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Page 2 of 2 from Streetwalker: Mall Magic
12.11.00
Cheaper Oil ONCE COMPLETED, CHEVRON'S $35 BILLION merger with Texaco will create the fourth-biggest oil company. Though the deal still has to pass regulatory muster, John Carey, manager of the Pioneer Fund, suggests buying Texaco
(nyse: TX - news - people) now to benefit from cost savings to come.
First, the companies plan a 7% work force cut that should save $300 million a year. Then there's consolidation of exploration activities. And to please regulators, the duo may have to sell some gas stations and refining capacity. But that's a blessing, as Texaco has some low-returning operations it will be happy to get rid of. All told, Carey expects savings of $1.2 billion a year at a company with pro forma net income of $6.8 billion.
If the merger is consummated, each Texaco share, now trading at $60, will be converted into 0.77 shares of Chevron. The combined company should be able to earn $6.35 a share next year. That means today's Texaco buyer is getting in at 12.5 times forward earnings. ExxonMobil goes for 20 times. —Christopher Helman
Happy-Meal Time INVESTORS AREN'T USED TO SEEING slower sales and earnings growth from McDonald's. That's a simple explanation for the 45% slump the burger giant's shares suffered this year. From its September low of $27, the stock has been inching back up. Anthony Maramarco, manager of the Babson Value Fund, thinks now is the time to get in. He points out that much of the short-term weakness in McDonald's
(nyse: MCD - news - people) is attributable to the euro. With 25% of sales and 36%of profits coming from Europe, any recovery in that currency—which could come if the U.S. economy weakens or our interest rates fall—will boost McDonald's net.
The company has begun building other promising concepts like Chipotle Mexican Grill and Donatos Pizza. Next year it will continue expansion of these chains. Maramarco sees 8% earnings growth this year and 10% in 2001. At $33, the shares look cheap at a below-market trailing P/E of 23. —C.H.
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