TAKING A BREATHER

A good performance, but only polite applause.

Minnesota's biggest companies boosted overall sales and profits in double digits last year, but investors were not impressed. The market value of the 100 companies that make up the Star Tribune 100 rose just 2.5 percent in the past 12 months, far slower than the 9.3 percent growth of the Standard & Poor's 500, and it also trailed most other major indexes.

It was the first time in five years that the Star Tribune 100 trailed the S&P 500. Ninety of the 100 companies delivered higher sales in 2006 than 2005; 75 posted profits and 72 added jobs -- but only 54 saw their market values rise.

Medical device giant Medtronic Inc. illustrates the disconnect: Sales rose nearly 10 percent and profits jumped nearly 39 percent. But market capitalization (that's the share price multiplied by the number of shares outstanding) dropped 13 percent as investors shaved $8.6 billion in market value off the company. And Medtronic was not alone. It was the same story at 3M, Best Buy and ADC Telecommunications.

What's gives? Several factors explain the valuation gap, and geology -- not geography -- is perhaps the biggest.

"We just weren't Texas last year," said Michael Swanson, senior economist at the Minneapolis office of Wells Fargo & Co. Swanson is referring to the oil patch, where high oil prices boosted the earnings and market values of energy companies last year. High global energy prices largely explain the S&P 500's big gains. Oil giant Exxon Mobil posted the largest annual profit in U.S. history last year ($39.5 billion). The Star Tribune 100 does not contain many companies that benefit from higher commodity prices.

But one exception proves the rule: global fertilizer giant Mosaic Inc., which joined the Star Tribune 100 in 2006. At Mosaic, a Cargill Inc. spinoff, sales dropped 5 percent and earnings sank 67 percent. But the company's market value has doubled in the past 12 months.

The reasons? Higher fertilizer prices on world markets; relatively cheap natural gas prices (a raw material for making fertilizer), and the ethanol boom, which is prompting U.S. farmers to plant a record-size corn crop this spring to cash in on demand for the fuel.

"That's a pretty good combination for profits," Swanson said. "Mosaic is one of the lone companies on the Star Tribune 100 to benefit from a run-up in commodity prices."

Besides geology, Swanson and Christopher Puto, dean of the Opus College of Business at the University of St. Thomas, believe two other factors are in play: the law of averages in general and special controversies in the health care sector, where Minnesota companies have a strong presence.

Swanson said overall valuations on Minnesota companies were due for a breather. "After you have outperformed for five years, that becomes impossible to sustain," he said. Statisticians call it "regressing to the mean." Think of it as economic gravity -- nothing goes up and stays there. The same dynamic is already happening in the energy sector; with oil prices stabilizing -- and alternative fuels increasingly competitive -- it's unlikely that the oil giants will repeat last year's performance.

Our assessment of Minnesota's largest companies reveals a diverse corporate landscape strong in financial services, retail, manufacturing and health care. Minnesota is home to 19 Fortune 500 companies, the second-highest concentration of headquarters firms per capita in the nation, behind Connecticut. These big Minnesota companies, and their high-paying headquarters jobs, have long been significant contributors to the local economy and the state's cultural climate.

In 2006, however, a scandal over backdating options at UnitedHealth Group has already cost the big health insurance provider its longtime CEO, and regulators are still investigating the company. UnitedHealth is the largest company on the Star Tribune 100, measured both by sales and by market value. Although its sales jumped 54 percent, primarily because of acquisitions last year, its market value dropped 6.4 percent, or $4.9 billion.

At Medtronic and St. Jude Medical, meanwhile, past success selling expensive medical devices has slowed considerably, especially heart defibrillators. This comes after several thousand of the $30,000 heart-shocking devices were recalled in 2005 and 2006 in actions by Medtronic and rival Guidant Corp. (now Boston Scientific Corp.) Also, questions about the effectiveness of some widely used devices, such as drug-coated heart stents, have depressed stock prices in that industry.

"The investing public is understandably swayed by the media," Puto said. "This does not mean that these companies are in trouble, but it does mean that they are undervalued."

Where do we go from here?

Three economists interviewed last week by the Star Tribune expect the economy to grow in 2007, but not as fast as it did in 2006, when gross domestic product (GDP) grew 3.3 percent.

Wells Fargo's Swanson said he sees "notable strength" in three Minnesota sectors: health care, financial services and retail.

The success of health care companies early in the decade has drawn the attention of cost cutters now, and that has slowed spending and depressed market values, he said. "But looking at the nation's demographics suggests health care spending is not going to decline."

Swanson has a "vanilla outlook" of 2.5 percent GDP growth. Retailers, such as Target and Best Buy, will continue to perform strongly, and the housing slump will bottom out this year, Swanson said. "I don't think housing will hit the Star Tribune 100 hard."

Minnesota state economist Tom Stinson isn't so sure. "Construction employment over the coming summer is still a question mark," Stinson said. "Last year, builders were inclined to finish what they had started, so they kept workers on the payroll through December. The question now is whether they start to break ground on new projects." Stinson's forecast: 2.1 percent GDP growth.

Dan Laufenberg, chief domestic economist at Ameriprise Financial, falls in the middle with a forecast of 2.4 percent. The April-May-June period will be the slowest, Laufenberg predicts, as the housing slump hits bottom. He expects the economy to pick up steam in the second half.

The jobs picture

The jobs reported by ST100 companies reflect their payrolls nationwide, so the increase does not translate into additional Minnesota jobs. Although Minnesota's biggest companies expanded payrolls by 5.2 percent in 2006, employment statewide grew just 1.4 percent, Stinson pointed out.

After adjusting for Supervalu's acquisition of Albertson's last year, the Star Tribune 100 companies added a net 62,500 jobs to their national payrolls. That's fewer than the 93,000 jobs (8.2 percent) added in 2005 but still strong when compared with recent years. In 2003 and 2004, ST100 job growth was 3.8 and 2.4 percent, respectively, and confined mainly to a few large retailers.

Last year nearly three out of four ST100 companies expanded head count and 15 of them added 1,000 or more jobs, including Supervalu, Target, Best Buy and 3M.

Four companies shed 1,000 or more jobs, including Mosaic, grocery wholesaler Nash Finch and Piper Jaffray, which sold its brokerage operations to UBS Securities last summer. Northwest Airlines grounded nearly 2,000 employees.

A closer look

Not all industries are created equal. Among Minnesota's 100 biggest public companies, financial services firms contributed the most profits in 2006, while retail and service firms accounted for the most revenue and the most jobs. The state's most valuable firms, as measured by market capitalization, are in health care -- despite the large drop in market value at Medtronic, St. Jude and UnitedHealth.

Retail and service

Supervalu's acquisition of Idaho-based Albertson's boosted the Eden Prairie-based food wholesaler's revenue, profit, market value and payroll and also gave it a national footprint in the grocery business.

The big merger also threatened to distort the jobs picture for the Star Tribune 100 as 150,000 Albertson's employees joined Supervalu's payroll. We adjusted our job count to factor out the increase at Supervalu.

Target led the retail category with sales of nearly $60 billion and profit of nearly $2.8 billion. At Best Buy, sales rose nearly 15 percent and profit jumped nearly 24 percent but market value dropped nearly 12 percent.

At Northwest Airlines, which has been in Chapter 11 since 2005, sales rose 2.3 percent as the beleaguered industry began to recover. After a recent rebound in passenger traffic, the airline has resumed hiring, having won lower-cost labor agreements from its unions.

Health care

The four largest health care companies on our list -- UnitedHealth, Medtronic, St. Jude and the Patterson Companies -- all reported higher sales and earnings. Yet all lost market value.

After a tumultuous year that included the departure of its longtime CEO under fire for allegedly backdating stock options, UnitedHealth's market value dipped even as acquisitions boosted sales 54 percent and profit 35 percent.

Medical device giant Medtronic delivered a 10 percent sales increase and a 38 percent jump in profit but saw its market value drop 13 percent. It was pretty much the same story at St. Jude. Undeterred, both device makers continued to add jobs.

Financial services

Profit at the Travelers Companies jumped 104 percent on modest revenue growth of 3 percent. A quiet hurricane season helped the big insurer, which dropped "St. Paul" from its name this year.

U.S. Bancorp was the most profitable ST100 company in 2006, earning $4.75 billion. The big bank holding company ranked second (behind UnitedHealth) in market value at $62 billion.

At Ameriprise, a financial planning and mutual fund company, profit jumped 25 percent and market value climbed 24 percent while head count remained flat.

Manufacturing

3M, Minnesota's biggest manufacturer, grew sales 8 percent and profit 24 percent but market value dipped nearly 4 percent. 3M added jobs as it continued CEO George Buckley's strategy of making small-but-strategic acquisitions.

Food companies General Mills and Hormel both delivered sales gains of nearly 5 percent and market-value gains in the double digits.

Utilities

Xcel Energy, Minnesota's biggest electric utility, increased profit 14 percent on modest sales growth of 2 percent -- enough to recharge market value, which rose 36 percent.

Otter Tail Corp. of Fergus Falls is a diversified power company that also makes plastics and provides health care services. Its market value rose 22 percent, although earnings dipped nearly 6 percent.

Profit rebounded at Allete, the Duluth-based utility and real estate company.

Information technology

Sales at digital memory maker Imation Corp. jumped 26 percent, but profit remained flat.

At Ceridian, the provider of payroll and human resources services, sales rose 7.3 percent while profit jumped 36 percent. Ceridian's market value jumped 25 percent, with most of the increase coming after a dissident shareholder demanded that the company spin off its most profitable unit.

Despite strong sales and earnings growth at ADC, the telecommunications equipment maker, market value fell 35 percent.

Profits were squeezed at Hutchinson Technology, a maker of disk-drive assemblies for computer hard drives.

John J. Oslund • oslund@startribune.com Patrick Kennedy • pkennedy@startribune.com