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*/Menu,1/Magazine,2/Theory,4/Port,8/ */Market,9/EK,12/WX,14/AXP,15/GM,17/ */UK,20/XON,22/CHV,24 ╓─────────────────────────────────────────────────────────────────────────────╖ ║ Random Walk Investment BBS's HIGH YIELD MAGAZINE ║ ╟───────────────────────────╥─────────────────────╥───────────────────────────╢ ║ ║ For July 30, 1993 ║ ║ ║ ╙─────────────────────╜ ║ ║ ║ ║ Random Walk's DOW HIGH YIELD MAGAZINE ......................... 2 ║ ║ What is high yield investing? ................................. 4 ║ ║ Dow High Yield Portfolios Started Nov 1, 1992 ................. 8 ║ ║ Market Summary - NYSE (Alt-X NY for chart) ║ ║ - DJIA (Alt-X DJ for chart) .................... 9 ║ ║ Eastman Kodak (Alt-X EK for chart) ............................ 12 ║ ║ Westinghouse (Alt-X WX for chart) ............................. 14 ║ ║ American Express (Alt-X AXP for chart) ........................ 15 ║ ║ General Motors (Alt-X GM for chart) ........................... 17 ║ ║ Union Carbide (Alt-X UK for chart) ............................ 20 ║ ║ Exxon (Alt-X XON for chart) ................................... 22 ║ ║ Chevron (Alt-X CHV for chart) ................................. 24 ║ ║ IBM (Alt-X IBM for chart) ..................................... ║ ║ Sears (Alt-X S for chart) ..................................... ║ ║ Texaco (Alt-X TX for chart) ................................... ║ ╙─────────────────────────────────────────────────────────────────────────────╜ Dow High Yield Magazine Please note that all information provided in the magazine is for informational purposes only and is not to be construed as buy and sell recommendations. If you have an interest in investments you are invited to give Random Walk Investment BBS a call in the Toronto area at 416 274-2381. Although Random Walk is a subscription BBS ($35/year), you have free access for a two week trial period. It is loaded with over 87 megabytes of investment and Association of Shareware Professional files. Many of these files are originals from members and NOT in wide distribution on other BBS's. Random Walk is a member of Ilink, RIME, North America Net, and TA-Net which is dedicated to technical analysis. It is the host BBS of the Canadian Society of Technical Analysts. The BBS accepts calls 300/1200/2400 baud. A 16.8 modem is on order. Charts are provided courtesy of the Marketfax Charting/Filtering Service operated by Faxtel Information Systems Ltd., 133 Richmond Street West, Suite 405, Toronto, Ontario M5H 2L3 (416) 365-1728 and fax (416) 364-6599. Ask for Karl Wagner or Dan O'Connell. Charts (with or without technical indicators) for stocks, bonds, Canadian mutual funds, and futures are available for download to your PC. Although data is also available, there is no need to download data when the charts are available. There is also a fair bit of economic, index, index sector, interest rate, and currency data. ╓╥╥───────────────────────────────────────────────────╥╥╖ ║║║ ║║║ ║║║ RANDOM WALK INVESTMENT BBS (416) 274-2381 ║║║ ║║║ 300 - 2400 baud - 24hrs, 7 days ║║║ ║║║ ║║║ ║║║ * Canadian Society of Technical Analysts ║║║ ║║║ host BBS ║║║ ║║║ * Model Portfolios - Growth, Dow High Yield, ║║║ ║║║ TSE 35 High Yield ║║║ ║║║ * Bulletins - Market & economic data ║║║ ║║║ * Futures ║║║ ║║║ * Metastock & TAS ║║║ ║║║ * Files - 87+ meg - many unique from members ║║║ ║║║ * Biographical, Dow/commodity prices door ║║║ ║║║ * Mail Door - NANet, RIME, TA-Net, ILink ║║║ ╔╬╬╣ * Approved ASP board - online catalogue ╠╬╬╗ ║║║║ ║║║║ ╙╨╨╨───────────────────────────────────────────────────╨╨╨╜ The Dow High Yield Investing Approach The essence of this program is to buy the ten highest yielding stocks of the Dow 30 stocks. A variation is to buy the five lowest priced of the 10 highest yielding Dow 30 stocks. The thirty year results of this program have been extraordinary. With a better than fifteen percent annual rate of return, on paper the monies invested before taxes would have grown more than 64 times. In a paper trial for period December 31, 1959 to December 31, 1991 a one hundred thousand dollar investment would have grown to $10,576,519 before any taxes. Why does the Dow High Yield (DHY) technique work? ───────────────────────────────────────────────── It is based on the fact that the Dow 30 stocks have an incredibly stable dividend payout history, i.e., they rarely cut their dividends during periods of poor earnings. Because large institutions tend to buy and sell stocks on earnings and earnings expectations, a Dow 30 stock with poor earnings will see its price drop as institutions sell it. Its yield will rise because the dividend is maintained. The high yielders are bought when institutions have sold the stock and driven down its price. This is the a great contrarian approach to investing - buy when the institutions hate the stock and sell when they love it. When the stock price begins to rise there is often an added bonus as improved earnings lead to a dividend increase. Mutual funds can't use the technique because they are required to be more diversified than the DHY permits. Periodically, a high yielding stock DOES have its dividend cut. The most recent example is IBM. A simple way of avoiding this problem is to determine how many times the dividend is covered by cash flow. In the case of IBM, its cash flow was not covering its dividend and had not been doing so for 2 years. With no improvement in cash flow, a dividend cut was inevitable. It is even possible to estimate what the new dividend might be by examining cash flow. How does the DHY technique work? ──────────────────────────────── At any month end (the returns over the past 25 years confirm that there is no one month that is any better than another), go through the stock quote pages of your newspaper writing down the closing price and the yield. If the paper does not list the yield, write down the dividend and calculate the yield by dividing the dividend by the price. Make sure that the dividend is the annual payout and does not include any special payouts. Rank the 30 stocks in descending order based on yield. Select either the 10-stock portfolio or the 5-stock portfolio, call your discount broker, and buy equal dollar amounts of each stock. One year later repeat the exercise and rebalance the portfolio. Some stocks will be sold; some will be kept; some will be kept and added to. Many questions have arisen since I first started this program: 1. What happens if the dividend is cut? Continue holding the security for one year after purchase. Since 1960 there have been twelve dividend cuts, GM three times, and yet, in many cases the stock price has gone up after the dividend cut. 2. What happens if the stock is taken off the Dow Jones Industrials? Continue holding the stock for one year after purchase.Most recently USX, Primeamerica, and Navistar were dropped from the Dow in May, 1991. Only USX had been in top ten yielders recently. As of April 1991, the price of the old USX is up, as are the prices of Primeamerica and Navistar. In the past when Chrysler and Johns Manvill were take off the prices were higher a year later. In both cases the dividend had been eliminated. 3. What happens if the stock is split or has an asset spinoff? Keep all of the post split shares or spinoff shares until it is time to rebalance the portfolio. 5. What about cash dividends? Invest them in money market fund. 5. I do not have much money to start, and therefore can not buy round lots? Do not worry. Buy whole shares. The odd lot differential is not a major hurdle and will not radically affect the long term results. It is possible to use the DHY with as little as $5,000. 6. Where can I learn more about the DHY technique? Beating the Dow. A High-Return, Low-Risk Method for Investing in the Dow Jones Industrial Stocks with as Little as $5,000. Michael O'Higgins with John Downes. HarperCollins, 1991. ISBN 0-06-016479-4 The Dividend Investor. A Safe Sure Way to Beat the Market. Harvey C. Knowles III & Damon H. Petty. Probus Publishing Company, Chicago, 1992. ISBN 1-55738-243-3 ┌────────────────────────┬─────────────────────┬──────────────────────────────┐ │Date: 30-Jul-93│ TOP FIVE (*) │ TOP TEN (*) │ │ DOW HI YIELD PORTFOLIO│NAV/Shr: 14.0920 │NAV/Shr: 12.7639 │ │ │Yr-to-date: 32.86%│Yr-to-date: 26.15% │ │Start: Nov 1/92 │From start: 40.92%│From start: 27.64% │ │ │Month: 2.80%│Month: 2.13% │ │ │Vs DJ30: 4.81 │Vs DJ30: 3.25 │ ├────────────────────────┴─────────────────────┴──────────────────────────────┤ │ Shares Security Cost Price Mkt Val Asset% Yield │ ├─────────────────────────────────────────────────────────────────────────────┤ │ 1,550 Westinghouse * 20,088.25 15.750 24,412.50 9.56% 2.54% │ │ 1,350 Union Carbide * 19,863.75 18.750 25,312.50 9.92% 4.00% │ │ 935 Amer Express * 20,090.08 32.625 30,504.38 11.95% 3.07% │ │ 650 General Motors * 20,078.50 48.500 31,525.00 12.35% 1.65% │ │ 485 Eastman Kodak * 19,902.18 53.625 26,008.13 10.19% 3.73% │ │ Dividends - 3,189.20 1.25% │ │ ---------- ---------- │ │ 100,022.76 140,951.70 │ │ 330 Texaco 19,865.40 62.875 20,748.75 8.13% 5.09% │ │ 475 Sears 20,027.00 50.125 23,809.38 9.33% 3.19% │ │ 144 Dean Witter 37.250 5,364.00 2.10% │ │ 325 Exxon 19,971.24 65.625 21,328.13 8.35% 4.38% │ │ 300 IBM 20,125.50 44.500 13,350.00 5.23% 2.25% │ │ 280 Chevron 19,941.40 88.375 24,745.00 9.69% 3.96% │ │ Cash 46.70 - 46.70 0.02% │ │ Dividends - 4,933.35 1.93% │ │ ---------- ---------- ----- │ │ 200,000.00 255,277.00 100.00% │ └─────────────────────────────────────────────────────────────────────────────┘ 07/30/93 STOCK INDEXES & INDICATORS DOW JONES HIGH LOW LAST CHANGE NYSE 000s 30 INDUSTRIALS .... 3567.70 3530.81 3539.47* -27.95 +VOLUME 104475 20 TRANSPORTATION.... 1614.46 1594.15 1613.81* +19.66 -VOLUME 115378 15 UTILITIES .... 250.92 248.95 250.00* -0.86 TOTAL 254394 65 COMPOSITE .... 1322.62 1313.73 1317.95* -1.15 NYSE S&P 500 .... 450.22 446.98 448.13* -2.11 ADVANCES 925 S&P 100 .... 416.33 413.12 414.41* -1.91 DECLINES 1008 S&P 400 MIDCAP .... 167.51 167.11 167.44* -0.07 UNCHANGED 639 MAJOR MARKET .... 363.25 358.93 360.10* -3.15 NYSE TICK +486 NYSE COMPOSITE .... 249.38 247.93 248.49* -0.85 NYSE TRIN 1.01* FINANCIAL .... 221.81 220.40 220.98* -0.76 NASDAQ COMPOSITE .... 706.54 702.37 704.70* -2.54 AMEX INDUSTRIAL .... 719.93 714.59 717.14* -4.16 TOTAL VOL 18824 BANKING .... 649.06 644.17 648.82* +4.01 ADVANCES 298 INSURANCE .... 897.64 891.50 894.84* +3.05 DECLINES 257 NMS COMPOSITE .... 312.43 310.53 311.52* -1.25 AMEX COMPOSITE .... 437.18 435.71 437.00* +0.41 VALUE LINE (GEO) .... 278.82 277.90 278.42* -0.41 VALUE LINE (ARITH).... 420.07 418.77 419.58* -0.51 GOLD/SILVER .... 129.56 127.52 128.90* +2.51 AMEX OIL INDEX .... 256.49 254.69 256.02* -0.43 07/30/93 New highs and lows: NYSE: 98-36 AMEX: 27-20 NASDAQ: 120-53 Alt-X NY for NYSE chart and Alt-X DJ for DJIA chart Stocks declined Friday on Wall Street, but the Dow Jones industrial average exaggerated the extent of the decline. The Dow fell 27.95 to close at 3539.47. Declines led advances by a slim 1008-925 margin on the New York Stock Exchange. Adjusted volume was 250,380,700 shares. The NASDAQ compositeRindex was down 2.54 to 704.70, due in part to a 5-point tumble in Microsoft, to 74. Advances led declines on NASDAQ, 1437-1286, in volume of 255,657,750 shares. The Wilshire 5000 fell $14.942 billion to $4,443.280 billion. Microsoft was downgraded from Merrill Lynch. Late Thursday, the company said it expects continumd downward pressure on its software prices in fiscal yeav 1994 because of competitors' steep price cuts. UAL was up 5 to 144. It posted better-than-expected second-quarter earnings of 54 cents a share Thursday, and was subsequently upgraded by Salomon Bros. General Motors was up 1 to 48 1/2 after a rating upgrade from S.G. Warburg. GM reported improved second-quarter results Thursday. 3M was down 3 3/4 to 105 after reporting second-quarter earnings of $1.51 a share, up from $1.45 a year ago but slightly off expectations of $1.52. Merck was up 1/8 to 30 5/8. The Wall Street Journal said Merck's agreement to merge with Medco Containment Services is not expected to trigger aggressive scrutiny by the Clinton administration because the deal is nearly certain to intensify price competition amone drug makers. The Dow theoretical intraday high and low Friday: 3581.11; 3515.72. Ron Doran, director of institutional trading at C.L. King & Associates in Albany, N.Y., said the currency ``turmoil in Europe'' sparked a sharp rise in gold prices, which ``could fuel possible inflationary pressure.'' The August contract for gold soared 9.20 to $407 an ounce - its highest level since January 1991. Nevertheless, profit-taking hit selected mining issues, particularly silver mining stocks. Sunshine Mining was down 1/8 to 3 3/8 and Coeur d'Alene fell 1/2 to 23 1/4. RJR Nabisco Holdings eased 1/8 to 5. On Thursday, it reported second-quarter earnings of 6 cents a share compared with 7 cents a year ago. Disney was down 1 1/8 to 37 1/2 after an analyst said that theme park attendance in 1992 was indirectly aided by abnormally low air fares. A.L. Labs tumbled 9 to 14 5/8 after a long trading halt was lifted. The drug company, which earns a substantial part of its revenues overseas, said that 1993 earnings from continuing operations will probably trail those of 1992, due in part to foreign currency weakness. Placer Dome was up 3/8 to 22 1/8 in active trading, as gold and silver prices rallied in response to turmoil in European currency markets. Aetna was fell 1 5/8 to 58 3/8. It posted second-quarter net income of $1.32 a share, topping estimates of about $1.11 a share. Granite Construction fell 3/4 to 17 1/4 after it said that fourth-quarter net income will trail expectations. Brooke Group fell 1 3/8 to 3 3/4 after negative coverage of chairman Bennett LeBow in the Wall Street Journal. EASTMAN KODAK (Alt-X EK for chart) 7/30/93 52-Wk-Rng FY/Q EPS93 EPS94 PE94 NxtQtr LyQtr Eastman Kodak 53.62 56-39 12/3 3.70 4.60 11.4 **.** **.** EK 1. Second-quarter earnings of $1.13 vs. $1.11 a year ago were higher than some analysts' $1.10 estimate and consensus forecast of $1.06. 2. Second-quarter earnings included a $0.04-per-share charge for the early retirement of debt. 3. A $79-million positive operating profit swing in the information group was responsible for the stronger-than-anticipated quarter. Kodak's second-quarter operating profits (including the chemicals group, which is scheduled to spin off at year end) rose $75 million to $823 million. The positive comparison was essentially due to a $79-million swing in the information group's profits from a loss of $31 million a year ago to a $48 million profit. Film volume was essentially flat in the quarter, which resulted in a 2% decline in imaging group profits. Chemical group sales and operating profits rose 6%. The performance of the health group was disappointing. Sales rose 5%, while operating profits were off 2%. Higher research and development spending on ethical drugs, increased promotional spending to launch Bayer Select, and some sluggishness in sales reflecting concern over healthcare spending hurt the earnings comparison. On balance, analysts were encouraged by the quarter since it demonstrated Kodak's cost cutting efforts are beginning to impact the bottom line. This was particularly evident in the information group, where profits rebounded $79 million on a 5% sales decline. Analysts believe that further cost cutting and more disciplined utilization of cash flow should be the two key elements of Kodak's turnaround effort. In the past, management has indicated Kodak's capital expenditures should be aligned more closely with depreciation. In 1992, Kodak's capital expenditures equaled $2.09 billion versus $1.39 billion in depreciation. This latter number excludes amortization of $146 million. For the first half of 1993, Kodak's capital expenditures were $739 million versus $1016 million last year. Depreciation was $553 million versus $585 million a year ago. In 1993, capital expenditures should approximate $1.6 billion versus depreciation of $1.3 billion. The excess cash generated by the reduction in capital expenditures will be utilized to repay debt. WESTINGHOUSE ELECTRIC CORPORATION (Alt-X WX for chart) 7/30/93 52-Wk-Rng FY/Q EPS92 EPS93 PE93 NxtQtr LyQtr Westinghouse 15.75 17-9 12/3 0.93 0.90 17.9 0.20 0.22 1) Analysts continue to rate Westinghouse shares market underperformers. Second quarter earnings declined 31% to $0.20 versus $0.29. Weak order trends in the defense and environmental services areas, coupled with a sluggish economy, underlie the earnings revisions. Analysts expect a third quarter comparison of $0.20 versus $0.22. 2) In the quarter, only three business units posted earnings gains: Industrial repair services, Power generation, and Thermo-King. Industrial benefitted from a depressed comparison and reduced costs, while Power generation also had lower costs. Interestingly, all three units recorded declining sales. 3) Good progress was made on selling off financial services assets in the quarter. Westinghouse ended the quarter with net assets of $2.04 billion in this area, and outstanding committments of $523 million. During the quarter, it is estimated that parent company net debt rose modestly. AMERICAN EXPRESS (Alt-X AXP for chart) 7/30/93 52-Wk-Rng FY/Q EPS93 EPS94 PE94 NxtQtr LyQtr American Expr 32.63 34-20 12/3 2.70 3.00 11.4 0.67 -0.45 Q1 Q2 Q3 Q4 XXX XXX XXX XXX 1994 3.00 1993 0.49A 0.83A 0.67 0.71 2.70 1992 0.51A 0.63A (0.45)A 0.15A 0.83 * Raise 1994 to $3.00 from $2.60 and raise this year's expectations to $2.70 from $2.40. * Second quarter earnings beat analysts' expectations by $0.21, and reported earnings of $0.83 vs. $0.63 advanced 34% and were the company's best ever. * Stock is now selling at 11.5 to 12 times 1994 estimate. 1.) Second quarter earnings of $0.83 were better across the board than expected. TRS earned $234 million vs. $124 million a year ago, a somewhat better earnings performance than we had expected on sharply lower loss provisioning and reduced operating expenses. Revenues as expected were down slightly on a continued reduced cardmember base and sharply lower merchant discount fees. Shearson-Lehman brokers earned $121.5 million, though only $95 million of this is attributed to the portion of the company (Lehman Brothers) which will remain with American Express following the previously announced sale of Shearson to Smith Barney. 2.) There is no doubt that the new management has had a beneficial impact on the company and its stock price. While recent quarters have been adversely impacted by special charges, asset quality issues, and rising uncertainty this quarter contained nothing extraordinarily unusual, though analysts caution against annualizing second quarter growth in assessing the company's earnings power going forward. First, $0.05 per share of the $0.83 reflects earnings of operations which will be sold. Secondly, TRS earnings are now benefiting from a decline in reserves as the company reduces its provision for losses while non-performers at Optima have charged off and declined significantly from extremely high levels. Thus TRS' strongest seasonal quarter are usually the second and third quarter IDS posted an extremely strong quarter with earnings gains at 23%. GENERAL MOTORS CORPORATION (Alt-X GM for chart) 7/30/93 52-Wk-Rng FY/Q EPS93 EPS94 PE94 NxtQtr LyQtr General Motor 48.50 49-28 12/3 1.25 4.00 11.8 -0.50 -1.86 GM 52 Wk EPS P/E Ind. Range 1992 1993E 1994E 1993 1994 Div. Yield ===== ==== ===== ===== ==== ==== ==== ===== $49-$29 -3.02 $1.25 $4.00 37.6X 11.8X $0.80 1.7% * Increasing in 1993 estimate to $1.25 from $1.00. * No change in 1994 estimate or market performer rating. * Good 2Q results, but generally in line with our expectations. GM REPORTED SECOND QUARTER RESULTS OF $0.92 PROFIT VERSUS $0.22 LOSS A YEAR AGO. Results were essentially in line with street consensus of $0.86. Second quarter results were clean with no unusual items. Analysts have increased their 1993 estimate to $1.25 per share from $1.00. The increase reflects slightly higher variable profit levels for North American vehicle sales. Cost reduction efforts in North America automotive (NAO) was the key element driving GM's operating improvement. The North American Automotive operation continues to move in the right direction, albeit from a depressed base. THe key concerns with NAO remain future products, potential market-share vulnerability, and an entrenched UAW. Little improvement is expected in Europe in the intermediate term. A more positive outlook in these areas could lead analysts to take a more aggressive view on the stock. SHARP TURN IN OPERATING PROFITS TO $977 MILLION IN SECOND QUARTER FROM $304 MILLION A YEAR AGO. Total revenues increased 2.8% to $32.9 billion and automotive related revenues increased 1.8% to $29.4 billion. A 3.5% decline in volume was more than offset by a 5.4% increase in pricing (revenue per unit). Total gross margin (pre pension expense) increased to 17.2% from 15.1% a year ago. In the automotive segment, gross margin increased to 16.4% from 14.1% a year ago. The improvement reflected cost reduction efforts in North America. Retail incentives declined to $850 per vehicle from $1,030 a year ago and $940 in the first quarter. Fleet sales also declined (27% of total U.S. sales versus 31% a year ago), as GM continued to curtail sales to daily rental car companies. Largely reflecting the declining fleet activity, GM's market share dropped to 34.6% in 2Q versus 35.1% a year ago. TURNAROUND IN NORTH AMERICAN AUTOMOTIVE DRIVES YEAR OVER YEAR IMPROVEMENT. GM reported a net loss in NAO of $95 million versus a $761 million loss a year ago. Somewhat surprisingly, International automotive results improved ($368 million profit versus a $284m profit a year ago), with weaker, but still profitable European results more than offset by strength in South America (primarily Brazil). Results in GM's non-automotive subsidiaries (EDS, Hughes, and GMAC) were essentially in line with expectations. POSITIVE CASH FLOW IN SECOND QUARTER. Cash balances increased to $9.1 billion from $8.4 billion in the first quarter. GM's debt to capital ratio was flat at 55.8% versus first quarter levels. A key issue remains the magnitude of GM's unfounded pension liability, which stood at $14.0 billion at yearend 1992 (versus $10.6 billion in 1991). GM indicated, without specifics, that it plans to make significant contributions to the pension fund over the next six years. Pension expenses are running slightly ahead of our projections, with $2.5 billion likely in 1993 versus our prior $2.3 billion estimate and $2.0 billion in 1992. 1993 OUTLOOK BY SEGMENT. Analysts' 1993 estimates of $1.25 per share are consistent with GM's NAO doing slightly better than their targeted break- even EBIT goal. Net income by segment forecast for 1993 follows: NAO automotive ($1.3 billion loss vs $4.9 billion loss in 1992); Int'l automotive ($900 million profit vs $1.2 billion a year ago); GMAC ($1.0 billion profit vs $1.2 billion); and EDS and Hughes ($1.6 billion profit vs $1.3 billion). UNION CARBIDE (Alt-X UK for chart) 7/30/93 52-Wk-Rng FY/Q EPS93 EPS94 PE94 NxtQtr LyQtr Union Carbide 18.75 20-12 12/3 0.90 1.25 15.0 0.21 0.18 UK 1. 2Q EARNINGS OF $0.24 WERE BETTER THAN ANALYSTS' ESTIMATES largely due to higher income from companies in which Carbide had an equity position and due to lower "other expense" and lower depreciation. EBITD from core operations was actually lower than expected by $11 million. In aggregate a roughly $7 million pretax loss from an asset sale was largely offset by unusually low depreciation and interest expense. Carbide expects these last two items to revert to higher levels in the second half of 1993 compared to the second quarter levels. 2. The recently completed sale of the silicons business will have a net- net dilutive effect of $0.03-$0.04 per share each quarter compared to the first and second quarters of 1993. While that business earned very little in last year's first half, it has been a very good contributor year to date, thus next year's first half will have a tougher comparison year over year. 3. Core business trends remain weak contrary to the tone of today's Wall Street Journal article. New capacity additions will likely keep margins depressed. For its part, Carbide expects to add roughly 100 million pounds per year (partly ethylene) capacity in Quebec by early 1994. Formosa's 530 million pounds per year ethylene glycol and 450 million pounds per year HDPE plants start up in the next few weeks followed next year by 1.5 billion ethylene and a 500 million pound LLDPE plant. 4. Cash flow is trending a bit below budget. Year to date operations have been cash negative to the tune of $50-$60 million Capital spending will likely run $10 million below budget this year at $350 million, but next year's spending is likely to be $400-$425 million (vs. our $400 million earlier estimate). 1995 spending will likely exceed 1994 levels as spending for the Kuwait mega project starts. SHARES OUTSTANDING CONTINUE TO DRIFT UPWARDS TO 155 MILLION BY THE END OF SECOND QUARTER 1993. 5. WHERE IS THE GOOD NEWS? FIXED COST CONTINUES TO DRIFT DOWNWARDS. SG&A plus R&D was $7 million below year ago in the first half (full year 1992 was $34 million below 1991; second half 1992 was $2 million below year ago). Interest expense is down $56 million is the first half of 1993 vs. year ago; will be expected to be $17 million lower in the second half of 1993 vs. year ago. MARGINS IN POLYETHYLENE AND ETHYLENE GLYCOL HAVE LITTLE OR NO ROOM LEFT TO FALL. VALUATION Multiple UK DOW LYO CUE(1) S&P500 1994 EBITD 6.0 7.0 13.0 7.1 NA 1993 Gross Cash Flow 8.9 7.9 29.4 6.2 9.0 Normalized EBITD 4.3 4.8 3.9 3.3 NA 1994 P/E 15.0 19.9 88.2 NM 14.9 Yield,% 4.0 4.3 5.1 0.0 3.0 (1) Hanson has bid to acquire this company. EXXON CORPORATION (Alt-X XON for chart) 7/30/93 52-Wk-Rng FY/Q EPS93 EPS94 PE94 NxtQtr LyQtr Exxon Corp. 65.63 69-57 12/3 4.00 4.75 13.7 **.** **.** 1. Exxon reported second quarter net per share of $.98, up from $.73 last year. Earnings included $210 million in non-recurring tax credits and gains on asset sales. Excluding these results, adjusted net income is $.83 versus a similarly adjusted result in last year's second quarter of $.71 per share. While analysts routinely strip out of reported earnings these identified one-time gains, it is worth noting that in Exxon's case, the company has had small to moderate non-recurring gains in nine out of the past ten quarters and only one small non-recurring loss. Overall, Exxon has had a net cumulative contribution to earnings of $.70 per share from so-called non-recurring items since the beginning of 1991. This would seem to indicate a conservative accounting approach and a higher quality of earnings than would be the case for several of its competitors. 2. There were no significant surprises contained in Exxon's second-quarter release. Foreign exploration/production earnings were impacted by a large decline in European gas sales related to a warmer than normal second quarter. Second-quarter demand always declines from the first but it was much sharper than usual this year. In addition, sales/earnings were modestly and negatively impacted by deferral of liftings of U.K. North Sea oil until the third quarter (revenues and earnings are booked as oil is sold, not produced). These two items resulted in foreign exploration/production income below normal. Foreign refining/marketing earnings and margins were stronger than projected, with conditions in the Far East quite good. Results in the U.S. petroleum segments were as expected. 3. In the category of Other Operations, Exxon's earnings in Hong Kong Power continued strong and to show good growth ($59 million for the quarter versus $51 million last year). But coal and minerals earnings were hurt by lower coal production and falling copper prices. 4. Looking ahead, Exxon's earnings will be helped by a build-up in domestic oil production later this year, and analysts have raised their estimate for full-year foreign refining/marketing. The latter reflects a strong second quarter and a likelihood that this segment may benefit from the recent decline in oil prices. On the other hand, oil prices have been weak and analysts have lowered their full-year estimate leading to a reduced earnings expectation for Exxon's exploration/production sector. 5. Capital and exploration expenditures were marginally higher than last year's second quarter at $2.1 billion and for the first half were some 7% below last year at $3.7 billion. Exxon should be in balance this year on its cash flow and asset sales versus capital expenditures and dividends but look for the company to generate significant free cash flow in 1994 and 1995. This makes analysts highly confident of a dividend increase later this year or early 1994. CHEVRON CORP. (Alt-X CHV for chart) 7/30/93 52-Wk-Rng FY/Q EPS93 EPS94 PE94 NxtQtr LyQtr Chevron Corp. 88.38 90-66 12/3 5.70 6.40 13.7 **.** **.** CHV 1. Chevron reported second-quarter net per share from operations of $1.62, a 63% increase over last year's $.99 per share. Chevron also took a one- time net charge of $1.47 per share in the second quarter, bringing reported net per share to $.15. Earnings from operations were marked by strong increases in all petroleum segments relative to a year ago; cost-cutting and higher U.S. gas prices were the principal causes. Exploration/production results were basically unchanged relative to the first quarter while worldwide refining/marketing results were higher (U.S. earnings were lower, but this was more than offset by higher foreign results). Chemicals and minerals weakened compared to the first quarter while corporate expenses were lower. In all, earnings were generally as expected in form but were a touch better in magnitude. This was Chevron's third consecutive quarter of very strong operating results. 3. As mentioned, the company also had a one-time net charge of $1.47 per share in the second quarter. This had basically been preannounced a few months ago when Chevron released its domestic refining/marketing restructuring plan. The key element in the net charge was a $552 million item related to the restructuring of its U.S. refining/marketing system, primarily due to the writedown to estimated realizable value of the two refineries slated for sale (Philadelphia and Port Arthur), as well as anticipated losses on the sale of LIFO inventories connected with the two refineries. There were several other items which more or less offset each other. Importantly, the cash effect of the net charge was basically nil. And Chevron actually received some $642 million in proceeds from asset sales during the quarter, with Ortho the dominant one. 4. Chevron indicated that Tengiz production (its joint venture in Kazakhstan) was essentially breakeven in the second quarter and that Tengiz should be contributing to profits beginning in the third quarter as production volumes pick up. 5. It also indicated that it was distributing information packets on the two domestic refineries being offered for sale and that it hoped to close off bids by year-end 1993. No indication was given as to hoped-for proceeds, but the size of the writedown indicated above is probably a good sign that proceeds will be modestly sized. 6. Current trends include a weakening of crude oil prices, but natural gas prices continue strong. Marketing margins have improved significantly since the end of the second quarter; it appears that, at least so far, the industry has been able to hold onto a fair amount of the crude oil price decline at retail levels. If this continues, it could provide an unexpected bulge in third-quarter refining/marketing earnings. 7. Chevron continues to impress with strong operating results and cost- cutting efforts. Its business mix--with large contributions from domestic gas, California refining/marketing, Far East exposure through Caltex--is very favorable in today's environment. The Chevron story continues to be a strong and improving one.