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SAN FERNANDOVALLEY BUSINESS JOURNALVolume 19, Number 10 May 19 - June 1, 2014 • $4.00

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T H E C O M M U N I T Y O F B U S I N E S S TM

By JOEL RUSSELL Staff Writer

Cheap policies are adding up to higherstock prices for one of the Valley’s most suc-cessful public companies over the past year.

Shares of Health Net Inc. have jumped 15percent since the insurer released first quarterresults this month – even though the numbersfell short of analysts’ expectations.

The unusual market reaction stems fromthe fact that the Woodland Hills company hassucceeded in signing up new buyers on the

By STEPHANIE FORSHEE Staff Reporter

On any given day of the week, an InternationalHouse of Pancakes restaurant is cooking up stacks offlapjacks along with eggs, bacon and sausage.

But in the Middle East, it’s a different story, becausethe chain must substitute its pork with Halal, or Islamic-certified turkey hams, veal sausages and beef bacon in itsbreakfast meals.

“With that whole Middle Eastern economy andhow they view things American, it’s an understatementto say that they love IHOP,” said Julia Stewart, chiefexecutive of DineEquity Inc., the Glendale parent of

the breakfast chain.DineEquity has opened eight IHOP locations in the

Middle East since 2012, with plans to open a total of40 by the end of 2017.

Also its Applebee’s brand will add onto its 40 exist-ing locations in the region by opening about five storesannually over the next several years.

Then there’s Cheesecake Factory Inc. ofCalabasas, another local, publicly traded restaurantchain that is making a footprint in the region. Otherchains opening stores there include Starbucks Corp.,Yum Brands Inc.’s KFC, Denny’s and BrinkerInternational’s Chili’s.

Indeed, a fascination with America, coupled with agrowing middle class, and low startup and operational

Pricing Low,Gains Large

Waiter: Pile On the Flapjacks but Hold the Bacon

Do twistedsheets bendyour mind?Unwind withsome fancylinen. PAGE 4

HEALTH CARE: Health Net winswith ObamaCare cost strategy.

RESTAURANTS: IHOP, rivals facepitfalls with Mideast expansions.

By ELLIOT GOLAN Staff Reporter

Want to get a pictureof how a typical, highlyprofitable companymight operate? ConsiderCherokee Inc.

The Van Nuysapparel brand licensingcompany has just 40 employees and doesn’town any plants or distribution warehouses. Soover three years its average return on equityhas topped an impressive 50 percent, making itNo. 2 on this year’s annual list of Most

Not Just Big;Rolling In ItFINANCE: Some of largest areafirms are most profitable.

LOS ANGELES • GLENDALE • SANTA CLARITA • BURBANK • CONEJO VALLEY • SIMI VALLEY • SAN FERNANDO • CALABASAS • AGOURA HILLS • ANTELOPE VALLEY

By MARK R. MADLER Staff Reporter

Three miles separate the campuses of WaltDisney Co. and DreamWorks AnimationSKG Inc., yet these leading Valley compa-

nies find themselves going head-to-head – in bothvirtual reality and the other side of the globe.

Both Disney, in Burbank, and DreamWorksAnimation, in Glendale, have made acquisitions inthe online world of multi-channel networks. Andthey are building themed entertainment attractionsin the same Chinese city of Shanghai, based ontheir popular film characters and storylines.

But the approaches each is taking in these ven-tures is reflective of their size and longevity – withDisney the entrenched media and entertainment giant

run by Robert Iger, while DreamWorks Animation,run by former Disney executive Jeffrey Katzenberg,plays its hand as the scrappier player.

Deep-pocketed Disney shelled out $500 millionin March for Maker Studios Inc., a large Culver City-based YouTube network, and is splitting a $5 billionprice tag with its Chinese partners on the ShanghaiDisney Resort scheduled to open next year.

DreamWorks Animation acquired multi-channelteen network AwesomenessTV last year for just$33 million and has a joint venture for a DreamCenter entertainment complex in Shanghai where itwill spend far less than Disney.

Both companies, though, are facing the same

Please see FINANCE page 19Please see ENTERTAINMENT page 56

Please see RESTAURANTS page 57

Local studios square off in China, on YouTube

Please see HEALTH CARE page 57

NOW SHOWING

Stacked Up: IHOP grand opening in Jeddah.

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SPECIAL ISSUE PUBLIC COMPANIES

THE LISTMost ProfitablePublic CompaniesPAGE 19

Sanjay Sabnanithinks it makessense to takeyour cents.PAGE 10

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MAY 19, 2014 SAN FERNANDO VALLEY BUSINESS JOURNAL 57

Covered California online exchange establishedto help people get coverage as required under theAffordable Care Act, also known as ObamaCare.

New policies incur upfront costs – includ-ing sales commissions and administrative timeto set up accounts – that depress near-termprofits. But Health Net investors are apparent-ly focusing on the long term, where the com-pany has emerged as low-cost leader for insur-ance, especially in Southern California.

Brad Kieffer, aspokesman for HealthNet, said most of thenew policies are forCommunityCare, a“tailored” HMO planwith a limited networkof doctors, hospitalsand clinics that haveagreed to keep priceslow.

“CommunityCare isconsistently one of the most affordable planson the exchange,” he said. “It strikes the rightbalance between affordability and quality.What you are seeing is its acceptance inSouthern California, where we have roughlyone third of the market.”

Joseph France, an analyst at CantorFitzgerald in New York, said Health Net’sstrategy of working with Covered California isyielding dividends for investors in the form ofnew customers.

“We believe that Health Net’s 2014 resultswill continue to reflect heavy startup costs …but we expect accelerating earnings growthover the next two years as it achieves greaterscale and produces better margins,” Francewrote in a note to clients on May 7.

In its first-quarter filing, Health Net report-ed net income of $28.8 million (36 cents ashare), up significantly from $19.8 million (25cents) for the same quarter a year ago. Revenueincreased nearly 11 percent to $3 billion.

Analysts on average expected net income of 42cents a share on revenue of $3.25 billion,according to Thomson Financial Network.

But the numbers look good when combinedwith data released in late April by CoveredCalifornia, which show Health Net sold 264,079policies on the exchange during the first openenrollment period, which ended April 15.

And Chief Executive Jay Gellert told ana-lysts during a conference call that he expects tosell another 90,000 to 100,000 new policies inMay, and more as the year progresses.

He even believes additional competitors inthe low-end of the market will expand thenumber of consumers who want such policies.

“If the whole market moves there, itexpands the market so much that it works toour benefit,” he said. “Our best dream is thateveryone gets in the pool with us and weexpand the pool to be an ocean.”

The stock closed at $39.14 on May14. That’s 54 percent higher than a 52-week low of $25.40 in early Novemberbefore ObamaCare rolled out.

Tough competitionStatewide, Health Net claimed

18.9 percent of the policies sold on theCovered California exchange, whichplaced it third. Thousand Oaks-basedAnthem, a unit of WellPoint Inc. inIndianapolis, finished first with 30.5percent of the market, followed byBlue Shield with a 27.3 percent mar-ket share.

However, figures from Covered Californiashow that Health Net fared much better in LosAngeles County.

The exchange divides the state into geo-graphical regions that reflect local differences inhealth care pricing. In Region 15, which stretch-es across northern L.A. County, Health Net sold60,841 policies or 34.2 percent of the market toplace second behind Anthem. In the southernpart of the county, Health Net placed first with a31.7 percent market share, or 70,774 policies.

The geographical dominance stems from the

insurer’s local provider network, said SherrieZenter, senior vice president at MomentousInsurance Brokerage in Van Nuys.

“They are doing extremely well in the L.A.area because their network offers both Cedars-Sinai and UCLA hospitals, while some of theother carriers don’t,” she said. “Because ofthat, we have transitioned a lot of clients into

Health Net.”In fact, Zenter said that among

individual clients looking to buyinsurance under the health reformmandates, she estimated 90 out ofevery 100 went with Health Net,largely because of the low premi-ums.

“Their pricing is the most com-petitive in the market,” she said.

For example, according to theCovered California website, ahypothetical four-person familywith household income of $60,000in the San Fernando Valley could

buy a silver HMO Health Net plan for $371 amonth after federal subsidies. Anthem andMolina Healthcare Inc. plans at the samelevel cost $410, while Kaiser Permanente topsout the options at $557.

Zenter said Health Net faces two chal-lenges in the market. First, with its low premi-ums and high-quality provider network, itremains to be seen whether the model will holdup once claims for coverage start piling up.Second, the company needs the infrastructureand staff to service the new customers.

“The challenge would be staying on top of

good service to handle the flow,” she said.“Their billing needs to have a good turn-around, with premiums coming in and pay-ments out on time to keep the system running.But that’s not just true for Health Net – all theinsurance companies are working on overloadwith not a lot of manpower.”

Kieffer, the Health Net spokesman, said thecompany has a successful track record runningtailored HMO networks, and it has been con-servative in calculating utilization rates, or howmuch people will use their new insurance.

“Health Net is the pioneer in tailored net-works,” he said. “It’s a tried and true approachfor us. We’ll strive to continue our efforts todevelop programs that preserve affordability ina way that allows access to quality care.”

Next: SHOPAs for the service challenge, Kieffer said

the company is analyzing the mad rush thisyear to help it prepare for the fall, when openenrollment starts again.

He noted that the statistics about salesincludes only individual and family policies.Covered California’s market for small businessinsurance, called the Small Business HealthOptions Program or SHOP, wasn’t a factor thisyear because in February the federal govern-ment announced an extension that allowedcompanies to keep their health policies, even ifnot compliant with reform’s minimum cover-age requirements, for one more year.

In the fall, “SHOP is going to ramp up,”Kieffer said. “For next year, we are taking les-sons learned from this year.”

France, the analyst at Cantor Fitzgerald, saidhe expects a clearer idea of Health Net’s futureby the second half of this year. For now, he main-tains a “hold” rating on the stock and a targetprice of $35 as investors take greater interest.

“If this performance is sustained as (healthreform) is rolled out through 2016, we believethe stock’s traditional discount could narrow,”France wrote in his note to investors. “Thecompany’s longer-term earnings power isgreater than what it has been in recent years.”

Health Care: Tailored Networks Draw PatientsContinued from page 1

costs explains why a slew of popular U.S.restaurateurs are expanding there.

“The Middle East is the new frontier forglobal expansion. Opening a new businessthere is easier for these brands that have over-saturated the U.S.,” said California RestaurantAssociation spokeswoman Angie Pappas.“They have a strong coffee, mall and shoppingculture there. Brands that do well in malls hereare likely to expand there.”

‘Volcano sauce’DineEquity’s earliest presence in the

Middle East stems from its acquisition ofApplebee’s in 2007; the casual dining chainhad already entered the region in 2000. Today,it has locations in Qatar, Kuwait and UnitedArab Emirates (UAE), with its largest presencein Saudi Arabia with 15 stores.

“Many of the other brands are still in theearly stages of international growth. That’s putus way ahead of the others,” said Daniel delOlmo, a DineEquity executive overseeing theinternational expansion.

IHOP is among the recent arrivals into thearea. It opened its first of eight locations inAugust 2012 in the Mall of the Emirates inDubai, UAE and has an agreement with M. H.Alshaya Co. to open a total of 40 stores.

Alshaya is one of the largest franchisees inthe region. It has deals with more than 70major companies, including CheesecakeFactory, H&M and Victoria’s Secret who

have entered the Middle East.DineEquity, as of the end of last year, was

about 99 percent franchised. So it already hasexperience with a U.S. business model thatassists franchisees while letting them run therestaurants.

“This helps us understand what our busi-ness partners overseas want,” del Olmo said.“In the Middle East, they have these multi-bil-lion dollar malls. People want to shop and dinewhen it’s 120 degrees outside. They all want tobe inside an air-conditioned environment.”

Much like in the U.S., Applebee’s andIHOP franchisees abroad bring their own

financing for restaurant development, whileDineEquity helps with site planning, training,operations, supply chain and marketing.

Del Olmo was appointed to his position lastDecember and just returned from his secondvisit to the Middle East where he met withfranchise partners, including Alshaya. “Everysingle country is different, with cultures, mar-ket realities and approaches on how to executerelationships,” he said. “It’s all about relation-ships.”

Alshaya declined comment for this story,but the company has paved the way for fran-chisors as they try to navigate the complex cul-

tural peculiarities, legal systems and bureau-cracies in the region. The company specifical-ly helps companies manage human resources,lease and buy property, work out their supplychain and accounting, as well as customerservice and other functions, according to thecompany website.

“We’re working well together, and they’vegot a very strong commitment to grow for usIHOP in the Middle East,” Stewart said.

Alshaya helped DineEquity on menu devel-opment and locating new sites, del Olmo said.For instance, although IHOP does not servealcohol, Applebee’s had to remove all liquorfrom its menu. As substitutes, Applebee’s sellsfresh juices and places an emphasis on seafoodto accommodate the flavor palette of choice inthat region.

Applebee’s also created a “volcano sauce”exclusively for the Middle East. “It is a propri-etary sauce that gives a spicy, tangy taste, andthe Middle Eastern audience seems to appreci-ate it,” del Olmo said.

Operational adjustments by the chainsinclude the stipulation that Saudi Arabiarequires all male staffing, and restaurants arerequired to have separate family and singlesseating areas with separate entrances.

And although it’s known for its breakfasts,IHOP is actually more popular during lunchand dinner hours in the Middle East. Most peo-ple don’t dine out for breakfast, del Olmoexplained, and most malls and mini-mallsdon’t open until about 10 a.m.

Restaurants: Menus, Service Need Serious TweaksContinued from page 1

Health Net Inc.

Woodland HillsCEO: Jay GellertEmployees: 7,565Market Cap: $3 billion

P/E: 17.9EPS: $2.12

Source: Yahoo Finance

(NYSE: HNT)

FRI. CLOSE, PAST 5 WKS

4/11 4/17 4/25 5/2 5/9

383736353433323130

May 14: $39.14

Gellert

Look Familiar?: Crowded Cheesecake Factory outlet at Dubai Mall, Dubai.

Please see DINING page 58

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PUBLIC COMPANIES

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Jerry Prendergast, restaurant consult-ant and founder of Prendergast & Asso-ciates in Culver City, said the Middle Eastrepresents a huge market for Americanproducts. For food providers, the region hasa high disposable income with people whoeat out frequently.

“There’s a lot of money to be spent,” hesaid. “The government has issues with porkand alcohol, and you have to change yourmenu to fit Islamic food laws, but a lot of peo-ple are willing to do it. You can’t look at a bil-lion people and say, ‘We’re not going to be partof that market.’”

Cheesecake Factory opened the doors toits first store about 15 minutes away fromIHOP in the very same month at the DubaiMall, making its debut into any internationalterritory.

It later opened a second location in Dubailast year at the Mall of the Emirates next doorto the famous Ski Dubai slope inside the mall.The 22,800-square-foot storefront seats 526guests, making it the world’s largestCheesecake Factory.

The chain has so far opened four locationsin the Middle East, making its most recent ven-ture into Saudi Arabia last December. Theother location is in Kuwait, and all are situatedwithin malls.

Aside from its largest in Dubai, Cheesecake’s

other stores are somewhat comparable to the sizeof U.S. stores, although they skew on the largerscale seating 300 to 475 guests.

The company has not revealed how manylocations it plans to open in the region, but itstated its agreement with Alshaya also pro-vides for development in Bahrain and Qatar, aswell as North Africa, Russia, Turkey andEurope.

Its latest earnings report stated that thechain could open as many as three to five newlocations within the Middle East and Mexicothis year. Cheesecake declined a request for aninterview.

It is unclear how much profit DineEquity andCheesecake Factory make in the Middle East,because in quarterly filings the companies don’t

break down their operations geographically. But restaurant economist John A. Gordon

with Pacific Management Consulting Groupin San Diego thinks the chains are doing verywell financially. Cheesecake’s sales at individ-ual restaurants there could either be at or couldtop the $15 million minimum for a U.S. outlet.The same goes for Applebee’s and IHOP out-lets, though they gross much less, closer to $2million.

He also pointed out that although manyU.S. restaurants are expanding in the region,the competition is much less than in the U.S.,giving existing outlets a nearly captive market.

“There’s an opportunity to make a lot ofmoney,” he said. “You need to have strongfranchisees. That’s the bottom line.”

Dining: Alshaya Has Multiple Franchise Deals

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