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Tuesday, April 09, 2002

By Jim McKay, Post-Gazette Staff Writer

At first glance, Consol Energy's perch at the top of this year's list of local companies with the highest return on equity seems odd, perhaps even wrong.

	Consol Energy Inc. BUSINESS: coal and natural gas HEADQUARTERS: Upper St. Clair EMPLOYEES: 7,523 H.J. Heinz BUSINESS: food products HEADQUARTERS: Downtown EMPLOYEES: 45,800 Federated Investors BUSINESS: investment management HEADQUARTERS: Downtown EMPLOYEES: 1,829 American Eagle Outfitters BUSINESS: clothing retailer HEADQUARTERS: Marshall EMPLOYEES: 3,012 Matthews International BUSINESS: designs and makes grave markers and other identifying products HEADQUARTERS: North Shore EMPLOYEES: 2,200 Online Graphic: Return on Equity

After all, it's a measurement that tends to favor companies that don't require a lot of physical capital to operate -- a trait that generally favors financial companies as well as technology research and development firms.

Everything about Consol is about physical capital. As one of the country's leading producers of coal and natural gas, the Upper St. Clair firm relies on big machines and muscular workers to do its business, something it's done since the Civil War.

But 2001 was kind to Consol and other energy producers, thanks to a surge in coal and natural gas prices at the tail end of a decade-long expansion that caused Consol's earnings to jump 72 percent for its fiscal year that ended in June.

A repeat performance seems unlikely this year for Consol, which has since switched to a fiscal year that ends in December.

Warm winter weather and a sluggish U.S. economy have caused coal and gas prices to plunge along with demand, causing Consol to recently trim coal production and lower its earnings forecast for the just-completed quarter and the calendar year.

"At the moment, the spot market for coal is nil, customers are delaying scheduled shipments of coal, and some power plants where we have 100 percent of the coal requirements are burning significantly less than normal amounts of coal," Chief Executive Officer J. Brett Harvey said in a statement accompanying the March 20 warning.

Still, for 2001 at least, the operator of coal, natural gas and related businesses earned bragging rights as a top local performer for its investors.

In what was a bad year for the markets, Consol unseated Downtown money manager Federated Investors Inc., which held the top spot the previous year and in 1999 with yields of 122 percent and 115 percent, respectively, in the Post-Gazette's annual ranking of local companies with the highest returns on equity.

Like revenue and profit growth, return on equity is a standard measure of a company's performance, giving shareholders an idea of how effectively management is using their money.

Brett Harvey, president of Consol Energy, with abstract photographs of coal mining machinery in the lobby of the Consol offices in Upper Saint Clair. Consol generates the best return on investment for the region. (Franka Bruns, Post-Gazette)

Technically, it measures the ratio of income generated for each common share outstanding, so that a return on equity of 50.12 means Consol generated just over 50 cents of income for each $1 invested in the company by shareholders.

Other local companies that turned in strong years included an old standby, H.J. Heinz Co., which claimed second with an ROE of 28.91 percent; followed by No. 3 Federated, at 26.36 percent; No. 4 American Eagle Outfitters, the Marshall-based youth-oriented clothing chain, at 24.63 percent; and No. 5 Matthews International, the North Side-based maker of bronze grave markers and other memorial products, at 23.67 percent.

On the flip side, FreeMarkets Inc., the fast-growing Downtown Internet auction firm, brought up the rear of 56 local public companies ranked by return on equity with a -119 percent showing.

It's not surprising, given that after a brief flirtation with quarterly profits a few year ago, the company only now is starting to show signs of making money.

Its own plans had it losing money during its early years as it spent money to grow -- a policy reflected in last year's $295 million loss, though FreeMarkets did make money on its operations during the fourth quarter, a milestone that helped to secure its position as a dot.com survivor.

Rounding out the bottom five were No. 55 Seec Inc., the Findlay-based e-business solutions provider; No. 54 Adelphia Communications, the Coudersport, Potter County, cable giant that's encountered questions about its bookkeeping; No. 53 iGate, the Oakdale-based informational technology company hit hard by the dot.com shakeout; and No. 52 Ubics Inc., the Canonsburg-based information technology concern struggling with losses and layoffs.