Pennzoil-Quaker, Pt. 2
What state is it in?

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Feb. 17, 1999) -- Picking up where we left off yesterday, today we continue to slick through our look at Pennzoil-Quaker State (NYSE: PZL).

Yesterday we found that the company is valued at $1.3 billion, has annual sales of $3.2 billion, recently had gross margins of 35%, net profit margins of around 1%, and recently achieved return on capital employed of 1%. Estimates vary, but the stock trades at 13 times next year's earnings estimate and earnings are anticipated to grow 10.3% annually over the next five years. (Some analysts estimate earnings growth as low as 7%, however.)

Now, onto the rest of our Big Yellow and Green study!

Leverage: At the end of Q3 1998, the company's debt-to-capitalization ratio (total debt divided by the sum of total debt plus shareholders' equity) was 80%, compared to Exxon, for example, at 17.9% and Mobil at 25.5%. Pennzoil only has $376 million in long-term debt, but its total shareholders equity is only $290 million. (Giving it a long-term debt-to-equity ratio of 1.3.) Total debt is $1.2 billion, much of it short term, which goes a long way to creating the 80% ratio we just mentioned. The company's book value, you might recall, is $6 per share.

The long-term debt is reasonable; the ratios are okay. The company isn't on unstable ground or in a desperate position by any means.

Use of Cash Flow: Management expects to pay a $0.75 per share dividend this year, and it should continue to do so. Based on the current share price of $13, that equates to an attractive 5.76% dividend yield.

The combination of Pennzoil with Quaker State is expected to generate cost savings of $90 million to $125 million annually. This will be due to the elimination of duplicate functions and combined purchasing efficiencies, alongside "synergies in distribution and marketing, and administrative streamlining."

The company hasn't announced plans to buy shares of its own stock anytime soon (that I could find), and with ony $6.6 million in cash and $376 million in long-term debt, it probably won't, even though this giant can generate significant cash flow. Pennzoil-Quaker State is more likely to continue paying its 5.7% dividend yield than to begin buying back shares, unless the low share price entices management sooner rather than later.

Snapshot for Pennzoil-Quaker State: Click here to visit the Fool's snapshot for the company. Also, visit the Pennzoil-Quaker State website (which lists its DRP info, among much more) if you're interested.

It's difficult to cover all of the elements of Pennzoil-Quaker State's business in two short columns, of course. Plus, the company is new enough that we need time to see how its numbers and profitability will arise (or stagnant). Right off the bat, however, the company does have the leading two oil brands and oil change shops (Jiffy Lube and Q Lube) in the country, and that ain't bad -- at all. Also, it probably gets some decent oil prices from its parent (spun-off) exploration and production company, PennzEnergy Co. (PZE).

By the way, PennzEnergy looks to yield 8.8% and trades at a P/E of 3.5 -- although that must be a one-time accounting sort of thing. Anyway, why aren't we considering it for investment? I think it's time to add PennzEnergy to our list. I'll talk to Brian about it when he returns from a jaunt around the Deep South. (That is, if he does return.)

Based on what we saw in Pennzoil-Quaker State -- the strong dividend yield and decent debt position, the leading brand names and renewed focus -- we'll take the company into Round Two for further consideration. However, it's going to be difficult for the firm to advance beyond that while having such low profitability ratios. We can only hope that management sees this and realizes that it has a few weeks to raise margins by several points in order to be seriously considered for the Fool's Drip Port. Maybe that will generate fast results for the decades-old company.

Err... maybe somebody needs a reality check.

Anyway, congratulations to Pennzoil-Quaker State! Now that we're considering it in Round Two, consider drinking more of it. Or... you know what we mean. To discuss these columns, please visit the Drip Companies message board on the Web. Remember: Rely on the Tiger. Or the Big Q.

Tomorrow: some 'mm 'mm Campbell Soup (NYSE: CPB).

[To discuss these columns, please visit the Drip Companies message board on the Web.]

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