Continental's energy move fails to sidestep recession
Boston — One of the toughest challenges managers face is how to cope when a company's core businesses show lackluster growth.
When Continental Group saw prospects dimming for its container and forest-products lines in the late 1970s, the company embarked on a spirited diversification program. In 1977 it bought Richmond Corporation, an insurance holding company, and in l979 it added Florida Gas Company. This year Continental further bolstered its energy operations by joining with Allied Corporation in buying gas-rich Supron Energy Corporation for $825 million.
Now Continental's strategy is being tested as both its older business and its acqusitions feel the recession's effects. Earnings in the first half of the year were $81.9 million, down 29 percent from the $115 million of the year-earlier period.
Cheryl Kerr Cheston, an analyst with Butcher & Singer Inc. in Philadelphia, says Continental's energy diversification ''hasn't worked out as well as we would have hoped,'' because of the recession and weak demand for energy. ''But they have made good moves.''
Other analysts agree the diversification strategy should not be faulted too heavily for failing to completely insulate Continental from the economic downturn. ''We have one of the deepest recessions in history,'' says Arthur Stupay, an analyst with Prescott, Ball & Turben. ''Paper, forest products, and housing are all in the tank. In this economy, it is amazing (Continental's earnings) have held up as well as they did.''
Continental shows no signs of backing away from its strategy of moving assets and people out of its original container and forest-products operations into the faster-growing and more-profitable energy and insurance businesses.
There will be some continuation of the shift from packaging to energy, but it won't be ''as dramatic'' as in the past, when energy climbed to 31 percent of total assets, says R. Philip Silver, executive vice-president and chief financial officer. However, the company plans to raise $400 million to $500 milion by selling off more assets, and it brought in $200 milion from such sales in 1981 alone.
The funds from these sales - which include auctioning off ownership in international operations to local buyers - could well make energy operations the largest single element in the company by the mid-1980s, Mr. Silver says.
And the continuing commitment to energy investment could be seen last week in the company's announcement that it would spend $400 million to convert a natural gas pipeline system serving Florida to a carrier of petroleum products like gasoline and jet and diesel fuels.
This week the firm added to its insurance operations by completing the acqusition of CIC Financial Corporation, an insurance holding company.
''We ought to be in businesses to stay, not run for cover every time we get discouraged,'' says Donald J. Donahue, vice-chairman of Continental's board and architect of its diversification strategy.
While Mr. Donahue is not overly discouraged by the downturn in Continental's earnings, he does admit that ''it will be difficult to get back to the ($6.61) earnings level'' posted in 1982 until the economy recovers. ''As soon as we get back on track, we can fairly easily reach that level,'' he says. In fact, Value Line is forecasting earnings of $9.50 a share by 1985-1987.
Still, the weakened market for energy, mortgage insurance, and packaging and forest products will keep the company from meeting its goal of earning a 17 percent return on shareholder equity by 1983. Last year the measure hit 15.5 percent, up from 13.7 percent in 1980. ''With the hiatus created by this year's economy, the end of 1984 is a more realistic time frame,'' Mr. Silver says.
In a bid to boost returns, the company is fighting the oversupply and price cutting in its core packaging business. Continental has reorganized the business , instituted strict cost controls, and closed two less-efficient canneries. ''We are aggressively going after costs and market position,'' Mr. Silver says.
The company's forest-products operations, which account for 23 percent of corporate assets, also have been hit by the recession. Contintenal's goal has been to become a low-cost producer of kraft paper and linerboard while developing new fiber drum products.
Returns in the insurance business also have been affected by the recession and the price cutting it has caused. And Investors Mortgage Insurance Company, a private mortgage insurer purchased in 1981, suffers from the housing slump. Still, it earns enough to''service its debt and throw off a little profit,'' Mr. Silver says.
Although the energy business is central to Continental's strategy, in the short term, returns have been less than expected. ''We are not getting the price for oil we built into the budget,'' Mr. Donahue says.
But analysts note that in the future Continental energy revenues are likely to climb significantly. ''Between 1980 and 1982 they have spent half a billion dollars on oil and gas drilling,'' says Mr. Stupay, the analyst . ''Unless they are complete dummies, they are going to have significant (additional) oil and gas revenues.''