Bateman Eichler Growing While Big Rivals Shrink
Los Angeles brokerage Bateman Eichler, Hill Richards Inc. isn’t wasting much time in capitalizing on the troubles of some of its Wall Street competitors.
As Drexel Burnham Lambert dissolves, Shearson Lehman Hutton reels from internal problems and Merrill Lynch and other firms cut staff, Bateman is hiring: It will add about a dozen professionals over the next month or so, Bateman Chief Executive Richard Capalbo said Tuesday.
The additions will include five investment bankers, three traders and two research analysts who will focus on debt securities, Capalbo said. The idea partly is to fill the needs of West Coast clients who may suddenly find that their Wall Street brokerage is chopping its local operation.
“As those firms make cutbacks, they’re making them in cities like L.A., San Francisco and Seattle,” Capalbo said. In many cases, “they don’t want to fire people they see every day (in New York)--so they fire the poor stiff in L.A.,” he said.
For Bateman and other regional firms, that presents a golden opportunity to pick up jilted clients--both companies and individuals.
Indeed, rarely have the fortunes of the brokerage business been so badly split: While the major Wall Street firms have been hit hard by the decline in takeovers--and the subsequent plunge in fee income--many regional brokerages have continued to thrive, mainly on the strength of their business with individual investors.
Bateman, the West Coast’s largest regional brokerage, saw revenue jump 35% last year, Capalbo said, and operating profits “just missed the record.” About three-quarters of the firm’s business is with individual investors, via 475 brokers in seven Western states.
This year, Capalbo expects 15% to 20% revenue growth. And over the next decade, he believes that Bateman’s growth potential is stellar as more aging baby boomers become investors. The key for Bateman and other regional brokerages is developing and maintaining “high touch” relationships with clients, Capalbo said. After the bust of the go-go 1980s, clients “want to deal with people on a relationship basis again--not just whoever can do a deal for an eighth- or quarter-point cheaper,” Capalbo contends.
If he’s right about Bateman’s future, the firm’s parent--financial services giant Kemper Corp., which closed Tuesday at $39.125 on the New York Stock Exchange--will be the big beneficiary. Kemper bought Bateman in 1982 and also owns a host of other regional brokerages, including Prescott, Ball & Turben in Cleveland, Boettcher in Denver and Blunt, Ellis & Loewi in Milwaukee.
While Bateman’s star may be rising now, it went through its own painful restructuring two years ago. In February, 1988, Capalbo took over as CEO, leaving Drexel, where he had been marketing chief. Capalbo made clear that he wanted far better production from the Bateman staff--and that the weak performers could pack their bags. Many did: Of the 1,100 total Bateman employees today, 650 are new since Capalbo arrived.
The mix of old and new employees “feels real good” now, Capalbo said. And as Bateman looks to expand, there’s no shortage of good people to pick from, he said. “We’re being overwhelmed (with resumes) from every firm on Wall Street.”
Bateman’s Research Focus: As much as Capalbo is staking Bateman’s future on nurturing relationships with clients, he admits that such efforts won’t do much good if Bateman picks investments poorly. So one of his focuses since 1988 has been building a team of L.A.-based analysts to follow Western companies.
Bateman now has 11 analysts covering such major West Coast industries as biotechnology, aerospace and entertainment. At a press briefing Tuesday, the firm reviewed its current stock picks.
Some of the firm’s recommended stocks are major companies that also show up on the “buy” lists of many other brokerages, including such names as Boeing, Walt Disney and BankAmerica. Where Bateman stands to make a far bigger difference is in its coverage of smaller West Coast companies--those mostly ignored by bigger brokerages. Two examples:
* Vons Cos. The supermarket giant dominates Southern California, with a 23% market share, said analyst Sarah Stack. Vons is leading some of the major changes sweeping the grocery business, including bigger stores, more specialty departments (such as flowers) and greater use of computers for “shelf management”--picking winning products, Stack said.
Vons has been losing money for three years, partly a factor of its heavy debt load. But 1990 should see a return to profitability, Stack said--which she believes will lure more big investors to the stock. Two major investors already hold big positions in Vons: Kohlberg Kravis Roberts & Co. and Bass Group.
* Syncor International. This Chatsworth-based firm is the largest company that prepares short shelf-life drugs for hospitals--chiefly “radiopharmaceuticals” used with nuclear imaging cameras (to view body organs).
Syncor is benefiting from growing demand for its products, while at the same time some key competitors are exiting the business, said analyst Steven Gerber. Meanwhile, Syncor also operates a rapidly expanding home infusion therapy business.
Gerber, a physician by training before he decided to enter the securities business, projects that Syncor’s revenue will rise to $129 million this year from $114 million in the fiscal year ended last May 31. Earnings per share should reach 30 cents this year and 45 cents in fiscal 1991, he estimates. The stock’s current price: $6.875.
Tracking Western Stocks: To underscore the attraction of the region’s stocks, Bateman on Tuesday introduced a new stock index made up of 215 Western companies. It plans to use the index as a marketing tool to stress what it expects will be above-average performance of Western firms as the region’s economy grows at an above-average rate compared to the rest of the nation.
To be included in the index, a company needed a Western base, a market capitalization of at least $100 million, a minimum stock price of $4 and minimum trading volume of 2.5 million shares in 1989. Using those parameters, Bateman came up with a list of companies ranging from Atlantic Richfield to Zero Corp. (the latter makes enclosures for electronics). All of the companies are based in one of six states: California, Washington, Oregon, Arizona, Hawaii or Nevada.
Calculating the index back to 1972, Bateman found that Western stocks have outperformed broad market indexes for most of the period since then. From 1972 to 1979, the Western index gained 6% a year, on average, while the chief over-the-counter index of small stocks averaged 3.6% annually and the Standard & Poor’s index of 500 big stocks averaged just 0.7%.
For the entire 1972-89 period, the Western index averaged gains of 8.9% a year, versus 8% for the OTC index and 7.1% for the S&P.;
Interestingly, the Western index lagged the broader indexes from 1980 to 1989. The reason, Bateman said, is that natural resources companies are major components of the Western index and those stocks did relatively poorly in the 1980s as commodity prices plunged.
So far this year, the Western index is down 4.4% while the S&P; 500 is off 5.1%.
BATEMAN EICHLER’S ‘SPECIAL SITUATIONS’ LIST
Los Angeles brokerage Bateman Eichler, Hill Richards currently has 28 stocks on its “recommended” list. The following 11 compose the “special situation” stocks on that list.
52-week Tues. 1990 Stock range close est. P-E* ADAC Labs $6 1/4/$2 3/8 $3 10 Air Midwest 9 1/4/3 3/8 4 1/8 7 BankAmerica 36 3/8/20 5/8 29 1/8 5 Beverly Ent. 10/3 3/4 4 1/2 23 Diasonics 4 1/2/2 3 1/4 14 Motel Six 18 3/4/11 3/8 13 5/8 7 Pacific Telesis 51 1/2/33 5/8 45 1/2 14 Syncor Intl. 8 1/4/4 5/8 6 7/8 23 Telecredit 41 1/2/29 3/4 37 15 Telemundo 8/4 1/2 5 1/2 -- Vons Cos. 23 3/4/13 3/4 20 38
* price/earnings ratio based on estimated 1990 earnings per share
WESTERN STOCKS VS. THE REST
Bateman Eichler has created a new index of 215 Western stocks to track the region’s stock performance versus national averages. How the index performed over three periods:
Average annual compounded return Index ‘72-’79 ‘80-’89 ‘72-’89 Western stocks 6.0% 11.2% 8.9% NASDAQ OTC 3.6% 11.6% 8.0% S&P; 500 0.7% 12.6% 7.1%
Source: Bateman Eichler
