Kids companies see '05 market cap plunge

High Point— Where have all the dollars gone? Collective market capitalization of the 10 vendors on this year's Kids Today scorecard plummeted more than 35% at the end of 2005 to just over $5.3 billion from $8.2 billion the prior year.

The answer lies in part in the 19% decrease of aggregate shares outstanding for the 10 companies. Falling share prices caused the balance of the market cap decline.

Two furniture producers, Ethan Allen and Furniture Brands International, are now at the top of the market cap leader board. Ethan Allen's capitalization of $1.2 billion was 40% below year-ago results, but the vertically integrated company edged out FBI's market cap of $1.1 billion for top honors. FBI recorded a 31.5% increase in market cap from 2004 to 2005.

Martha Stewart Living Omnimedia posted a nearly 40% decline in share price over a two-year period starting in 2004, no doubt reflecting the stock market's steadily eroding confidence in the company as its founder took a mandatory time out. Coupled with a 25% decrease in the number of shares outstanding, the company recorded a 55% drop in market cap from the end of 2004 to last year's end.

Market capitalization, calculated by multiplying the stock price times the number of shares outstanding, is one measurement of how much a company is worth. Market capitalization calculations take into account any stock splits and reverse stock splits.

A company with high market capitalization has the flexibility to pursue acquisitions, fund expansions or otherwise invest in the business, all of which can be underwritten by either borrowing against the capitalization or selling company-owned stock.

A company with slipping market cap may find itself the target of a takeover attempt, depending on how much of its stock is available to buy. Savvy company boards frequently take advantage of low stock prices and strong cash flow to buy back available shares, safeguarding the company's ownership.

Companies are generally categorized by the size of their market capitalization:

• Micro cap: Under $100 million.
• Small cap: $100 million to $1 billion.
• Mid cap: $1 billion to $5 billion.
• Large cap: Above $5 billion.

Just three companies on the Kids Today list increased market cap, compared with seven last year. Buoyed by a 27.3% share price increase and a 58.5% increase in shares outstanding, textiles specialist Crown Crafts more than doubled its market cap from the end of 2004 to the end of 2005, to $6.7 million from $3.3 million.

Taking a wider view, companies on this scorecard appear to be outshining their much bigger counterparts on the New York Stock Exchange and Nasdaq. Market cap among the juvenile home furnishings producers at the end of 2005 was dictated by changes in the number of shares outstanding, not necessarily a bad thing.

Both Dell Computer and General Motors, two of the most widely watched public companies, saw their market caps take substantial hits last year. At Dell, a Nasdaq company, it fell from over $100 billion in 2004 to just over $60 billion in 2005. That nearly 33% drop was caused by a 29% drop in share price, paired with a 5% decline in shares outstanding.

Dell's results pale beside the fate of New York Stock Exchange-listed General Motors. The number of shares outstanding at the automotive giant remained stable, but share price plummeted more than 48%, resulting in a corresponding drop in market cap. GM's market cap fell to nearly $11 billion from $21 billion the year before.

An increase or decrease in market capitalization isn't necessarily a reflection of company performance. Most of the dot.com companies of several years ago failed to record anything but huge quarterly and annual losses during their boom years, when their market caps were sky high.

Market capitalization can serve, however, as an indication of how the stock markets perceive a company's value.