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HOT GROWTH COMPANIESBusiness savvy, the right focus, and a little bit of luck are a potent comboScott A. Schuff was just 13 when he started working in the shop of the small steel plant his father managed in Phoenix. High school summers were spent drawing blueprints and estimating costs for complex construction projects. In 1976, when his father, David, struck out on his own and started Schuff Steel Co. (SCHUF), 17-year-old Scott joined him. Two years later, he dropped out of college to work full-time. ''You learn a lot faster on the job,'' says Schuff, now 39 and chief executive officer. The education is paying off. Schuff Steel has a lucrative niche in ''fast-track'' contracts, where construction begins before the design is finished. Schuff has landed several large projects in the past few years, including jobs for Las Vegas' Mirage Resorts Inc. (MIR) and MGM Grand Inc. (MGG) hotels. Now it is tackling its toughest job to date: a half-scale Eiffel Tower replica for Hilton Hotels' (HLT) Paris Las Vegas hotel. Schuff's performance proves you don't have to be in high tech to generate scorching growth. Over the past three years, the steelmaker has racked up annual earnings and sales growth of 48.3% and 30.1%, respectively. With 1997 earnings hitting $7.2 million on sales of $138.2 million, Schuff barreled its way to No.40 on BUSINESS WEEK's list of the 100 fastest-growing small companies. And while any construction company is vulnerable to downturns, so far Schuff's key markets, including Arizona, California, and Nevada, continue to boom. ''They're in a pretty sweet part of the market right now,'' says David Fondrie, an analyst at Heartland Advisors, Schuff's largest outside shareholder. That combination of business savvy, relentless focus, and discipline is behind the success of each company on our Hot Growth list. These tiny operators have outgunned their larger rivals, generating average annual sales and earnings growth of 59.8% and 102.8%, respectively, over the past three years. That compares with 7.6% and 9.8%, on average, for companies in the Standard & Poor's Industrial index. And return on capital for these 100 companies averaged 31.1%, while the S&P average was just 11.9%. So how do companies make the list? Often by being in the right place at the right time when bigger companies farm out key work. That's how Kendle International Inc. (KNDL), which helps test new drugs for pharmaceutical giants such as Parke-Davis and Bristol-Myers Squibb Co. (BMY), grabbed the No.1 spot. Another big recipient of drug-company outsourcing is Boron, LePore & Associates Inc. (BLPG) (No.24), whose marketing and promotional services include organizing doctor conferences and providing field-sales support. Of course, many winners did ride the high-tech boom. About half of the 100 provide computer or telecommunications products or services. Dunn Computer Corp. (DNCC) (No.6) is a personal-computer maker that sells largely to U.S. government agencies such as the Justice Dept. Last year's No.1 company, Yurie Systems Inc. (YURI), which makes equipment for high-speed transmission of data, voice, and video, was No.3 this year. Yurie's success didn't go unnoticed: In April, Lucent Technologies Inc. (LU)--Yurie's biggest customer--said it would buy the upstart for $1 billion. NO GLAMOUR. While high-tech equipment is hot, software and services may be even hotter. JDA Software Group Inc. (JDAS) (No.32) specializes in retail supply chain software, including inventory management and point-of-sale systems. Hall, Kinion & Associates Inc. (HAKI) (No.9) recruits high-tech workers, including some from places such as Russia and India, to provide much-needed information technology workers to Silicon Valley. And Medical Manager Corp. (MMGR)(No.8) develops software to automate doctors' offices. ''Health care is one of the last areas to become more efficient,'' says Paul J. Rasplicka, senior portfolio manager at AIM Capital Development Fund. ''There's a huge market here.'' But plenty of entrepreneurs hit pay dirt in less glamorous fields. Take Coast Dental Services Inc. (CDEN) (No.12) and Monarch Dental Corp. (MDDS) (No.29), which compete in the crowded field of operating and managing dentists' practices. Or OMNI Energy Services Corp. (No.13), which provides drilling, helicopter, and surveying services to oil companies in the swamps and marshes of the Gulf Coast and Alaska. And PJ America Inc. (PJAM) (No.11) serves up sizzling results as the largest franchisee of Papa John's (PZZA) pizza restaurants. All these companies seek to follow in the footsteps of the more elite graduates of the BW Hot Growth 100. Back in 1985, then-unknown Computer Associates International (CA) was No.14. Today, it is the third-largest software company, with 1997 revenue topping $4 billion. Networking titan Cisco Systems (CSCO), which made the list in 1991, has seen its stock soar more than 5,000% since. New Line Cinema Corp., No.11 in 1987, is now owned by Time Warner Inc. (TWX) and has released such hits as Austin Powers. Before they make it to the big leagues, however, small growth companies want a little respect on Wall Street. In 1997, the fourth year in a row, small caps trailed their big-cap brethren in stock market performance. Market pros say large caps' continued strong earnings performance gave investors little reason to venture into smaller, less liquid stocks. And when small caps seemed to be rallying in the second half of 1997, Asia's financial crisis cut them short. So while the S&P 500-stock index rose nearly 32% in 1997, the Russell 2000, a barometer for small-company stocks, rose just 22%. ''We've been sailing against the wind for a number of years,'' says David J. Evans, portfolio manager of the Robertson Stephens MicroCap Growth Fund. The wind may yet shift. That's because small-cap stocks are simply a lot cheaper than big-company stocks. The price-earnings ratio of the S&P 500 is now 22.4, based on projected 1998 earnings growth of 10.2%. The p-e ratio of the Russell 2000 is 20.4, but with much higher expected earnings growth of 20.6%. If small caps gain ground, that should help keep the market for initial public offerings chugging. According to S&P, 529 IPOs in 1997 raised $43.6 billion. That's down from 1996, in which 737 deals raised $49.2 billion, but it beats 1994 and 1995 levels. IPOs are rife on this year's list--more than 35 of the 100 Hot Growth companies went public after January, 1997. The boom continues: In the first four months of 1998, 109 IPOs raised $8.9 billion. The flow of venture-capital funds is also robust. A record $10.4 billion was raised by 138 funds in 1997, with another $5.1 billion raised by mid-May of this year. Some clouds remain. If the Fed hikes interest rates or the Asian situation worsens, small caps probably will take a big hit. And of course, some highfliers will burn out, unable to manage such growth (page 88). Investors who are drawn to the high growth rates should also factor in the high attrition rate. If ever there was a case of past performance not guaranteeing future results, this is it. But for those who can handle the speed and dodge the swipes of giant competitors, the race has just begun.
By Amy Barrett in Philadelphia, with Steven V. Brull in Los Angeles RELATED ITEMS
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Updated May 21, 1998 by bwwebmaster
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