FINANCE
Outlook for the Chemical Industry C. P. NEID1G, White, Weld & Co., 40 Wall Sf., N e w York, Ν. Y.
D
•
1953 Results: First half significantly better than second for most chemical companies
•
1954 Estimates: Sales continue to be d o w n but seemed to be strengthening b y March
•
Long term future outlook is extremely bright, es pecially for plastics, fibers, agricultural chemicals
URING THE PAST 25 years the chemi
cal industry has had an average growth of 9% per year, compared with 3 % per year for all other industries, according to a recent Stanford Research Institute study. Only air transportation (up 30.3%) and aluminum (up 9.2%) had greater growth rates. Certain other growth rates include: electric power, 5.9%; natural gas, 5.8%; petroleum, 4.5%; rubber, 4.0%; paper, 3.8%. Tak ing into consideration the ability of the chemical industry to develop new prod ucts constantly, it seems quite reason able to believe that, over the next 25 years, the industry will continue to grow faster than most other industries. Obviously, certain segments of the chemical industry will grow at a more rapid rate than other segments—just as some companies will expand more rapidly and more profitably than others. The number one candidate for expan sion must be plastics, for which the po tentialities are limitless. In 1953 plas tics production was a mere 1.3 million tons, yet this was the all time high. When one considers that the competi tive materials which plastics are replac ing total some 200 million tons, it is apparent that only the surface has been scratched. The future for plastics—as, in fact, for all chemicals—is dependent on the ability of research to develop im proved products at lower cost. One can say with a fair degree of certainty that the plastics in large volume use in 1964 will not be the same chemically as those w e know today. Much as the metal in dustry is built on a vast number of dif 5338
ferent alloys, s o the 1964 plastics will, which will give the farmer additional i n effect, be alloys—only in this case incentive to use more fertilizer even there will be various combinations of though his income may continue to de the building blocks such as styrene, cline somewhat. butadiene, acrylonitrile, vinyl chloride, and many others, to get t h e desired Chemical Industry O n l y O n e properties for the finished product. Serving A l l 72 Basic Groups There is every reason to believe that The chemical industry is one of our today's leaders in the plastics field- most complex industries. It is the only Union Carbide, Dow, and Monsanto— industry which serves the entire 7 2 will continue to head the parade, with basic industrial groups as classified by companies such as Allied and American the U. S. Department of Commerce. Cyanamid having more important roles While the chemical industry is its own than they now have. best customer, there is still very active There are also other areas where competition between companies. It is rapid expansion is expected. Among virtually impossible to make any gen the more important are synthetic fibers eral statements regarding developments and agricultural chemicals. During the affecting the chemical companies since forties cellulosic fibers enjoyed steady they are so different. To my knowledge growth, increasing from under 500 there are no two chemical companies million pounds in 1940 to 1.35 billion which can b e clearly considered as com pounds in 1950. In the past several parable with each other in all respects— years there has been a decline in the the closest approach is probably Victor cellulosic fibers, except for the high Chemical and Blockson Chemical. tenacity viscose filament used in tire Even here each company uses a differ cords. There is not complete agreement ent process to produce its phosphate in this segment of the industry as to the chemicals. While D o w and Monsanto probable level of operations in the next are quite competitive in some groups few years although there seems little of products, each has other groups of likelihood that many plants will operate products with which it competes with at capacity. However, 10 years from other companies. D u Pont and Carbide now the demand for the cellulosic fibers are the two largest chemical companies, should have required some modest yet they do not compete with each other in a major way—except for such prod plant expansions. The future of agricultural chemicals, ucts as polyethylene and antifreeze. including fertilizers and the variety of There is a simple illustration of the insecticides, weed killers, defoliants, complexity of the chemical industry. etc., looks exceedingly promising. The The automobile industry, as w e all trend toward more concentrated fer know, takes a wide variety of materials tilizers should reduce the cost per unit and produces essentially one product. C H E M I C A L
A N D
E N G I N E E R I N G
NEWS
Comparison of 1952 and 1953 Results
Sales Operating Profit6 Profit Margins Depreciation Pretax Earnings
1952 1953 lacrease 1952 1953 1952 1953 1952 1953 1952 1953
Allied Chemical $490.18 545.56 11.3% 95.07 105.81 19.4% 19.4% 15.21 22.64 80.42 82.45
American Cyanamid $368.41 380.39 3.3% 58.32 66.47 15.8% 17.5% 18.22 21.31 46.61 52.47
(in millions) Dow D u Pont Chemical* $1613.04 $407.16 430.39 1765.43 5.7% 9.4% 139.79 595.23 653.12 141.49 34.3% 36.9% 32.9% 37.0% 32.83 95.29 52.02 110.83 109.52 593.74 86.56 640.40
Pretax Profit Margins
16.4% 1952 26.8% 12.6% 13.8% 15.1% 20.1% 1953 20.00 1952 73.70 40.11 Taxes 25.00 37.28 50.70 1953 35.82 26.61 1952 40.31 N e t Earnings 35.86 27.47 45.17 1953 3.07 4.55 1952 1.65 Earnings/Share 5.10 1.58 3.15 1953 3.00 1952 0.80 2.00 Dividends/Share 3.00 2.00 0.90 1953 3872 72V2 1952 56 Average Price 49 1953 387* 697 2 18.2 15.9 23.3 Average P / E Ratio 1952 15.6 13.6 1953 24.4 a Fiscal year ends May 3 1 . h Excludes depreciation, interest, other income, and other expenses.
On the other hand, the petroleum industry starts with one product—crude oil—and out of it are produced literally hundreds of end products. However, the chemical industry takes hundreds of raw materials and produces thousands of end products by a multitude of processes. Industry Is Dependent o n "Insurance" And " I n v e s t m e n t " Research
As one digs further into the chemical industry several interesting points develop. There is no one way to produce a given chemical and what may b e very practical for one company is totally uneconomical for another. For example, there are at least four commercial methods of producing phenol and each has its merits. Also, try to get the chlorine producers to agree as to which electrolytic cell is the best! It soon becomes apparent that several entirely different products can be employed in a single end use. Witness the struggle now going on among the resins used in waterbase paints. Consequently the chemical industry is certainly one in which there is considerable process and product obsolescence. The industry has, therefore, become quite dependent on research— boùi the "insurance" type of research which attempts to keep present processes at least even with competition and the "investment" type of research which is aimed at developing new and profitable products. V O L U M E
3 2,
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36.8% 36.3% 369.68 404.84 224.06 235.56 4.70 4.94 3.55 3.80 8872 9972 18.8 20.1
Hercules $181.52 190.20 4.8% 42.84 42.45 23.6% 22.3% 7.80 9.10 32.12 31.34 17.7% 16.5% 20.90 19.66 11.22 11.68 4.03 4.20 3.00 3.00 72
677, 17.8 16.1
Currently the chemical industry is spending an average of 2.5 to 3% of sales on research and is supporting more research with its own funds, as differentiated from government funds, than any other industry. Each year many annual reports indicate that research expenditures were increased and 1953 was no exception. D u Pont's 1953 expenditures for research exceeded $57 million compared with $33 million in 1949. Monsanto spent over $10 million in 1953, more than double the 1950 expenditures. The Hercules figure was $7.9 million, substantially above 1952. Allied indicated its research expenditures were $14.5 million and American Cyanamid spent approximately $20 million. The other major chemical companies—Union Carbide, Dow, and Mathieson—also had very heavy research expenditures. Yet the mere spending of dollars for research is certainly not the important thing; neither is the project on which it was spent although this is undoubtedly quite significant. The real measure of the success of this research lies in the ability of the company to commercialize the new chemicals which the research department has discovered. N e w Products A r e Essential to Continuing Company G r o w t h
From time to time companies will mention the significance of new products to their growth. For example, JUNE
7,
1954
Mathieson $147.11 243.58 65.6% 31.90 46.54 21.7% 19.1% 8.28 10.41 21.49 34.73
Monsanto $266.70 340.62 27.7% 58.16 75.60 21.8% 22.1% 13.18 22.85 41.28 49.45
14.6% 14.3% 7.94 16.50 13.55 18.23 3.44 3.20 2.00 2.00
15.5% 14.5% 18.09 23.06 23.19 26.39 4.29 4.90 2.50 2.50
4372 38 12.6 11.9
9572 87 22.1 17.7
Union Carbide $ 956.93 1025.83 7.2% 266.63 292.30 27.9% 28.5% 54.29 75.35 227.31 227.76 24.0% 22.2% 128.99 124.98 98.32 102.78 3.41 3.55 2.50 2.50 64i/2 68 18.9 19.1
Monsanto stated that over 4 0 % of its 1953 profits came from products which were not manufactured 10 years ago. In that 10-year period, Monsanto profits went from $4.9 million to $26.4 million. In 1952 Union Carbide stated that, since 1939, more than one third of the earnings had come from new processes and from new products which did not exist in commercial quantities prior to 1939 and which had resulted directly from research and development. Over 50% of American Cyanamid's sales in 1953 were from n e w products and processes developed in its own research laboratories and put into production during the past 15 years. The last 15 years have seen unparalleled growth in the chemical industry, a major part of the expansion reflecting the development of new products. Unquestionably the most spectacular new product developed in this period, or perhaps any other period, was nylon. Initial production came in 1939 and sales hav 'ncreased steadily since that time. It ^ estimated that D u Pont's sales of nylon exceeded $300 million in 1953; this was more than the total sales of the entire D u Pont company in 1939. It can certainly b e argued that it took the resources of a Du Pont to develop nylon since costs for research and initial production facilities exceeded $27 million before the first commercial sales were made. Still, not all of the important new products required this kind of an in2339
FINANCE
vestment. D o w did the original development work on styrene just prior to World W a r II, primarily because of interest in polystyrene. W i t h the need for synthetic rubber, the Government turned to the GR-S formula which required styrene and the D o w know-how was m a d e available to others. Dow, Monsanto, Koppers, and Union Carbide built plants for the Government which were later acquired and are now being used to produce styrene for synthetic rubber, polystyrene plastics, and a host of other profitable products. In 1940 Dow sales were $37.7 million a n d Monsanto sales were $45.6 million. In 1953 sales of styrene and derivatives by D o w and Monsanto were significantly larger than the total sales of either company in 1940. O n e of the most interesting post-war developments has been t h e sensational rise of synthetic detergents at the expense of soap. In less t h a n 15 years the synthetics have grown to 1.8 billion pounds, over 5 3 % of t h e detergent market; meanwhile soap has declined from 3.3 billion pounds in 1939 (essentially 1 0 0 % of the m a r k e t ) to 1.6 billion pounds (some 4 7 % of t h e detergent m a r k e t . ) . Although t h e quality of the synthetic detergents has improved, t h e major reason for t h e growth of the synthetics was t h e d i s c o v e r y near the end of World W a r II—that sodium tripolyphosphate, w h e n added to the formula, significantly increased the ability of the synthetics to clean heavily soiled cotton clothes. Several companies shared in this development including; Monsanto, Victor, Blockson, and Westvaco Division of Food Machinery. T h e importance of this development is illustrated by the fact that approximately 50% of Victor's 1953 sales of $42.7 million was accounted for by sodium tripolyphosphate, contrasted with its total sales in 1945 of $16.5 million; Blockson's sales of sodium tripolyphosphate in 1953 were approximately $14 million, as against total sales in 1945 of $6.3 million. Monsanto's sales of products to the synthetic detergent industry in 1953 were $38.5 million, equivalent to 1 1 . 3 % of total sales. Included w e r e sodium tripolyphosphate, All (a p a c k a g e d detergent for automatic washers) and Santomerse (a synthetic detergent b a s e ) , as well as some other products. This figure compares with 1945 sales to that industry of $2.3 million, which was 2.4% of Monsanto's sales. The vinyl resins, which go into raincoats, floor tile, shower curtains, garden hose, and similar objects, h a v e grown over 100-fold in the last 15 years d u e largely to two companies, Union Carbide and B. F. Goodrich. T h e combined capacity of these t w o companies 2340
is probably over 7 5 % of the country's total capacity. Although Carbide's sales of vinyl resins probably exceeded $60 million in 1953, this was only about 6% of the company's total sales. Yet in 1940, Carbide's sales of vinyl resins were under $3 million. In the case of Goodrich, vinyl resins have given the company profitable diversification. It is estimated that some 15% of Goodrich's 1953 sales, and a higher percent of profits, were represented by products of its chemical division, among which the vinyl resins were by far the most important. Viewed from any angle, the longterm position of the chemical industry looks very favorable and continued growth seems assured. Although the future seems bright, the near-term outlook is also of great importance.
year end adjustments taken by many companies in the high tax bracket. Consequently the results for the first quarter of 1954 take on added significance—with the elimination of excess profits taxes it will now be possible to see h o w well the chemical industry can operate in a strongly competitive atmosphere. 1 9 5 4 Estimates: Sales Continue Down But Strengthening
I n estimating the results for 1954 for these eight chemical companies, it seems logical to divide the discussion into several parts including: sales, operating profit, depreciation charges, pretax earnings, taxes, and per share earnings. As t h e chemical industry has grown it h a s become more dependent on general business. This was quite evident in t h e last half of 1953 when the sales 1 9 5 3 Results: First Half of m a n y of the major chemical comSignificantly Better t h a n Second panies declined, particularly in the Most of the chemical companies fourth quarter. T h e declines were not showed improved results in 1953 over uniform as Du Pont and Union Carbide 1952. This was particularly true of the suffered more than the others due eight largest chemical companies. All chiefly to reduced synthetic fiber and eight had increased sales in 1 9 5 3 ; in ferro-alloy business, respectively. In fact, this -was a peak sales year for all the early months of 1954, sales continexcept American Cyanamid a n d Her- ued to b e down for most of these eight cules, both of whom h a d higher sales companies but there seemed to be some in 1951. Operating profit margins, be- indications of strengthening in early fore depreciation, were better in 1953 March. Whether this is a seasonal for all of the major companies except influence or actually a forerunner of Dow and Mathieson, b u t were still sig- better business remains to be seen. nificantly below the peak year of 1 9 5 1 . Most economists seem to feel that the The operating profit margins of t h e ma- general level of business will continue jor companies vary considerably, rang- to decline slightly with a leveling-off ing from t h e 3 7 . 0 % shown by D u Pont or modest upturn anticipated in the to the 18.9% of American Cyanamid. fall. O n this assumption it seems reaD o w . a t 32.9% and Union Carbide at sonable to expect that the sales of 28.4% are relatively high bu* the others these chemical companies may be off were comparatively low—Monsanto at 3 t o 5 % from the 1953 level. Excep22.2%, Hercules at 21.6%, Allied at tions should b e Allied (which added 19.3%, and Mathieson at 1 9 . 1 % . n e w productive facilities in late 1953 In spite of higher depreciation and early 1954, a part of which output charges, most of the major chemical should be sold even with the business companies had higher pretax earnings d o w n t u r n ) ; Mathieson (with a higher in 1953, the exceptions being D o w and level of fertilizer sales and two small Hercules. Only Dow and Mathieson companies acquired late in 1953), and had lower per share earnings in 1953 possibly, Monsanto (with higher sales compared with 1952. A comparison of of All, its packaged detergent, and a the detailed results for 1952 and 1953 reasonable level of sales of acrylonitrile is shown in table on page 2339. for Acrilan). Although the over-all results for 1953 were generally good, the trend b y quar- O p e r a t i n g Profits M a r g i n ters was disturbing since t h e first W i l l Be Lower This Year half of the year was significantly Better T h e operating profit margin (before than the second half. All of the major depreciation) will b e somewhat lower companies had peak sales in the second quarter except Cyanamid (which had in 1954 due to the following factors: its peak in the first quarter). Pretax ( 1 ) A combination of the reduced level earnings were also high in t h e early of sales with increased costs of selling, advertising, research, and other part of the year and then declined. Uncharges. fortunately for security analysts the ( 2 ) overhead Price reductions in some of the major fourth quarter results are virtually products reflecting the substantial meaningless as far as projections are over capacity in most of the more important chemicals. concerned due to the rather substantial C H E M I C A L
A N D
ENGINEERING
NEWS
these and many other vinyl plastic products enjoying an increasing consumer demand — are made with economical and effective
(di-iso~octyl phthalate)
The fastest growing plasticizer used in vinyl sheetirngs, extrusions and plastisols. D-i-o-p is available from leading plasticizer manuifacturers under their brands featuring individual charac teristics. ENjAY does not manufacture D-I-O-P or any other plas ticizer but supplies the uniform high quality ESTJ AY ISO-OCTYL ALCOHOL from which D-I-O-P is made. Ask your supplier of plasticizer s for D-I-O-P. V O L U M E
3 2,
NO.
23
»
.
» » JUNE
7,
1 9 H
3U successful years of leadership in serving industry
£NJAY
Ε Ν JAY COMPANY, INC. 15 West 51st Street New York 19, Ν. Y. 2341
FINANCE. (3) Increased concessions to the customer which are normal results of extreme competition. These may take the form of freight absorption, better service insofar as deliveries are concerned, different containers, and the many other "extra's" which are now required to get an order or keep the customer. (4) Moderate increase in wages and salaries. In 1953 roughly 25% of total income was used for wages and salaries—hence any increase in this category coupled with a decline in sales could have a noticeable effect. At the same time there are several factors which favor higher profit margins: ( 1 ) A number of companies did "preventive maintenance" in anticipation of the removal of the excess profits tax. As a result the maintenance charges for 1954 may be significantly below the 1953 level. (2) Several companies had substantial "year end adjustments" which were again influenced somewhat by the excess profits tax. These were, in general, nonrecurring and acted to reduce fourth quarter margins significantly. In appraising the above mentioned points it seems quite likely that most of the eight major companies will have lower operating profit margins in 1954 than in 1953. Exceptions could b e Allied (several of its new plants have significantly lower costs than previous units) and Mathieson (reflecting higher profits from Squibb and full year earnings from Morgantown compared with five months in 1953). Depreciation a n d Amortization W i l l Be Higher in 1 9 5 4
All of these companies will have higher depreciation and accelerated amortization charges in 1954 as is shown below:
It is clearly evident t h a t all of these major chemical companies will have higher depreciation charges in 1954, although the increase in the case of Hercules and D u Pont is negligible. Reflecting the generally lower level of sales, moderately lower operating profit margins and higher depreciation charges it is expected that, of the eight major chemical companies, only Mathieson will have higher pretax earnings in 1954 than those recorded in 1953. In Mathieson's case, higher earnings from Squibb and the Morgantown operation should b e enough to offset the higher depreciation charges. While Allied is also expected to have higher operating profits in 1954, this increase will probably not be enough to offset $7 million higher depreciation charges expected for 1954. One of the generalizations often applied to chemical companies implied that all were in the excess profits tax bracket. This was true in 1951, somewhat true in 1952 but, by 1953, only a few of the larger chemical companies paid excess profits taxes. Of t h e eight companies under study, E P T was of major importance to only D u Pont and Hercules, although Union Carbide paid excess profits taxes equivalent t o 47 cents a share. On its chemical operations, D u Pont paid taxes at a 7 2 % rate, which reflected both excess profits taxes and renegotiation. It is estimated that excess profits taxes amounted to approximately $2.00 a share for Du Pont in 1953. Hercules paid $1.10 a share in excess profits taxes in 1953. These latter companies will materially benefit from the lower tax rate applicable in 1954; Union Carbide will benefit to a relatively minor degree while Allied, American Cyanamid, Mathieson, and Monsanto will not b e influenced noticeably. Since Dow's fiscal year ended May 3 1 , 1954, it is
fiïivu!vis1takiai;îbeî^ -income: statement, meanwhile setting tip ^deferred - tax|'cîuirie^^icfô^Mibôf D-52 6* χ 24r Stainless stee}, Wt. 6 lbe SM9 r ne - # 6 J 4 χ 8'Stainless steel, K ' p i p * opening. ° end.
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{Continued
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2100 volts. Counters having more than three chambers are filled to a pressure of 13.2 cm. and operate at 1200 volts. Standard models consist of 1, 2, 3 , 4, and 8 chambers, although models of up to 15 chambers are available. ΕΪ5 • Glassware
washing
machine,
by
-Namco Machinery, has capacity for 288 pieces of glassware or bottles per hour. An extra tray can b e provided for hold ing 24 pieces of any type. Test tubes and other small pieces are handled in a separate basket, four baskets per tray. Unit has operating temperature u p to 200° F . and operates on 115-volt, 60cycle a.c. Ε 16 • Filter cloth of polyethylene offered by National Filter Media is free flowing, easily cleaned, and slow to bind. Com pany also states cloth is resistant to most acids, the common alkalies, certain organic solvents and oxidizing agents, most salt solutions, and mineral and vegetable oils. Ε 17 • Two electronic strip chart recording instruments designed to record 10 and 20 points have been added to Minne apolis-Honeywell Regulator's line. The 2344
C H E M I C A L
20-point strip chart recorder yields 2 5 % more data than 16-point recorders with out a proportionate increase in either size or maintenance expense, says com pany. Ε 18 • Chlorinator, A-701, by Wallace & Tiernan, features a dual orifice meter which allows feed ranges up to 100 to 1; corrosion resistant materials; linear scale reading of chlorine flow rate; and automatic, electric, hydraulic, air or vacuum control. Maximum capacity of the A-701 is 1000 lb. per 24 hr. The chlorinator employs a heavy Fiberglas pedestal and an improved design of the W & Τ glass enclosed, visible-vacuum and water-diaphragm principle of feed control. Ε 19 • A one-piece washer and rubber Ο ring combination, with the Ο ring per manently bonded to the washer, has been developed by Rubber Teck. Called Duo-Seals, units are available in V i c t o δ / β in. nominal bolt diameter. They provide leak-proof sealing against fluids, gases or air. Ε 20 • Activated
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( Continued AND
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on page 2351 )
ENGINEERING
NEWS
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(Continued
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2342)
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M a r k e t Reaction: W i l l I t Still Evaluate as " G r o w t h Industry"?
in g at a lower multiple of cash earnings than the average for the past 20 years.
Even if one could, b y some strange power, precisely predict company earn ings several years hence, the $64 ques tion would still remain unanswered. That is, how will the market appraise these earnings? Will t h e market con tinue t o evaluate t h e chemical industry as a "growth industry" a n d p a y 2 0 times (or more) reported earnings for the leaders, or will the market become discouraged if reported earnings of the major chemical companies show only moderate increases in spite of t h e tre mendous capital expenditures p u t into new facilities in recent years? Obviously there is n o answer to the question b u t there are about as many opinions as there are investors. T h e proponents of the theory that the mar ket will continue to pay high multipliers for chemical earnings often base their arguments on t h e expectation (or hope) that investors will look beyond relatively low reported earnings and see continued build-up of cash earnings which are caused by the rapidly in creasing depreciation and accelerated amortization charges. The chemical in dustry has n o t historically sold on a cash earnings basis but it may d o so in the future. If cash earnings are used, it could b e argued that chemical stock prices are low since all of t h e eight major chemical companies are now sell-
Long Term Future Outlook Is Extremely Bright
Company Allied American Cyanamid Dow6 D u Pont Hercules Mathieson 0 Monsanto Union Carbide α
Reported Earnings $5.10 3.15 1.58 4.94 4.20 2.70 4.90 3.55
In past years the chemical industry has grown three times as fast as indus trial production. Much of this growth can b e traced t o the development of new products which have resulted from the heavy expenditures i n research. Products such as nylon, synthetic deter gents, various plastics and. a host of other products have contributed t o the impressive growth record. The long term future outlook for t h e chemical industry is exceedingly bright with strong growth trends expected in plas tics, synthetic fibers, and agricultural chemicals as well as other fields. I n 1954 a n d for several years thereafter the over-capacity in most of the impor tant basic chemicals will tend to keep the chemical industry extremely com petitive. Sales may increase moder ately, b u t operating profit margins may decline a n d depreciation charges will increase. Consequently i n 1954 r e ported earnings of the major chemical companies are not likely t o show m u c b improvement except for those com panies w h o paid high excess profits taxes in 1953 such as D u Pont a n d Hercules Powder. Mathieson sbould also show an increase in 1954. PRESENTED before
Financial Analysts of
Phila
delphia, April 1, 1954.
1953 Cash Earnings" $7.66 5.61 3.95 7.38 7.59 5.60 9.24 6.15
Price/Cash Earnings Ratio 1953 Cash 1934-53 Price 3/26/53 Earnings Average $ 83 10.8 11.0 7.7 9.1 43 8.9 12.1 35 113 15.3 15.4 74 9.7 10.8 39 6.9 7.5 80 8.7 13.2 71 11.5 12.3
Sum of reported earnings p e r share and depreciation charges p e r share. 6 Fiscal year ending May 3 1 . β Earnings restated to make comparable with other chemical companies in view of Mathxeson's different method of handling accelerated amortization.
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