the third quarter of 2010, compared to a 6.6 percent increase in sales that quarter overall.
“The strength of their business for the last two years-plus has been the outdoor and activewear collection,” Kummetz said.
Increasing sales revenues for VF, and in turn an increasing market cap, can indicate more consumer confidence, at least among a certain segment of consumers, said Mike Lord, professor of management at Wake Forest University’s School of Business.

“To the extent that VF is doing fairly well,” Lord said, “it’s a reflection that people can afford and are buying fashion brands.”

Unsustainable heights
Though banking and financial service industries were among the hardest hit during the 2008 economic collapse, BB&T has been able to buck that trend largely due to a more conservative approach to mortgage lending. The bank has posted steady gains since 2008 and saw much smaller losses in its market cap than its industry peers during 2008.

“BB&T didn’t play all the games that the big money-center banks (in New York and Charlotte) got involved in,” Lord said. “BB&T had more of a slow and steady approach. It was more back-to-basics banking, which is lending money to people who can afford to repay it.”

Topping its 2007 market cap, when times were relatively good, was easier for BB&T because its value then wasn’t as inflated as others in the banking and financial services industries, Lord said.
That’s certainly the case with

Winston-Salem-based mortgage insurer Triad Guaranty. The company saw its market cap value drop from $146.2 million at the end of 2007 to just $5.7 million in 2008, then fall further to $1.4 million. It posted a 179.5 percent gain in 2010 — the largest percentage gain of all local companies — but its market cap value of just under $4 million is a fraction of what it was before the collapse.

“It was an unrealistic and unsustainable peak,” Lord said of Triad Guaranty in 2007. “It wasn’t real. The revenues weren’t real. The profits weren’t real.”

Most of BB&T’s local banking peers continued to see declines in their market cap values in 2010, though not all.
Greensboro-based NewBridge Bank, for example, saw a 113.9 percent rise in its market cap value during 2010 to rank third among the Triad’s public companies. The bank, like many of its local peers in the financial industry, was hit hard during 2008, when it saw its market value plunge from $169.4 million to $37.3 million. During 2010, that value rose to $74.4 million — the first increase since the drop.

All of these positive signs in the economy still don’t portend a surge in hiring any time soon, experts say.

“I think there is more of a disconnect now between company performance and stock market performance and employment than there has been in the past,” Lord said. “Companies are very skittish about hiring even though this quarter or this year’s numbers look good.”