THE TIMES 100 : THE BEST PERFORMING COMPANIES IN CALIFORNIA : INDUSTRY REPORT : Every Sector Adds to the Pot : Banks, Energy and Retailing Lead 48% Rise in Profits Among the State’s Public Firms

California’s public companies racked up a 47.4% increase in 1988 profits as the 921 firms surveyed for the Times 100 listings reported strong earnings in almost every sector. Net income totaled $19.5 billion last year, up from $13.3 billion, while sales rose 9.8% to $388.1 billion.

The year was marked by some spectacular turnarounds. Most dramatically, there was a 178% increase in income--$3 billion in a single year--reported by the 167 financial services institutions. The total $4.8 billion accounted for about a quarter of all earnings among the state’s publicly traded companies.

The financial-services rebound was led, of course, by BankAmerica, which left its bad foreign loans behind and climbed from nearly a billion-dollar loss in 1987 to a $547-million profit. Similarly, First Interstate went from a $556-million 1987 loss to a $102-million profit.

Meanwhile, energy prices continued relatively strong during the year, favoring the state’s huge oil firms (but running up costs for public utilities, a sector in which income declined 7.5%). Chevron dislodged Arco from its position as the state’s leading company in absolute profits with $1.768 billion in earnings, up from slightly more than $1 billion. Arco finished second as earnings rose to $1.58 billion from $1.22 billion.

After the two energy giants, only Pacific Telesis’ earnings topped the billion-dollar mark. Continued strong growth in demand for telecommunications services--including cellular phone service--and improved productivity helped boost earnings to $1.19 billion from $950 million.

A beneficiary of the state’s continuing population growth was retailing. California companies continued to add new stores--and employees--with shopping centers and strip malls springing up in the Southland deserts and Central Valley farming communities as younger families move ever farther from the urban core in search of cheaper housing.

“Mall construction is dead outside California,” said Sarah Stack, who follows retailing for the Bateman Eichler, Hill Richards brokerage in Los Angeles. One result: Retail employment within California increased 10% last year, compared to 7% outside the state.

Overall, “last year was a year of solid growth,” said Pauline Sweezey, head economist for the state Department of Finance.

Adrian Sanchez, associate economist at Security Pacific Bank, said the strong earnings results reported by consumer-product, wholesale and retail businesses stemmed both from population growth and an increase in personal income that outpaced the national average by 1.5 percentage points. Per-capita income in California is 15% higher than the national average.

That profitability was shared even by the state’s budding and volatile biotechnology sector, in which the 27 firms surveyed saw combined income increase by nearly 25% to $35 million from $28 million in 1987 (and a net loss of $13 million the year before).

But the general gain was not without some individual pain. For example, Genentech of South San Francisco slipped last year in market value, income and sales growth even after introducing its much-awaited product, TPA, which is used to dissolve blood clots. The problem for Genentech was TPA’s disappointing sales results.

If commercialization of biotechnology eventually means rapid growth and increased profitability, the industry would be following in the footsteps of the state’s computer and electronics industries.

“The whole high-tech area has been one of California’s strengths for a long time,” said Sweezey. “A lot of the innovative work is done in small firms.”

Despite the public companies’ strong profitability in 1988, there remain some concerns for 1989. This is especially the case in aerospace and defense, whose share of the total state economic pie has been shrinking for the past few years as the big buildup of the early Reagan years gives way to defense cuts.

“It takes awhile to ramp down once you build up,” said Larry J. Kimbell, director of UCLA’s Business Forecasting Project. But the buildup is clearly over, he said.

While income increased 15%, sales rose just 2.4%. Both income and sales have shrunk from 12% of the total reported by California-based public companies in 1986 to 10% last year.

At the same time, employment declined only slightly, to 163,000 in California last year from 168,000. But, Kimbell said, the full effect of defense cuts is probably being softened by increased new orders for commercial aircraft.

Those big airplane contracts underline the fact that California’s economy has a number of strengths, he said.

“One of the arguments we have been making for years,” Sweezey said, “is that California has such a diverse economic structure. There can be hard times in one sector while other sectors remain strong.”

Last year, for example, income earned by the financial-services sector represented 25% of all income among the publicly traded companies after having shrunk to 13% in 1987. This largely offset the tighter earnings registered by utilities--from 21% of total earnings in 1987 to 13% last year--as regulators cut revenues and trimmed companies’ rates of return to reflect productivity gains and lower business costs.

All the same, Sweezey said, the outlook for 1989 remains clouded at best. “We wonder about interest rates, the Fed’s reaction to the inflation numbers coming out, whether business will restrain price increases and what is the threshold on interest rates that will choke off activity.”

Added Kimbell of UCLA: “We’re going to stick to being a little bit pessimistic.” One likely strong performer this year, however, is heavy construction, which continues strong in the state, said Sanchez of Security Pacific. But continued strong growth seems unlikely in consumer spending generally, where some signs of slowing (such as new home construction) are already developing.

“Last year was a very strong year,” Sanchez said. “In recent years, only 1984 was stronger, but our outlook for 1989 is for decidedly slower growth because of high interest rates and inflation.”