In the black but blue

For Minnesota's largest companies, sales and earnings rose in 2007. But stock prices -- and attitudes -- are depressed.

It was a year of profit ... and discontent.

Amid soaring energy prices, a deepening housing crisis and worried consumers, sales and earnings at Minnesota's biggest companies turned in solid gains. Payrolls grew, too, by about 3.6 percent.

But the market value of the companies that make up the Star Tribune 100 sank 8.4 percent in the past 12 months. It was the second consecutive year that Minnesota's 100 largest publicly held companies trailed the Standard & Poor's 500 index and most of the other major indexes.

More than three out of four ST100 companies posted higher sales in 2007. And 78 had profits, up from 75 in 2006. Yet just 26 of the ST100 companies had higher market values in the 12 months ended March 31 than they did a year ago. (Market value is the stock price multiplied by the number of shares outstanding.) Ø

Volatile trading, a slowing economy and a housing-inspired global credit crunch conspired to strip a net $45 billion in market value from the Star Tribune 100 companies. The bulk of that came out of the hides of three giants: UnitedHealth Group Inc., Target Corp. and Best Buy Co. Inc. -- two big retailers vulnerable to tightfisted consumers and a health insurer that's reeling from legal troubles and faces pricing pressure in some of its biggest markets.

There was one spectacular exception: the fertilizer giant Mosaic Co. Its market value soared more than $32 billion as it successfully met thriving demand for fertilizer in the United States and around the world -- a trend that's likely to continue, the company said recently.

"It does say something about expectations and stock price, doesn't it?'' said Tom Stinson, Minnesota's state economist.

In today's economy, emotions matter more than earnings. "People can be very anxious, even though they are making money,'' said Michael Swanson, senior economist at Wells Fargo & Co. in Minneapolis.

Our annual assessment of Minnesota's largest companies reveals a diverse corporate landscape strong in financial services, retail, manufacturing and health care. Minnesota is home to 20 Fortune 500 companies, the highest concentration of headquarters firms per capita in the nation. Those big firms, and their high-paying headquarters jobs, have long been significant contributors to the local economy and the state's cultural climate.

In years past, that diversity has cushioned the state from economic shocks. But not this time, most economists say.

"Minnesota cannot escape the gravitational pull of the national markets,'' Swanson said. "We cannot escape a [downward] economic cycle this time.''

Most economists believe the nation is in a recession, which may have started in the fourth quarter of 2007 and continued in the first quarter of 2008. Housing prices continue to fall and new-home construction nationally has slowed to post-World War II levels. Most economists believe full recovery in the housing sector remains years away.

Looking ahead, there is both anxiety and hope. The economic stimulus program passed by Congress and signed by President Bush will inject about $100 billion into the consumer economy in the coming months -- that's about 1 percent of annual personal consumption spending, said Dan Laufenberg, chief domestic economist for Ameriprise Financial Inc. He and Stinson expect that the likes of Target and Best Buy will benefit.

Of course, some folks will save their $600 rebates, and others will use it to pay off debt. But in an economy where the savings rate is zero, Laufenberg said, what makes anyone think that most "consumers will not go out and spend it?''

The stimulus package is expected to boost the economy in the second, third and possibly the fourth quarters. But what happens then?

As spending from the stimulus plan plays out, "the chance of a meager first quarter of 2009 ... is a real possibility,'' Stinson said. "It would be nice to say that the worst is over. But I am not sure the worst is over.''

If angst and volatility describe the 2007-08 period, Laufenberg said, then 2009 will "no doubt satisfy everyone's definition of a recession.'' He sees a relatively strong second half of 2008, but flat economic growth in 2009. The primary fear: accelerating inflation that could hobble growth and force the Federal Reserve to raise interest rates. Food inflation already has doubled from a year ago, and oil prices continue to set historic highs.

On the positive side, by December, more than a year's worth of interest rate cuts will have begun to work their way through the economy. In the meantime, the global economy remains strong and U.S. exports are growing, thanks to the weak U.S. dollar.

Laufenberg's advice: Be flexible.

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 3.6 percent in 2007, employment statewide for that period grew just 0.5 percent, Stinson said.

Overall, 62 of the Star Tribune 100 companies added jobs in 2007, for a net gain of 50,356 jobs. That's a slower pace than 2006, when 72 companies added a net 62,515 jobs. Health care jobs grew the fastest in 2007, as they did in 2006.

Retailers topped the list of the biggest job creators, with Target adding 14,000 (4 percent growth) followed by Best Buy's 9,256 (up 7.1 percent). Insurer UnitedHealth, which continued to grow by acquisition, added 9,000 jobs to its payroll, up 15.5 percent from 2006.

Among the 31 job slashers on our list, only two cut more than 1,000 jobs. Wilsons the Leather Experts, which is restructuring, cut 1,002 positions, or 29 percent, as it closed stores and repositioned its brand. Supervalu trimmed 10,000 jobs, or 5 percent, in the year after its 2006 acquisition of Albertsons Inc.

Seven companies, including big manufacturers General Mills, Toro and Mosaic, held head count flat.

"That's how you make money -- by cranking out more stuff with the same number [of] people,'' Swanson said.

A closer look by category

Among Minnesota's 100 biggest public companies, financial services firms contributed the most profits in 2007, followed by manufacturing and health care. Retail and service firms accounted for the biggest portion of sales and the most jobs.

The state's most valuable firms, as measured by market capitalization, were in manufacturing. That's a change from 2006, when health firms were the market capitalization leaders. Big declines in market value at UnitedHealth and Medtronic Inc. contributed to the reversal.

Only four ST100 companies added $1 billion or more in market capitalization in the past year, with Mosaic adding $32 billion. Medical device maker St. Jude Medical Inc. came next with a $1.9 billion gain.

Insurers, retailers and financial services firms led the declines as 13 ST100 firms shed $1 billion or more. Among them: UnitedHealth (down $28 billion), Target (down $10.4 billion), Best Buy (down $6.4 billion) and U.S. Bancorp (down $5.4 billion).

Retail and services

Target Corp., the national beacon for the "cheap chic'' consumer, was dogged by slower consumer spending and hounded by an impatient investor in 2007. Its discounts-with-a-flair strategy came under pressure, but the company vows to stay the course. Hiring slowed slightly to 4 percent from 4.1 percent in 2006.

Supervalu's acquisition of Albertsons boosted sales and profits at the huge grocery wholesaler and retailer, but investors sliced nearly 22 percent off its market value.

Best Buy delivered double-digit sales and earnings growth, but investors worried about discretionary consumer spending lopped 27 percent off its market value. Head count rose 7.1 percent as the electronics retailer continued to expand, but that was down from 9 percent in 2006.

Northwest Airlines exited bankruptcy in May and prospered briefly before encountering $100-a-barrel oil prices. Still, it managed a profit for the year. Last week, Northwest surprised no one by agreeing to be acquired by Atlanta-based Delta Air Lines, a deal that's been rumored for the past four months. If federal regulators approve the merger, this may be Northwest's last year on our list.

Health care

UnitedHealth delivered higher sales and double-digit profit gains, but questions about its core insurance business -- and continuing multiple investigations into its business and compensation practices -- sliced nearly 40 percent off its market value.

Profits sank 18 percent at Medtronic and market value dropped 5 percent as the maker of heart pacemakers and defibrillators wrestled with a large product recall.

Meanwhile, medical device maker St. Jude enjoyed success across all of its divisions in 2007, adding sales and market cap in double digits and boosting head count 9 percent.

Patterson Companies, the dental and veterinary products and services company, added sales and profits.

Manufacturing

Minnesota's biggest manufacturers boosted sales and profits while holding head count virtually flat. 3M continued its strategy of growth through smaller acquisitions and more sales overseas.

Manufacturers using U.S. intellectual property and domestic raw materials have found success exporting as the weak U.S. dollar has made their products bargain-priced for foreign buyers, Swanson said.

Mosaic, the global fertilizer firm, benefited from unprecedented demand as more corn, wheat and other crops are being planted worldwide.

"Mosaic is in a good spot,'' able to sell its fertilizer products domestically or overseas for good prices, Swanson said.

Food companies General Mills and Hormel delivered solid sales and earnings as they were able to pass along higher food costs to consumers. The slowing economy boosted sales of Spam, Hormel's signature canned meat product, the company reported.

Financial services

Minnesota's biggest banks and insurance companies largely avoided the subprime trap that ensnared the big Wall Street firms, but their market values all took a hit anyway.

The Travelers Companies Inc., the big casualty insurer formerly called The St. Paul Companies, delivered a solid year and benefited from a season relatively free from major storm damage.

U.S. Bancorp ranks first on our list in market capitalization, having claimed the top spot from UnitedHealth.

Utilities

Minnesota's biggest electric utilities all increased sales and profits in 2007, but only Otter Tail Corp. showed an increase in market value. Xcel Energy Inc., which has become the nation's No. 1 producer of wind power, added nearly 1,200 jobs last year.

Information technology

Lawson Software Inc. got a boost from the successful acquisition of Intentia, a European software company. But it ended its fiscal third quarter in February with write-downs on "auction-rate securities,'' short-term investments that have become illiquid in recent months because of the global credit crisis.

ADC Telecommunications Inc., which added 2,000 jobs last year, is growing again after a tough several years starting in 2000. But it, too, was caught in the auction-rate securities trap.

Digital memory maker Imation Corp. and Hutchinson Technology Inc., which makes disk-drive assemblies, both struggled amid intense global price competition.

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