Allied Corporation vs. the recession

Edward L. Hennessy Jr. wants to make the Allied Corporation relatively immune from recession. But that goal is taking longer to achieve than Mr. Hennessy, the Allied board chairman, had hoped.

And the fate of his carefully crafted plans is symptomatic of the disruptive effect the recession is having on even the most ingenious corporate strategies.

When Hennessy was hired to run the ailing Allied in 1979, he notes, most of its chemical, fibers, and plastics products were commodities, and, he adds, ''therefore highly cyclical. We needed to expand in new areas to reduce the negative impact of every economic downturn.''

To equip Allied to ride an economic roller coaster, Hennessy, a former United Technologies Corporation officer, began selling off Allied's lackluster businesses, thinning the ranks of middle managers, and snapping up promising companies in the energy, health and scientific, and electronics industries.

The early results of his maneuvering were striking. In 1978 Allied's net earings per share were $4.25. By 1981 they had soared to $9.17 a share. In the same span, its return on average assets jumped from 12.1 to 15.9 percent.

''He has done an impressive job in the short time he has been at Allied,'' notes Theodore Semegran, a Shearson/American Express vice-president.

Nevertheless, last week Hennessy told New York securities analysts that Allied's earnings in the first quarter of 1982 would be 40 to 50 percent lower than the $2.33 posted a year earlier. ''We are working toward less cyclicality in our operations, but there are not many products which are immune to the present recession,'' he explained.

''It is too early to judge the success or failure'' of Hennessy's acquisition and divestitures program, says a Dean Witter Reynolds Inc. analyst, Eric A. Knabe. ''We won't know if he has made the right bets until 1985.'' Still, like other Wall Street analysts, Mr. Knabe has lowered his earnings estimate for Allied from $9.60 to $7 a share.

Analysts say none of its five core businesses - oil and gas, chemicals, fibers and plastics, electrical and electronics, and health and scientific products - will be particularly robust in 1982. But the way the recession has hit Allied's older businesses--oil, chemicals, and plastics--shows why Hennessy was eager to embark on acquisitions and divestitures.

For years, meager earnings from Allied's chemical operations were offset by profits rolling in from Union Texas Petroleum, the company's oil and gas subsidiary. In 1981, 76.4 percent of operating income came from energy, while chemicals supplied only 16.9 percent.

But the weak oil market has cut into the energy profits. Merrill Lynch analyst Harry Flavin estimates that during 1982 Allied will average about $32 a barrel of North Sea oil--or $4.30 a barrel less than it earned in 1981. According to Hennessy, each $1.50 drop in North Sea oil costs Allied $14 million to $15 million in pretax profit.

Profits from domestic energy sales will rise, however, as a result of its acquisition, jointly with the Continental Group, of Supron Energy Corporation. The purchase earlier this year of the Dallas- based natural gas company is part of Allied's plan to build up the domestic portion of its energy business, Hennessy says.

While its domestic energy sales will be up in 1982, the immediate outlook for the company's key chemical products is ''bleak,'' according to Knabe at Dean Witter. With agricultural prices depressed, demand is weak for the ammonia fertilizer Allied sells. And since the recession has cut the demand for glass, consumption of the soda ash used to make glass has been hurt.

The depressed economy has also cut into demand for carpet materials made by Allied's fibers and plastics operation.

To overcome the cyclical exposure of its older business units, Hennessy is moving Allied into electrical and electronic products and health and scientific gear. ''Studies convinced us that these two areas have great potential for future growth and will grow faster than the economy (as a whole),'' he says.

In a bid to get a better base in electronics, Allied last year acquired Bunker Ramo Corporation for $347 million. Bunker Ramo makes sophisticated electronic connectors and electronic information systems. While the electronics industry is likely to grow faster than Allied's older business units, Bunker Ramo's connector segment ''experienced a sharp falloff in orders and intense price competition'' in 1981 as a result of the economic slowdown, Merrill Lynch's Flavin notes in a report. ''Such conditions seem likely . . . to persist through much of 1982.''

Allied's other electronics unit, Eltra Corporation, was acquired in 1979. Unfortunately for Allied, Eltra has several divisions dependent on the depressed auto industry.

The outlook is significantly brighter for Fisher Scientific Company, which Allied acquired in 1981. Fisher, which makes laboratory supplies and apparatus, has posted eight consecutive years of record sales and earnings. Still, because of the recession, analysts have lowered their estimates for Fisher's earnings as well.

Although Allied's earnings are still somewhat cyclical, Hennessy remains confident about his strategy. ''While the short-term outlook for our business . . . is somewhat uncertain due to the recession, we have no doubt that Allied's long-term prospects are very bright indeed,'' he says.