Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
by Benjamin Graham
The Magazine of Wall Street
1917- 1922
1917-09-01 Curiosities of the Bond List v.20 no.11 3
1917-09-15 Valuation of Great Northern Ore Certificates v.20 no.12 6
1918-04-27 Inspiration’s Difficulties and Achievements v.22 no.2 10
1918-05-11 Nevada Consolidated a Mining Phoenix v.22 no.3 14
1918-05-25 Rock Island versus Missouri Pacific v.22 no.4 17
1918-06-22 Will War Taxation Affect Dividends v.22 no.6 21
1918-07-20 War Taxation and Cash Position of Industrials v.22 no.8 26
1918-08-31 Secrets of Invested Capital v.22 no.11 31
1918-09-14 The Great Steel Tax Mystery v.22 no.12 35
1918-09-28 American Agricultural and Virginia-Carolina v.22 no.13 40
1918-10-12 Sad Case of M. K. & T's Bond Issues v.22 no.14 45
1918-10-26 Attractive Peace Bonds v.23 no.1 50
1918-11-23 High Yield and Safe Investments v.23 no.3 56
1918-12-07 Hidden Assets of Consolidated Gas v.23 no.4 61
1919-01-18 Bargain Hunting Through the Bond List v.23 no.7 66
1919-02-15 An Advisable Exchange. B&O for C&O v.23 no.9 70
1919-03-29 Industrial Balance Sheets v.23 no.12 75
1919-04-12 Attractive Industrial Preferred Stocks v.23 no.13 79
1919-05-24 A Profitable Switch v.24 no.3 83
1919-06-07 Northern Pacific Outstrips Great Northern v.24 no.4 87
1919-07-05 Three Switches in New York Tractions v.24 no.6 91
1919-07-19 The Coal Situation and Coal Stocks v.24 no.7 94
1919-08-16 Strategic Switches in Railroad Issues v.24 no.9 98
1919-09-13 A Neglected Chain store Issue v.24 no.11 102
1919-09-13 Switching in Interborough Securities v.24 no.11 106
1919-09-13 The Art of Hedging v.25 no.7 108
1920-01-10 The Two American Ships v.25 no.5 110
1920-04-03 Which is the best Sugar Stock v.25 no.11 113
1920-12-11 The Collapse of American International v.27 no.3 116
1921-03-19 The Goodyear Reorganisation v.27 no.10 119
1921-08-20 Is United Drug Cheap at 53 v.28 no.5 122
1921-12-10 Missouri, Kansas and Texas Emerges v.29 no.3 125
1922-01-07 The Problems of Pennsylvania v.29 no.5 129
1922-01-21 Speculative Opportunities in Railroad Stocks v.29 no.6 132
1922-10-28 Arithmetic and Stock Values v.30 no.13 135
1922-11-11 Hide & Leather vs Central Leather v.31 no.1 139
BONDS *» INVESTMENTS
Curiosities of the Bond List
Issues That Sell on Illogical Bases— Misconceptions of In
vestors — Some Foreign Issue Anomalies
By BENJAMIN GRAHAM
test of the market, like that ing $1,180 for a $1,000 bond, he must
TJHEof | Barrie's policeman, is popu eventually lose $180. The fallacy of this
larly supposed to be "infalli- argument is well illustrated by this very
able." Economists picture a example. For it would require only $59
thousand buyers and sellers congregating a year to yield a straight 5 per cent on
in the market place to match their keen the $1,180 investment— the rate of the
wits and finally evolve the correct price junior issue. But since the 7s pay $70
for each commodity. In the securities per bond, there is a surplus of $11 per
market particularly, the word of the year, which if simply accumulated with
ticker is accepted as law, so that one out interest would at the date of maturity
often thinks of prices as determining amount to about $300— fully $120 per
values, instead of vice-versa. bond more than the premium paid. If in
But accurate as markets generally are, terest is compounded on these surpluses,
they cannot claim infallibility. While the gain over the 5 per cent bond would
vagaries are to be found in both the be considerably more.
stock and bond lists, the latter offers the
better field for study since direct com
A Reversed Case
parisons are easier, especially where two The reverse side of the prejudice •
issues of the same company are selling against premium bonds is found in the
out of line. The recent universal read instance of Baltimore & Ohio convert
justment of bond prices has produced ible 4J/2S, due 1933, compared with the
more than the usual number of such dis Refunding and General 5s of 1995. Both
crepancies, so that there are many op issues are secured by the same mortgage,
portunities for investors to exchange but the 4l/2s sell at 87 y2, yielding 5.70
their holdings for issues "just as good," per cent, while at 96^4 the 5s return
and returning a higher yield. Several only 5.16 per cent. This is all the more
of these anomalies will be discussed in peculiar because the 4j^s have a con
the following paragraphs. version privilege which may conceivably
Let us first consider the case of Loril- become valuable ; their maturity is much
lard 7s, due 1944, and 5s, due 1951. The nearer, making for greater stability in
7s are senior to the 5s in their claim market price ; and their amount is limited
on the company's assets, yet they are to the bonds now outstanding, while the
offered at 118, to yield 5.62 per cent., Refunding 5s may be increased almost in
while par is bid for the 5s — a 5 per cent, definitely — in fact, the 4J^s are to be
basis. retired by an issue of Refunding 5s.
The cause of this discrepancy is prob
An Investment Misconception In the first place, invest
ably twofold.
Here then is an issue yielding five- ors seem to prefer a 5 per cent coupon
eighths per cent more than a directly to any other. This is absolutely illogical,
junior security. Moreover the 7s are a since a 4 per cent coupon on a bond
smaller issue, of nearer maturity. Of bought at 80 is certainly no less attrac
course the explanation of this discrep tive than 5 per cent on an issue costing
ancy lies in the general prejudice against par. Secondly, the public is wont to dis
bonds selling at a high premium. The regard that portion of the yield repre
investor apparently imagines that by pay sented by the redemption at par of a bond
(743)
744 THE MAGAZINE OF WALL STREET
purchased at a discount. The usual argu and 5.14 per cent, respectively, for the
ment is that they don't expect to hold long term issue. Both maturities are
the bond to maturity, and therefore can secured by the same mortgage, and in
not count on receiving par for it. this case they are both convertible into
This reasoning is fallacious, because common stock at par. The 5s of 2014
it is not necessary to hold an issue until have some advantage in that their con
the due date in order to recover at least version privilege extends to 1926, four
part of the discount. Each year as the years longer than that of the 1932 issue.
maturity approaches, the market value This feature is probably neutralized by
of the bond should grow closer to par — the nearer redemption and limited
unless its yield is increased as the result amount of the latter bonds, so that the
of general or special conditions. In the additional yield of more than one-half
case of long term bonds the annual ad per cent makes these much more at
vance is imperceptible, but in short or tractive.
medium maturities it is very evident. So There are three other St. Paul issues
with these Baltimore & Ohio 4j^s, their secured by the same mortgage as the
appreciation of 12 points to par will foregoing, but not convertible. The
be spread over the comparatively short 4y2s of 2014 sell at 93^ and yield 5.39
space of 13 years, adding a substantial per cent; the 4s, due 1934, yield 5.45
amount to their yield. per cent at their present price of 84,
The peculiar aspect of this question is while at 89% the 4s of 1925 return fully
the fact that the same investor who com 5.65 per cent.
pletely ignores the additional yield con
Other Discrepancies
tained in a discount price is extremely
adverse to buying a bond quoted at a Similar discrepancies in bonds of the
premium. He is obsessed by the idea that same mortgage are afforded by three
the $180 premium on Lorillard 7s will newly reorganized roads — St. Louis and
have disappeared by 1941, but he pays San Francisco, Pere Marquette and
•
little attention to the fact that by 1933 Missouri Pacific. In the case of the
he will recover the $120 discount on Bal Frisco 4s and 5s of 1950, the 4s at 61
timore & Ohio 4J/2S. yield 7.05 per cent against only 6.48 per
As it happens the straight yield on this cent for the 5s at 80— a difference of .53
latter issue at 87j4, considered as a per cent. Even figuring the straight
stock, is practically equal to that of the yields as stocks, the 4s return 6.57 per
General 5s, so that their other advantages cent, the 5s only 6.25 per cent.
described above render them a far more This difference is probably caused by
desirable security, even eliminating the the much larger amount of 4s outstand
discount element. ing — a circumstance which explains, but
The Baltimore and Ohio new two-year does not justify the variance. But there
notes, secured by 120 per cent in these are fewer Pere Marquette 4s than 5s of
Refunding 5s and Reading stocks, yield 1956, yet the 4s at 71 yield 5.92 per
5.73 per cent, against 5.17 per cent for cent, against 5.76 for the 5s at 88.
the longer maturity. Their security is The Missouri Pacific consolidated 5s
at least as good as that of the 1995 present an even more glaring discrep
issue, and in the present unsettled bond ancy. This issue is divided into three
market they can be relied on to display series, due 1923, 1926 and 1965, re
greater price stability because of thejr spectively. One would naturally expect
early redemption at par. the nearer maturities to sell at a lower
basis — as is usually the case ; e. g. the B.
The St. Paul Issues
and O. 5s of 1918 yield only 5.12 per
Almost the identical situation as in cent against 5.73 per cent for the 1919
the B. and O. issues is presented by Chi issue. But the Missouri Pacific 5s of
cago, Milwaukee and St. Paul convert 1923 return 6.15 per cent at 94%, the
ible 4^s of 1932, and convertible 5s of 1926 series yields 622 per cent at 91% :
2014. The 1932 maturity sells at 88 % while the 1960 maturity, which is the
to yield 5.65 per cent, as against 97% largest of the three series, is 90 bid —no
CURIOSITIES OF THE BOND LIST 745
better than a 5.60 per cent basis. Finally we shall invade the foreign
A simple analysis will indicate the government field and consider the pe
absurdity of this situation. In 1923 the culiar case of the Japanese 4^£ per cent
shortest maturity must be redeemed at issues of 1925. These are outstanding
par, an appreciation of 6 points. If the in two series, the "seconds" having a
1965 series is still selling on a 5.60 per junior claim on the earnings of the gov
cent basis, it will have gained only one- ernment tobacco monopoly. Neverthe
half of a point in the six years. In less, both series have been usually quoted
order to equal the advance of the 1923 at the same price, and on some occa
issue, it would have to be selling at 96, sions recently the second 4>^s actually
which would be only a 5.25 per cent were selling above the first series. This
basis. seems strange, considering that the
Incidentally it may be mentioned that Cuban 5s of 1914, which follow the
the Missouri Pacific third extended 4s of 1904 issue in their lien on the customs
1938 —which are an underlying mort revenues, are now quoted six points
gage on the main line — are now offered under the older issue.
at 80 to yield 5.62 per cent.
An Interesting Case
It is interesting to observe that the
General Electric debenture 5s of 1952 In some respects the most interesting
are still selling at 103, yielding 4.82 per discrepancy of all is to be found in the
Japanese "German stamped,"
cent, in spite of the fact that the new 4>£s
6 per cent note issue due 1920, ranking which sell about seven points below the
plain bonds. Although these bonds
equally with them, returns fully 5.70
per cent on its present price of 100^4. were once the property of German sub
In the public utility field, mention may be jects, they are accorded exactly the same
made of the 5.37 per cent return of treatment as any other bonds of that
American Telephone and Telegraph col issue as far as interest payments are
concerned, although probably not in
lateral 4s of 1929 at 88, compared with
5.12 per cent on the newer 5 per cent cluded in the frequent purchases for the
issue due 1946 at 98*4. The 4s have sinking fund. The punctual payment
the additional advantage of being legal of both principal and interest is guar
for savings banks in some New England anteed on the face of the bond even to
States. the citizens of hostile countries — which,
as a matter of fact, does not apply in
N. Y. Central Con. 4'a this case anyway, since the bonds are
Another important railroad issue is now the bona-fide property of American
the New York Central consolidation 4 citizens.
per cent mortgage, due 1988. These A painstaking scrutiny of the bond list
bonds are virtually senior to the refund would probably disclose other discrep
ing 4J/2S of 2013, by which they are to ancies of the same nature as those dis
be refunded. They are additionally fa cussed above. This article has limited
vored by their limited authorized itself to issues of general interest, and
amount, and they yield 5.24 per cent hopes to find some utility in suggesting
at 77, against 4.82 per cent for the 4j/is to investors here and there the possi
at 9324. bility of advantageous exchanges. These
In the same way Norfolk and West are times of rapidly shifting values, and
ern General 6s of 1931, which underly the security owner should be on the
the consolidated 4s of 1996 recently sold alert to acquaint himself with new con
at 112^, a 4.72 per cent basis, against ditions affecting his holdings, nor hesi
a yield of 4.56 per cent for the junior tate to modify them when favorable op
issue at 88. portunities are presented.
Valuation of Great Northern Ore
-
Certificates
Based on 1914 and 1916 Operations—Life of Mines—Com
parison with Porphyries—An Opinion on Present
Market Price
By BENJAMIN GRAHAM
of
reports pected life
of
nual of the Great the mines.
[…]-
Northern Iron Ore properties
have been full of data but very
Trust Formed in 1907
As well known the Great North
is
bare of information. Instead of the
ern Iron
Ore Trust was formed
to in
familiar statement of a corporation to
1907 by the Great Northern Railway
stockholders they represent the ac
its
counting
administer the income from various
of
to
trustees beneficiaries.
no question profit and iron mines controlled along its lines.
of
Hence there
is
railway
of
of
loss, but only receipts and disburse The holder each share
of
given
of
stock was share interest
noof in
All expenditures, for instance,
a
ments.
lumped together for current opera the Ore Properties, making total
a
are
1,500,000 shares outstanding, with
or
of
Moreover, the organization the mines had been
of
the
properties highly complicated. The owned outright by the railroad, and
is
trustees act both as administrators of the remainder were held under lease
varying royalties and for various
or
GREAT
- turn been leased or sub-leased to
in
-o “leases
º
-ºo.
-
:
property
of
of
the same time lessees, lessors and All the remaining mines (some own
(since 1914) operators. Consequently ed, others held under lease) had been
the public's knowledge Steel Corporation, rep
of
U.
the actual
to
S.
leased
operations and earnings by the Great Western Mining
of
Great resented
Northern Ore remarkably limited, Co. The contract provided for annually
is
average
at
the shares.
In
1912
the following analysis the output under this lease approxi
is of
therefore
to
the trustees’ reports. Its purpose mated 7,500,000 tons and the net royal
first to transform the financial state ties exceeded $9,000,000. At this time
intelligible income ac
an
ments
place ques
to
lease and its threat of prosecution cates the determination of the life
is
under the Sherman Act compelled the present
of
of
the mines on the basis
Steel Corporation to exercise op ore resreves and 1914 production.
to its
cancelling the contract
of
tion take
final effect at the end of 1914. Life of Mines
State of Unsettlement For greater accuracy we will consider
abrogation this important the “old leases” and the Great Western
of
The
agreement plunged lease separately. From estimates made
of
the affairs the
properties great unsettle by the Great Western Mining Com
of
in
state
a
to 31
ment, from which they have not yet pany, appears that on December
it
completely recovered. last, the lands formerly under lease
of
Some the
mines relinquished by the Steel Cor that company contained about 203,-
poration were leased
of
Production
in
others, num 000,000 tons ore.
to
so
ber have been operated by the trustees, 1916 aggregated 6,014,000 tons, that
and the remainder were still idle at output were main
of
the 1914 rate
if
TABLE
GREAT NORTHERN ORE’SI EARNINGS IN 1914
Receipts from “old leases”. $336,202
.
.
........
.
.
.
.
.
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Receipts from Gt. Western Lease. $11,161,627
.
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.
Less freight ... ... $3,440,398
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-
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-
--
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-
...
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Less property account credits. 49,466 158,030
.
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..
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Trustees misc. income, less expenses........................... 47,126
.
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Total income $4,358,681
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Expenditures
...
$3,479,822
.
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.
to ..
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the last fiscal year. Con tained the future these mines would
in
of
the close
probably
34
exhausted
in
is
of
not index
in
lease.
the certificates on the basis both of called per cent and per cent standard
7
but eliminating items not properly in $25.40. Briefly explained, the earnings
income account and making per cent re
of
cluded
in
in
as
if
against 53c net per certificate received Ore remaining the mines held
in
by
last, according
by
butions
The next step valuing the certifi the Minnesota Tax Commission, equal
in
830 THE MAGAZINE OF WALL STREET
led 89,350,000 tons. Since the 1914 owing to the low rate of royalty the
output from this source was 1,825,579 advance in earnings from this source
tons, this rate of production would totalled only $226,000.
give the properties in question a life of
Earnings from the “old
An Abnormal Year
49 years.
leases” amounted to only 22c per share. Assuming provisionally that future .
Applying the above method of valua operations will proceed only at the
tion, the interest of each certificate in 1916 rate, the method of valuation em
the old leases is shown to be worth ployed above would yield the following
only $2.86. results:
The total value of the earnings from
Life Earned
all properties will thus equal $28.26 of per ctf. Value
per share. On December 31 last net Mines 1916 per ctf.
current assets were $5.40 per certifi “Old leases” .......... 28 $0.375 $4.17
cate. Adding these items we have a Other mines and misc. 52 1.335 17.56
Net current assets..... . . . . . . . 5.40
final present valuation of $33.66 for
each certificate on the basis of 1914 Total . . . . . . . . . . . . . . . . $1.71 $27.13
operations.
From the point of view of the Trus
TABLE II tees, 1916 was a particularly abnormal
year, inasmuch as they were required
GREAT NORTHERN ORE'S INCOME FOR
1916 to assume the operating management
of some of the mines—a development
Receipts from “old leases”. ....... $562,705
not contemplated at the time of form
Receipts from “new leases”. . . . . . . . 984,967
Net proceeds of direct operations.. 544,994 ing the Trust. Accordingly they have
Miscellaneous receipts... $858,761 made strenuous efforts to again place
Less prop. acct. credits. 373,130 485,631
under lease the various properties
relinquished by the Steel Corporation.
Est. val. of 659,000 tons shipped from
Hill & Walker mines, accruing to I am informed that contracts have now
ctfs., but not included above.... 659,000 been actually completed covering the
last of these mines, so that beginning
Total earnings ................ $3,237,297
with next year all of the Great North
Expenditures ...... . . . . . $1,480,796
Less charg. to prop. acct. 820,671 668,125 ern Ore Properties will again be leased
to outside interests.
Net earnings . . . . . . . . . . . . .. . .. $2,569,172 For business reasons the terms of
Per certificate ................ $1.71
the most recent agreements cannot be
published, but enough data is contain
Before commenting on this result ed in the last annual report to indicate
let us apply the same process to the how earnings under the new regime
1916 report. Here the earnings from will compare with those from the
the Great Western lease have disap Great Western Lease. In 1914, a year
peared and their place is taken by a of abnormally low iron ore prices, the
number of new leases and by the Trus net royalties paid by the Steel Corpora
tees’ own operations. (Table II.) tion averaged $1.28 per ton. In 1916
Of course the relatively poor earn with ore quotations nearly 50c above
ings in 1916 were due chiefly to the de the preceding five year average, the
cline in production following the abro properties directly operated showed
gation of the Great Western lease—but profits of only $1.21 per ton. Even
also largely to the disastrous shortage more significant is the fact that the
of tonnage space on the Great Lakes. average rate of royalty received from
Shipments from mines formerly oper the new leases was only 81c per ton.
ated for the Steel Corporation were As for future production under the
only 3902,000 tons, against 6,014,000 new management, I have been told by
tons in 1914. The output of the “old a Trustee that it will exceed substan
leases” increased 1,382,000 tons, but tially the 1916 figures (especially since
VALUATION OF GREAT NORTHERN ORE CERTIFICATES 831
the lessor companies control their own 15 and 13 years respectively. Of course,
cargo space), but it will not equal the these leases may be renewed, but a
enormous output of 1914. In other higher underlying royalty may then be
words, it appears that neither the pro charged (as recently in the case of the
duction nor the royalty rate can be Leonard mine), and in any case their
counted on in the future to reach the approaching maturity will involve an
figures reported under the Steel Cor uncertain factor.
poration lease. Consequently the Perhaps largely because of the gen
valuation of $33.66 per share on the eral ignorance of the actual earning
basis of 1914 operations must be re power of the certificates, Great North
garded as the maximum appraisal of ern Iron Ore has always been a favor
the certificates under present condi ite medium of market manipulation.
tions. But despite the many bull campaigns
Mines Not Inexhaustible of the last decade, the certificates have
yet to pay an annual dividend larger
Although the Trustees use every than $1.25. Elsewhere in this article
opportunity to emphasize the fact that appears a graphic giving the range of
the Properties' ore reserves are being prices, dividends, and actual earnings
constantly depleted, a hazy, notion during the past five years. Whatever
seems prevalent that the mines are speculative fascination these Great
TABLE III
COMPARISON WITH THE PORPHYRIES
MINIMUM VALUE
(Sep. 7) Based on Based on
Present 1916 Prospective
Price Operations Operations
. . . . . . . . . . .”- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 53 $78 97
97 140 161
- - -- --- --- -- - -- - -- ----- --- - -- ---- ---- -- 22 31 33
26% 31 39
MAXIMUM VALUE
Based on Based on
1916 Operations 1914 Operations
Great Northern Ore. . . . . . .. . . . . . .. .. . . . . . . . .. . . 34 27 33%
a
are held under leases, expiring between favorable develops the near future.
in
By BENJAMIN GRAHAM
HE history of Inspiration has re for the current quarter came rather as a
peated itself. after an interval of pleasant surprise.
7; exactly two years. On July 1,
Features of Annual Report
1915, mining had not yet started;
on July 1, 1917, operations had completely
The justification of the continued $2
payments is found in the annual report for
cased. By April, 1916, the output had
1917, recently made public. Despite the
reached the calculated nominal rate of
large decline in production-equalling
10,000,000 lbs. per month. This month
one-third the 1916 output-the income ac
the company has announced that opera
count shows earnings after war taxes and
tions are again at- normal. The demoral
depreciation of $9.37 per share. Although
izing influence of the Arizona strike last
summer can best be perceived by the fact $8.25 per share had been disbursed in
that when operations recommenced it took
almost as long to attain the standard pro
Table I—INSPIRATION COPPER-PRODUC
duction as when first the mine was opened.
TION AND PRICES
To pursue the parallel, it is strange that
April, 1918, finds Inspiration at the same Production Average Price
price level as two years before. The co 1915-16 1917-18 1915-16 1917-18
represent more than half of this total, thus Another feature of interest in the report
reducing the Excess Profits Tax to less is the very moderate increase in the' cost of
than $500,000. production. Considering the sharp ad_
A paragraph in the report, however, con vances in wages and material prices, and
tains an interesting sidelight on the method especially the difficulties incident to the
employed by the mining companies to deal strike, one would have expected a disas
with the difficult question of depletion in trous jump in operating expenses. Under
relation to war taxes. Inspiration has these conditions, holding down the costs
made a valuation of the developed ore as to 10.44c. per pound—an increase of but
of March 31, 1913, and has then deducted l.77c.——must be regarded as quite an
from earnings for ore extinguishment an achievement. But these figures do not tell
amount equal to the proportion of this value the whole story. The-management purpose
represented by the tonnage extracted dur ly treated a lower grade of ore than the
ing the year. This charge to earnings for previous year, thus adding to the cost per
depletion appears only in the company’s pound. The operating cost per ton-—the
tax return, and not in its published income true measure of efficiency—increased only
account. 6c., from $1.95 to $2.01. In other words,
Ore Valuation and War Taxes the costs per unit increased by 3%—-a
pute the then present worth of each year’s The 1917 costs (excluding Federal taxes
production according to approved actuarial and depreciation) averaged 10.47c. per
methods, and the result was the valuation pound, permitting a net profit of say 13c.
of the ore-bodies prescribed by the U. S. on 23%c. copper. There is reason to be
Treasury. The company is naturally lieve that should expenses rise appreciably
averse to giving out figures on this delicate in 1918, they would bring a compensating
point, but the writer is convinced that the increase in the selling price of the metal,
additional valuation referred to in the re since a number of high cost producers find
port must equal several times the fixed it difficult to operate successfully on the
asset account in the balance sheet, and present margin. Thirteen cents should
that therefore the depletion charged to therefore represent a reasonable profit for
earnings for taxation purposes no doubt will Inspiration under war conditions. On 120,
run into a few million dollars annually. 000,000 pounds, the earnings would total
This element is of great general importance $15,600,000. From this sum are to be
in its bearing upon the war taxes of the deducted Federal Taxes which we estimate
coppers as a class. Apparently the burdens —very roughly, of course-—at around $2,
imposed by the War Revenue Act will not 000,000. There remains $13,600,000, or
be nearly as heavy as their relatively small $11.50 per share as the net profit applic
capitalization led investors to fear. able to dividends and depreciation. The
INSPIRATION’S DIFFICULTIES AND ACHIEVEMENTS IN 1917 139
depreciation charge in both 1916 and 1917 There is no immediate need for the leach
was fixed at $750,000, or about $.64 per ing plant and because of the prohibitive
share, but for reasons touched upon later price of machinery the company has wisely
this sum has not been deducted from the postponed this addition until after the war.
earnings applicable to dividends. The cost will eventually be met out of earn
Profits of $11.50 per share for the stock ings; but by that time the company will
under present conditions would justify the undoubtedly have accumulated a cash re~
continuance of the $8 dividend rate, espe serve for the purpose (if it has not already
cially in view of the company’s strong cur done so) so that this expenditure should not
rent asset position. The estimate of war encroach on dividends.
taxes is of course predicated on the assump
Investment Value of Stock
tion that the reserve in the 1917 report has
been correctly figured. - Is Inspiration cheap at the present price?
The copper companies in general have The question can be answered mathematical
great advantages over most manufacturing ly by computing the minimum value of the
enterprises. They do not tie up much stock both on 23%c. and 14%c. copper—
money in inventories, they sell on a cash the latter representing what many would
basis-and, most important of all, their call the lowest limit. But first the life of
yearly additions to plant are usually small. the mine must be estimated.
6.2g
.
Minimum lie
divfidends
mine . . . . . . . . . . . . . . . . . . . . .. . 11.52 years years
0
“
.
——-n——-_—__
Value of mining property . .. .. . . .. $91.42 per share $49.77 per share
“ “
.
.
.
.
.
.
.
.
.
Hence practically all the earnings are avail In the 1915 report Inspiration summar
able for dividends. Inspiration faced ized its ore reserves as follows:
is
Tons. Copper
likely to affect the dividend policy to any Sulpbide ore . . . .. 46.252,000 2.01
.
28,698,000 1.26
.
plant for handling the oxidized material Oxidized ore . . . . 17,460,000 1.31
.
which constitutes about 23 per cent. of the Mixed ore . . . .. 4,731,000 1.31
.
.
The company has experimented successfully ditional ore since then, but mining opera
on this class of ore, and refers to the favor tions have disposed of 9,268,000 tons of
able results of the large scale operations ef slightly less than average grade, leaving re
fected by New Cornelia. The latter mine serves of 87,874,000 tons at the beginning
recovered about 80 per cent. of the copper of 1918. Taking the.1916 production as
content. believe that Anaconda announced an index—5,316,000
‘
tons~—the minimum
I
an extraction of around 83 per cent. of its life of the mine would be about 16 years.
oxidized tailings. (Inspiration has been Having determined the normal production
saving about 90 per cent. of its copper in and the minimum life, we can set down the
sulphide form.) mathematical valuation of Inspiration stock
140 THE MAGAZINE 0F WALL STREET
under both war and peace conditions as in Nevada has increased its recoverable ore in
Table II. three years from 39,000,000 to 68,000,000
These appraisals are based upon the tons.
standard tables of Mr. H. C. Hoover, once If
it is true, as many experts claim, that
a mining engineer, but now Food Adminis 14V2c. copper is a long way off our “peace
trator. The earnings will net 8 per cent. valuation” of $62 would represent the
upon this valuation, and a sufficient annual height—or rather the depths—of conserva
surplus besides (if compounded at 4 per tism. But earnings even on a 14%c. mar
cent.) to replace the original investment at ket would justify a $5 dividend ratkby no
the end of 16 years. means a niggardly return on the present
The reason for not deducting deprecia market price.
tion in computing the per share earnings The porphyry coppers in general have
should now be evident. The equipment is not. earned the dazzling percentage upon
expected to outlast the mine, and hence the their market price shown by some of the
investor is himself depreciating it when steel issues. But they have no bonds or
laying aside (theoretically) his sinking preferred stocks; all the property and earn
fund. Should the mine actually last fifty ings belong to the common stockholders, and
years, the equipment might have to be re no panic or depression can ever send them
newed, but then the whole basis of valua on the rocks. The investor in the coppers
tion would have to be radically revised up at these levels is sure to get his money back
ward. before the mine gives out-—with an excel
This point draws attention to the fact lent return in the meantime-and each in
that our valuations are based upon present crease in metal prices, ore reserves, or pro
ore reserves, which are practically certain ductive capacity makes his holdings more
to be increased later. Only a fraction of valuable. One of the newest and best ex
the mineral lands have been explored, and amples of this type of investment is In
when development work is resumed there is spiration Copper, which in an industry long
no reason why Inspiration should not dupli distinguished by able management, has
cate the recent success of the other large established an enviable record for produc
porphyries. It will be remembered that tive efficiency.
MARKET STATISTICS
. Breadth
Dow Jones Avgs. 50 Stocks (No.
40 Bonds 20 Inds. 20 Rails High Low Total Sales issues)
Monday, April 8. . . . 75.01 77.69 79.53 68.29 67.76 242,400 156
“ 9. . . . 75.77
Tuesday, 77.40 79.21 67.86 67.42 170,900 172
“
Wednesday, 10. . . . 75.83 76.85 78.90 67.54 67.07 190,200 157
Thursday,
“
ll . . . . 75.85 75.58 78.00 67.04 66.22 343,500 195
“
Friday, 12. . . . 75.91 76.25 78.45 66.84 66.23 211,400 153
“ 78.26 66.71
Saturday, 13. . . . 75.91 76.01 66.42 115,100 127
“ 79.15
Monday, 15 . . . . 75.92 77.51 67.57 66.88 305,600 161
“ 78.98 67.70
Tuesday, 16. . . . 75.98 77.21 67.14 360,300 150
“ 78.60 67.23 66.68
Wednesday, 17. . . . 75.93 76.89 336,200 109
“
Thursday, 18. . . . 75.91 78.11 79.28 68.07 67.29 523,200 173
“
Friday, 19. . . . 76.05 78.60 79.38 68.70 68.07 521,200 187
“
Saturday, 20. . . . 76.16 79.73 79.52 68.78 68.29 302,400 147
Nevada Consolidated-a Mining Phoenix
A “Dying Mine” Expire-—Its Changing
That Refuses to
Balance Shcct—1nvcstmcnt Worth of Nevada’s Stock
By BENJAMIN GRAHAM
NDecember, 1912, the Nevada from 90,735,000 lbs. to 82,040,000 lbs.
”
directors declared an extra divi This was due chiefly to a reduction in the
dend of 50 cents per share, grade of ore mined in the open pit from
which they were careful to point 1.53 per cent to 1.28 per cent. In addition
out was not a payment from earnings but the percentage of copper recovered showed
a return of capital made out of the re a slight shrinkage, so that the extraction
serve for ore extinguishment. 1t chanced per ton fell from 24.12 lbs. to 21.81 lbs.
that in the annual report published shortly per ton.
afterwards the tonnage of’recoverable ore Judged from the assay of remaining ore
showed a decrease for the first time since reserves, the decline in the grade of ore
operations commenced. From these two mined should prove a temporary factor.
events originated the famous theory of the The open pit ore averages 1.415 per cent
exhaustion of Nevada, which completely copper and the richer material in the Ruth
dominated its market action for many underground working brings the grade of
years, and even now persists in the minds the total up to 1.58 per cent. The falling
of many an investor. off in recoveries is explained by the
The sad story of the gradual extinction crowded conditions at the mill due to the
of Nevada is shown in Table I. treatment of foreign ore from Consoli
_____-————__—___,—_—'_______-— dated Coppermines. Steps have already
been taken to meet this difficulty, with the
TABLE I—RECOVERABLE ORE
result that the extraction in the fourth
Sept. 30, 1907 . . . . . . . . . . . . . . . ..14,433,000 tons
” quarter reached 73.94 per cent, which is
1908 . . . . . . . . . . . . . . .20,000,000
” better than the average for 1916.
1909. . . . . . . .29,000,000
”
Dec. 31, 1910. . . . . 40,361,000
” Table 11 gives the latest income account
40,853,000
1911 . . . ” of the company. Of the net profit $8,297,
1912 . . . 38,854,000
1913 . . . 39,108,000
” 946, or $4.15 per share, was paid in divi
_ ”
, 1914. . . 41,020,000 dends and $528,706 was charged off for
'J ”
1915. .. . . . . .50,525,000
” plant alterations, leaving a final addition
. . . . . . . . .67,993,000
1916 . . . . .
” to surplus of $661,082, or 33c. per
1917 . . . . . . . . . . . . . . . . . . . 70,025,000
share. To this sum must be added an item
” of $108,434 representing the earnings of
Total tonnage mined to date.25,84l,000
the subsidiary Nevada Northern RR., in
excess of dividends paid to the parent com
After having mined nearly twice as much
ore as it started with in 1907, Nevada still pany.
has left about five times the original ton In the statement, the company’s fig
The map shows that large portions ures have been corrected to include an
nage.
of the company’s property are as yet un additional $165,800 for taxes, to bring the
allowance made during the year up to the
prospected, and the management is now
of final estimate. On the other hand the
very optimistic as to the possibilities
future additions to the ore reserves. On management explains that the price actu
the basis of last year’s record tonnage re ally received for copper was over 2c.
moved, the minimum life of the mine is more than the stated average of 23.75c.,
now 17% years against 15 years for In because the unsold copper (in accordance
For a liquidating proposition, with previous custom) has been inventoried
spiration.
Nevada seems to possess extraordinary at 13y2c. The writer has calculated that
vitality. there were 14,000,000 lbs. of finished cop
Although last year established a record per at hand at the end of the year, which
for tonnage mined, the production of re must already have been sold at 23 y2c.———an
fined copper suffered a substantial decline advance of 10c. over the carrying price.
(212) a
h
M
NEVADA CONSOLIDATED—A MINING PHOENIX 213
On the basis of the selling value of thepresent charges for depreciation, etc., are
copper produced, the year’s earnings were continued without change. Following is a
therefore about 70c. per share more per chronology of future events in the life of
share than reported-in all, about $5.50 Nevada, as they would appear on the
per share. _
books.
It will be observed that the net operating 1. By 1925 the mill and smelter will
costs before taxes and depreciation aver have disappeared from the balance sheet
aged 9.96c. per pound against 7.62c. the through depreciation charges which have
previous year—the difl'erence of 2.34c. rep already reduced their book value by 47 per
resenting the increase in mining expense cent. Needless to say these plants (which
due to war causes other than taxes. Taxes are well maintained) will be far from a
increased from .51c. to 1.0%. per pound, heap of ruins in eight years, and although
bringing the total advance in costs up to theoretically extinct, will probably be op
3.43c. per pound. In the operating ex erating at full blast.
pense of both years has been included a 2. By 1927 the stripping of the present
charge of 30¢. per ton of ore ‘mined—about ore reserves in the open pit‘ will be com
lyzc. per pound—for the amortization of pleted and the prepaid expense item in the
prepaid development expense. The latter balance sheet will begin to contract rapidly,
item represents chiefly the cost of removing through the 30c. per ton operating charge.
the capping, or layer of waste material, (It is impossible to make a. similar fore
which covers the commercial ore in the cast for the Ruth mine, but this is of minor
open pit. The expenditure for this pur importance.)
pose each year is carried' to a deferred 3. By 1928 the entire cost of the ore in
asset account, which at the same time is the ground will have been extinguished
being extinguished by the 30c. charge for and although the mine will then have re
each ton mined. maining over twice as much ore as at first
A careful analysis of the Nevada’s reported, this property will be given no
charge for depreciation, ore extinguish value in the balance sheet.
ment, and amortization of stripping ex 4. By 1931 the cost of stripping the
pense brings out some very striking facts pit ore will have been completely amor
as to the ultimate financial condition of tized by operating charges. This means
the company-and incidentally sheds that in the last three years of production
much light upon the much discussed capi there will be no stripping expense to charge
tal distributions referred to in the opening off,—an item which now represents lyzc.
paragraph. per pound of the cost of production.
Let us assume for the sake of simplicity But as these assets gradually fade from
that no new ore is discovered, that last the balance sheet, what will take their
year's rate of production is maintained place? The answer is cash,—-unless (1)
and that therefore the mine is exhausted new properties are purchased, or (2) the
in the middle of 1935. Also that the surplus is reduced by dividends in excess
m
214
of profits.
balance sheet
future.
at best
Table
carried forward
approximate—especially
treatment of the prepaid expense.
III
THE MAGAZINE OF WALL STREET
Mine
Three years before
that time the company will have converted
all its assets into liquid form, ready either
1913
$2.16
324
1.64
1911
$1.63
2.62
2.72
depreciation charges-the
fixed assets have been gradually replaced
in the balance sheet.
1925 (est)
$.43
2.72
In
1928 (est.)
$2.12
1931 (est.)
. ..
m
Net Current Assets (Includes Investments).. 3.02 8.16 11.98 13.01 $15.13
Total Book Value Per Share . . .. ... .. .. . .. $10.06 $15.13 $15.13 $15.13 $15.13
for distribution or for the purchase of new distributions are made, Nevada will soon
properties. be converted from a mine into a bank.
Regarded from another standpoint, on Marketwise, Nevada has 'v'neveri been
23y2c. copper Nevada can maintain its much in the limelight. In the past, when
former charges for depreciation, etc., pay it wasn’t condemned as a “liquidating
dividends of $4.50 per share and still keep proposition” it was disdained as a minority
its $20,000,000 surplus intact. On 14y2c, issue. Time brings its revenges. Utah
copper, assuming 1915 costs, it can earn Copper, which controls Nevada, is now in
$2.50 per share after all charges. The its turn controlled by Kennecott, and the
stockholder could therefore collect divi Nevada stockholder has welcomed his
dends of between $2.50 and $4.50 for thir patronizing big brother into the ranks of
teen years, and at the end of that period the minority.
still have an equity in net current assets day the public will realize that a
Some
of $15 per share, together with three years low cost, brilliantly managed copper mine
more of production at the present rate,—— like Nevada,—rich in cash and free from
but eliminating the stripping charge of debt-—is fully as safe an investment as
1V2c. per pound from operating costs. If many a railroad or industrial bond, and a
additional ore is developed, as the officials great deal more profitable.
MILLIONAIRE CHAUFFEURS
Near Charlotte, N. C., is one of Uncle Sam’s great training grounds ‘and a colonel at_ the
camp has been in the habit of getting his checks cashed at one of the big banks there, always
riding over in his car. Which on his last visit resulted in the following conversation between
the oflicer and the cashier:
Cashier: “Colonel, why don’t you open an account with us? We certainly would appre
ciate your business.”
Colonel: “Why, my account would be of no use to you, I regret to say. But if on can
land that chaufieur of mine it will be worth while. I am poor. He is worth two mil 'on!”-—
Financial and Investment Chronicle. -
Rock Island versus Missouri Pacific
Companions in Misery and Success — Searching Analysis on
Their Operations and Status —Contrast in Operating
Ratios — Prospects for Their Issues
By BENJAMIN GRAHAM
a
COMPARISON of Rock Island maintenance of bridges, trestles, etc. Of
with Missouri Pacific is almost prime importance also is Rock Island's
as inevitable as that of Northern higher average freight rate per ton mile
Pacific and Great Northern. (84c. against 74c.) giving it larger freight
Very similar in their physical char revenues, though carrying less traffic.
acter, the two systems are even more alike Finally Rock Island is richer in equipment
in their financial structure and their as compared with the business handled,
and thus has recently been deriving a large
income from the hire of freight cars, while
TABLE I— ANALYSIS OF REVENUE Missouri Pacific has been a consistent
Rork Island Mo. Pac. debtor for this item.
% of total % of total
Freight Revenue 66.6 75.5 Missouri Pacific More Economically
Passenger Revenue 26.0 16.9
Misc. Revenue 7.4 7.6
Operated
With these disadvantages in capitaliza
Total 100.0 100.0
tion, traffic density, rates, location and
Freight Rev. per Mile. ..$7,263 $7,850
Passenger Rev. per Mile 3,386 2,553 equipment, "Mop" might be expected to
Products of Mines 35.3* 39.4* earn much less on its common than Rock
Products of Forests 8.7* 18.0* Island. Yet the 1917 report shows $8.10
Rate per Ton Mile 84c 74c
Rate per Passenger Mile 2.10 2.31
per share earned on its junior issue against
*Of total tonnage. $7.20 for the other road — both- figures
being based on present interest charges.
This surprising result is due to Missouri
checkered history. Both were victims of Pacific's more economical operation, its
mismanagement and unwise expansion; running expenses and taxes having con
they plunged into receivership together in sumed only 73.4 per cent, of gross against
1915, and both were finally returned to 78.6 per cent, for Rock Island. Had the
their stockholders in June of last year — latter been operated as cheaply as its rival,
with much new money raised through as its net would have been $4,500,000 larger,
sessment and with interest charges substan
tially reduced. And in the past three
years they have rivaled each other in the TABLE II— ANALYSIS OF EXPENSES
phenomenal growth of their revenues. Rock Island Mo. Pac.
Under a closer scrutiny, Rock Island is % of gross % of gross
Maintenance of Way.. . 12.12 13.98
seen to enjoy important advantages. With Main, of Equipment... 18.84 15.90
a greater traffic density, its per mile cap
italization — both stocks and bonds — is Total Maintenance . .. 30.96 29.88
considerably smaller, and hence its interest Transportation, etc 42.74 38.11
Taxes 4.88 5.44
and preferred dividends require a much
lower percentage of its gross receipts. Al Total Operating Ratio 78.58 73.43
though Missouri Pacific is more compact — Average Train Load.. . 390 tons 530 tons
shows that Rock Island's larger mainte passenger service, yet official data of this
nance appropriation accounted for only a kind deserves serious attention, and should
small part of its higher operating ratio. warn us at least not to place too much
The chief advance is in the actual cost of stress upon the unprofitableness of R. I.'s
moving the business — transportation, traf passenger business.
fic and general expenses. These heavier The basic reason for Missouri Pacific's
costs may be due either to lower efficiency more economical operation lies evidently in
or to natural disadvantages. Under the its higher revenue train load. Last year
latter heading we would immediately put the average freight train carried 530 tons,
its greater proportion of passenger traffic, against 390 tons on the Rock Island1— an
which (as shown in Table I) constituted advantage of fully 1/3. Now even mak
26 per cent, of the total revenue, compared ing allowance for the larger proportion of
with only 16.9 per cent, for Missouri Pa coal and lumber traffic on the Missouri
cific. The unprofitableness of passenger Pacific (shown in Table I) which admits
business in general, and Rock Island's of heavier loading, so pronounced a super
losses from this source in particular, have iority as this must be described in large
MikoqeOwned
ondOp.ri.led Per Mile.
m rtrM.lt.
Earned on Prefr'd
for Mile. PerMiIt.
Rock Island
Per Mile.
.
1
bandedDetrffrefr'd S(oc* Com'nStoekW.Charjes frefVdDndt arawEarna* Me/afl.laio (&4&la»Vg«M. aft chrgs
Per Mile. PtrMile itu oier Inc- Per Mile.
Missouri-Pacific
an. KrMiU.
144*7=
tamed on Common • • " * 6.l^>.
7.Z*f»
Ratio « • • • 7J:4^fo.
Operating It-t^o.
ever chance to examine this part of the remember that dividends and market move
Rock Island statement in detail — (which is ments have their roots in just such techni
quite unlikely) — he would be struck by cal operating elements.
the high cost of fuel. This item last year If the paradox be pardoned — for the
consumed no less than $9,008,000 of Rock present the future depends upon the past.
Island's revenue, compared with but Which translated means that while the
$5,390,000 for Missouri Pacific. Other Railroad Control Act is in force the earn
wise stated, although R. I.'s gross was only ings of the two systems are determined by
14 per cent., its fuel bill was 6j per cent, their records from July 1, 1914, to June
greater than Missouri Pacific's. Had the 30, 1917. Since both roads were in re
difference in coal costs been kept propor ceivership during most of the period, it is
tionate to that in business, Rock Island generally thought that special compensation
would have saved $2,850,000 on this single will have to be arranged for them. It is
item — nearly 20 per cent, of the present true that in 1916, Missouri Pacific ex-
market price of its common stock. . pended over 38 per cent, of gross for main
Whereas "Mop" carries about 1/3 tenance, and that its average for the tri-
freight per mile more than R. I. its fue' ennium is considerably above the normal
costs per train mile are seemingly 1/6 less. ratio. The same cannot be said for Rock
Is this saving due to lower coal prices or Island, however, and its claim for a special
smaller consumption — i. e., greater locomo maintenance would be based not upon ex
tive efficiency? The Rock Island report cess upkeep charges, but, if at all upon
contains an illuminating analysis of its the large debit balance for hire of equip
operating costs per locomotive mile, includ ment in 1915, which was turned into. a sub
ing the amount and price of the fuel con stantial credit in the calendar year 1916,
sumed; but since Missouri Pacific omits following the outlay of $3,400,000 for
this table from its statement, a comparison 8,000 box cars. It is dubious how recept
on this vital point is impossible. The ive the Director General will prove to this
reader will hardly excite himself about so plea.
dry a problem as the number of pounds of In Table III we have accordingly drawn
coal used per locomotive mile — yet he must up an income account for the two systems,
274 THE MAGAZINE OF WALL STREET
based upon their guaranteed compensation, ers of this issue were offered a larger inter
and have added a revised calculation for est rate if they would consent to a modifica
Missouri Pacific, assuming a normal main tion of their indenture, but refused — a de
tenance charge for the three years. This cision which many hold to have been detri
ratio has been made about 1 per cent, of mental to their own interests as well as
gross larger than Rock Island's to allow that of the other security owners.
for the greater flood menace, referred to at
the beginning.
Comparative Position
The figures indicate that in all proba To summarize our analysis we find that
bility both roads will receive very much the Rock Island enjoys important advantages
same treatment from the Government, and in lower capitalization, larger earnings, and
that as long as the present regime continues higher rates; but that these are fullv
there will be little to choose between them. neutralized by Missouri Pacific's greater
But when (or if) the properties are re operating efficiency. While Rock Island
turned to their owners? may-— and should — improve its results by
This question brings up at once the raising the train load and reducing its fuel
fundamental investment weakness of Rock costs, it faces a more serious handicap in
Island securities, rising from its defective the lack of a medium for financing its large
bond structure. The road still carries its requirements.
"Old Man of the Sea"— the Refunding Consequently, if Rock Island were still
Mortgage. Since this issue is limited to under private control, only a period of un
4 per cent., it is a perfectly useless instru interrupted prosperity could totally remove
ment under present circumstances, yet by the menace of another reorganization. Full
prohibiting either senior or junior liens on dividends are now being paid on its 7 per
the property it effectually cent, and 6 per cent, preferred — which are
prevents any
other means of permanent financing — an both cumulative up to 5 per cent. — but so
essential requirement for a lustily growing far no payment has been made on the Mis
property like Rock Island. As long as such souri Pacific 5 per cent, issue, which be
a condition obtains, the financial position comes cumulative on June 30 next. Rock
of the road must always be precarious — Island common seems nearer to a dividend
especially since the Refunding 4s them than Missouri Pacific common, but its ulti
selves mature in only 16 years. The hold mate future is more uncertain.
Bv MKREDITII C. LAFFKY
By BENJAMIN GRAHAM
INANCIAL writers should ap against the framers of the law for failing
proach the subject of war taxes to gauge accurately the results of their leg
in a humble and contrite spirit, islation, an examination of some of the
remembering their ill-starred pre data at hand bearing upon the taxable in
dictions of last October when the present come of the United States corporations may
act was passed. In those days no publica be of interest.
tion was complete without a brief list of the
Probable Amount of Taxes
1917 taxes to be paid by the larger corpo
rations — most of which figures can now be The writer has studied the reports of
mildly described as inaccurate. For ex eighty representative companies, the securi
ample, statisticians were agreed upon a tax ties of which are listed on the New York
of $110,000,000 for U. S. Steel and about Stock Exchange, and in Table II
presents
$10,000,000 for Utah Copper — in the first a summary of their exhibits for 1915, 1916
case one-half, in the other double the com and 1917. Moreover, the last report of the
panies' subsequent figures. If such bizarre Commissioner of Internal Revenue gives
prophecies were made then, when both the
earnings and the revenue act were fairly
TABLE I— BUDGET ESTIMATE OF U. S.
well determined, what dangers must attach
REVENUES FOR THE FISCAL YEAR 1917-18.
to a discussion of 1918 taxes at this stage
—when the. profits and the law which levies I — Indirect Taxes
on them are alike concealed in the future?
A— Custom duties $220,000,000
B— Internal revenue—ordinary . 448,000,000
Yet the question of increased imposts is so C — Internal rev. — war taxes... 527,000,000
important to investors that some general D— Miscellaneous 273,800,000
consideration of the question — though con
fessedly premature and fragmentary — may
Total indirect $1,468,800,000
rate income of around twelve billion dol How Taxes Compare with Earnings
lars. If the I&y2 per cent, rate of excess We have next to inquire how these taxes
profits tax shown by our eighty companies will compare with corporate earnings in
were applied to the whole country, it would 1918 — the answer depending of course on
raise no less than $2,120,000,000. This the relation of this year's profits to those
figure is doubtless much too high, since the of 1917. From the various returns already
smaller companies are sure to pay a lower made for the first quarter of 1918 it would
rate of tax than the larger enterprises. But appear that fixed prices and rising costs
after making due allowance for this fact, are reducing the income of the coppers; but
it is evident that the Treasury's estimate of that most other industries (e. g. steel, ma
$1,226,000,000 (which includes excess chinery, chemical) are doing quite as well
profits tax payable by individuals and part as last year — at least after making allow
nerships) must have been far below the ance for the January weather. The tre
mark. We are inclined to place the 1917 mendous Government expenditures pro-
•Estimated.
excess profits tax on corporations alone in jected are themselves an important factor
the neighborhood of a billion and a half. making for a greater volume of business;
In any case, the estimate of $535,000,000 and the authorities are apparently leaning
for the corporate income tax is obviously toward a policy of continued high prices,
inadequate, since it must have been derived large profits and heavy taxes. Observe in
by applying the 6 per cent, rate to the 1916 this connection that the increase in the
returns of $9,000,000,000 net income— earnings of our eighty companies for 1917
without making any provision for the in over 1916 was so marked as to more than
crease in 1917 earnings over the previous compensate for the huge Government levies
year. — rendering ridiculous the once prevalent
The above discussion is pertinent, since fear of vanishing prosperity. Because of
if thepresent tax rates turn out to raise this experience the stock market is await
more than anticipated, they will require a ing the new taxes in a calmer mood.
less drastic increase to bring their results There is reason to believe therefore that
up to the new requirements. Our reason corporation profits subject to 1918 taxes
ing suggests that the 1917 income and ex will be equal to or at least not much below
cess profits taxes — individual and corpo the 1917 figures. This brings us to the
rate — will pass three billions, of which the last and most important question: How
companies will contribute about 70 per cent, will increased taxes affect dividends? The
or $2,100,000,000. If
now we assume that reader would like to know specifically how
these direct taxes will be called on to raise much the taxes of "his" companies could be
five billions of the eight to come from all raised without necessitating a cut in divi
sources, then the corporations will be po dends. In Table III
this information is
litely relieved of, say, $3,500,000,000; this supplied for every listed dividend paying
is just two-thirds more than we estimate industrial which has reported its taxes for
their payments for 1917. the 1917 calendar year. The first column
WILL WAR TAXATION AFFECT DIVIDENDS? 393
TABLE III— THE RELATION OF TAXES TO DIVIDENDS AND EARNINGS (in Thousands).
A complete of all listed dividend paying industrial common stocks which have reported
table
AD
their war taxes for the year ended Dec. 31, 1917, or later.
(Column E shows the percentage by which 1917 taxes could be increased before reducing the
balance of earnings below present dividend requirements).
C D E
1917 Earning! Balance Ratio of Surp'i
Applicable 1917 Present Common of 1917 Earn- Earning*
Name to War Taxes War Dividend Requirements. ings After 1917 to 1917
of and Common Taxes f •—* N Taxes and Pres- Taxes
Company. Dividends. as Reported. Rate. Amount ent Dividends. (D to B).
Ajax Rubber $1,995 $495 $6 $852 $648 131%
Am. Beet Sugar 4,162 1,327 8 1,200 635 123
Am. International 4,585 839 3.60 1,800 1,946 232
Am. Smelt. & Ref 19,219 3,850 6 3,660 11,709 304
Am. Steel Foundries. .. 7,820 2,288 7 1,203 4,329 189
Am. Woolen 11,083 3,000 5 1,000 7,083 236
Associated Oil 4,214 373 5 1,987 1,854 497
Atlantic, Gulf & W. I.. 14,282 5,400 10 1,796 7,386 £136
Booth Fisheries 2,257 625 2 500 1,132 181
Calif. Packing 6,870 1,300 4 1,356 4,214 324
Calumet & Arizona.... 10,095 1,683 8 5,140 3,272 194
Central Leather 18,074 6,000 5 1,985 10,089 168
Cerro de Pasco 12,052 1,648 5 4,540 5,864 356
Chino Copper 10,745 1,2:) 2 4 3,480 6,033 489
Cluett-Peabody 2,463 423 6 1,080 960 227
Consolidation Coal 10,002 1,491 *9 3462 5,349 359
Continental Can 3,725 850 6 810 2,065 243
Diamond Match 5,028 1,103 8 1,35 7 2,568 233
Distillers 6,013 1,233 8 2,464 2,316 188
Eastman Kodak 18,173 4,000 *30 5,861 8,312 208
Elec. Storage Battery... 2,478 450 4 650 1,378 306
Elkhorn Coal 1,438 108 2 480 850 787
General Chemical 10,482 1,800 17% **2,439 6,243 348
General Electric 34,192 7,289 *12 13,680 13,223 181
General Motors 33,532 6,939 12 9,912 16,681 240
Goodrich 10,947 2,250 4 2,400 6,297 280
Gulf States Steel 3,731 1,000 10 1,125 1,606 161
Ingersoll-Rand 8,613 3,453 30 **3,268 1,892 54
Inspiration 12,266 1,185 8 9,456 1,625 137
Int. Harvester of N. J.. 22,720 7,880 7 2,800 12,040 153
International Nickel.... 13,186 3,591 4 6,422 3,173 88
Island Creek Coal 2,867 900 10 1,188 779 87
Kelly-Springfield 2,436 430 4 785 1,221 284
Kennecott 18,190 584 4 11,148 6,458 1,110
Kresge 2,221 500 5 500 1,221 244
Kress 1,555 370 4 480 705 190
Lackawanna Steel 26,147 10,040 'II 3,861 12,246 121
Lorillard 6,237 1,100 *18 **2,728 2,409 219
Manhattan Elec. Supply 617 128 5 120 369 188
Manhattan Shirt 843 175 4 200 468 267
May Dept. Stores 3,372 850 5 750 1,772 208
Miami Copper 4,952 717 4 2,988 1,247 174
Midvale Steel 61,310 25,732 6 12,000 23,578 88
National Acme 5,164 1,500 6 1,500 2,164 144
National Biscuit 3,586 700 7 2,046 840 120
National Cloak & Suit. 2,204 524 5 600 1,080 206
National Lead 3,685 493 6 1.210 1,952 396
Nevada Copper 10,669 896 3 • 6,000 3,773 421
Old Dominion 1,789 304 4 1,188 297 98
Pacific Mail 2,336 900 3 690 746 83
Pierce-Arrow 3,960 1,162 5 1,250 1,548 133
Pond Creek Coal 1,393 600 2 418 375 63
Railway Steel Spring.. 7,963 3,500 5 675 3,788 108
Ray Consol. Copper.. 10,758 1,431 3 4,731 4,596 321
Republic Iron & Steel. 22,704 8,597 6 1,630 12,477 145
Sears-Roebuck 18,444 3,977 8 6,000 8,467 213
ShaHuck-Amona 1,634 189 1 350 1,095 580
394 THE MAGAZINE OF WALL STREET
'Includes extras.
**1917 Dividends. Present rate uncertain.
shows 1917 earnings available for taxes conservatives because it taxes not large
and common dividends, the reported fig profits but war profits. The English law
ures having been adjusted to present pre is far simpler than ours. It provides an
ferred dividend requirements. In the case exemption equal to the average earnings of
of the coppers no deduction is made for ore the two best years of 1911, 1912 and 1913,
depletion, since most companies omit it with a minimum (for corporation?) cf 6
from their statements as a bookkeeping en per cent, of the invested capital —the latter
try made for tax purposes only. Next are to be determined apparently by investiga
shown the war taxes as finally reported, in tion. The exemption is increased by 6 per
some cases slightly overstated through the cent, of all new capital invested during the
inclusion of other minor items. There fol war. All earnings above this exemption
lows the annual rate and total amount of are taxed 80 per cent, but allowance is
the common dividends on the current basis made for special depreciation of war plants
(which in quite a few cases have been re and for ultimate loss in the liquidation of
duced below the 1917 disbursements), and inventories.
the balance of last year's earnings after How would so drastic a tax as tdis affect
deducting both present dividends and the American companies? United States Steel,
reported taxes. The last column shows the which is hardest hit (both relatively and
ratio of this balance to the stock — in other positively) by the present law, should pro
words the percentage by which the tax vide an extreme example of the effect of the
could be increased before the surplus above British act Assuming 1917 earnings for
dividends is wiped out. this year, the calculation is shown in
A study of these figures discloses some Table IV.
interesting facts. Of the seventy-five com The severe British tax would leave U. S.
panies only nine report a margin above div Steel about $25 per share for the common,
idends less than their 1917 taxes — that is, one and one-half times the present dividend
all the others would have met twice their rate.
last year's tax without bringing their earn The Question of Cash
ings below present dividend requirements. It may be regarded as settled that the
Seven of the nine exceptions were in the 60 new taxes will not in general reduce earn
per cent, class, being thus physically im ings below dividend requirements; but that
mune from a doubling of their contribu fact by no means proves that the present
tions. rates will therefore be maintained. It is
Comparison with British Tax not earnings but cash that finally deter
In this connection a word or two about mines dividends. Profits mean cash, pro
the British excess profit tax is appropriate, vided they are not tied up in (1) Plant, (2)
since it is quoted approvingly by the rad Inventory, (3) Accounts Receivable. Since
icals for its 80 per cent, rate, and by the corporations are finding it very hard to
WILL WAR TAXATION AFFECT DIVIDENDS? 395
borrow to finance increases in these assets, (devoutly to be wished!) would help out
their earnings must first be applied to their the accounts receivable situation. Finally,
capital requirements before dividends are if prices do not rise above the present level,
perhaps the headlong growth of inventories
TABLE IV. will at length be checked. These are the
BRITISH bullish possibilities of the cash question.
EXCESS PROFITS TAX APPLIED
TO U. S. STEEL Upon these elements ultimately, rather
than upon the new taxes, would seem to de
(Assuming Earnings for 1918 the same as in
1917) pend the course of dividends. The taxes
Average Earnings 1911 and 1913 $65,567,000 are of great importance, of course, as ab
Add 6% of New Capital sorbing a large part of the cash receipts.
($380,627,000) 22,838,000 The writer thinks that the greatest aid
could be extended to industry by permit
Total Exemption $88,405,000
Net Earnings (1917) 457,864,000 ting as much as possible of the tax pay
Subject to Excess Profits Tax 369,459,000 ments to remain with the corporations,
Excess Profits Tax (80%) 295,567,000 either in settlement of Government work
Income Tax (6% of balance) 9,738,000
already done or as advances against future
Total Tax $305,205,000
deliveries. In this wise, financial strin
Balance for Pfd. Dividends 152,555,000 gency would be spared the industrials, just
Balance for Common 127,335,000 as the banks are protected by the policy of
Per Share $25.50 leaving Liberty Loan and tax payments on
deposit with them. The fact that the Gov
considered. To a great extent, therefore, ernment is going to owe the corporations
dividends will depend upon the success of much more than they will owe the Govern
corporations in restricting these items. If ment should make an arrangement of that
the war plant extensions are built by gov kind entirely practicable.
ernment funds — as seems to be the tendency All of which means that if the money
— the first part will be taken care of. The situation is successfully taken care of, cor
United States will be the chief customer of porations should be able to meet the tax
the large industrials, and prompt payment situation without harm to dividends.
THRIVING ON MYSTERY
There is always fascination about a mystery. What is the mystery about
New Haven?
Something over six months ago, the Block sold at 21^. Today it sells at
double this price. If the $43,000,000 of notes due in April of this year had not
been met by the Government, the only recourse of the road would probably
have been a receivership.
A New Haven stockholders' committee is now seeking proxies for the ap
pointment of a suitable person to prosecute, at the road's expense, a suit now
pending against former directors to compel them to restore to the company
something like $150,000,000, giving as a reason alleged mismanagement.
There are also rumors that the New Haven is to constitute the big Atlantic
Terminal of a regional system comprising, in addition to itself, the New York
Central and the Chicago, Milwaukee & St. Paul. There is no system in the
United States which has more wonderful power of recuperation than the New
Haven. i >, •
<\ '•. \
Yean ago, the Lake Shore Road went through a somewhat similar experi
ence. The stock of that road was finally taken over by the New York Central
at something like $1,200 per share when it was absorbed into the New York
Central system.
If half what is said about New Haven prospects and its ability to come back
is true, there is no telling where the stock may go. — Odd Lot Review.
War Taxation and Cash Position
of Industrials
Will Industrials Have Cash to Meet Taxation Plus Dividend
-
Requirements?—Comparison of Cash Holdings
of Leading Companies
By BENJAMIN GRAHAM
N my recent article “Will War their profits, and although the largest part
Taxation Affect Dividends?” these surplus earnings has gone directly
of
which appeared in the June 22 into working capital, nevertheless the cash
issue of THE MAGAZINE OF WALL position these companies
of
of
most much
is
STREET, the conclusion was reached that less comfortable than was four years ago.
it
increased taxation would not in general The force of this statement can be realized
bring earnings below current dividends, but only through concrete example. As one
a
that nevertheless it might render reductions fifty possible illustrations we have tran
of
its
necessary through effect upon the com scribed (in Table the working capital
I)
panies' cash position. position
of
The latter factor
at
American Steel Foundries the
the subject the following discussion, is end of 1913 and 1914—the best and worst
of
the
a
of
prospects The first
of
as
the also
industrials. striking fact the tremendous expansion
is
No aspect the present economic every item except cash assets. (The lat
of
of
be
situation can taken
A
DUSTRIAL–AM. STEEL FOUNDRIES.
Dec.31, 1913 Dec. 31, 1914 Dec. 31, 1917
Gross Business
...
2,017,000
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_*
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Per Cent
to
to
unless understood
the outset that the
is
it
us
or
criterion. Financially and commercially grown moderately while everything else has
another world, where old val multiplied three and fourfold.
as
we live We note
in
ues and old laws no longer obtain. further that net current assets have in
by
creased
but that nevertheless the current liabilities
Especially connection with the present
in
stressed; because while since 1914 the cash than ever before. Of chief importance,
finally, the fact that while
in
1914 cash
is
resources
assets alone were more than double all
enormously, the demands upon these re
working liabilities, yet 1917, after two
in
rate. Hence the strange but vitally impor wonderfully prosperous years, the company
tant conclusion—that although industrials finds itself with cash assets less than one
its
by its
liability appears here
in
own weight
its
which
as
This illustration shows clearly that in not burden
a
these times an industrial's cash position and alone can cripple the dividend power, but
which super-added the heavy demands
by
to
working capital position are
its
no means
expanding business may prove
an
kind
of of
has long been
a
one and the same thing.
It
finishing blow.
or
the custom treat “net current assets” as last straw
to
It
of
control over
is
the measure
not necessarily mean sur
do
ready money. This viewpoint has been plus earnings
substantially correct the past, because in plus cash. The cash account and the
in
ventories and accounts receivable were income account have followed separate
a
and often contrary course. But, repeat
by
to
largely convertible into cash—if not sale
any rate through bank ac what needs constant repetition, the
it
is
collection,
at
or
In
commodation. One would therefore have cash account that pays the dividends.
called Steel Foundries' financial condition the past development and present condition
stronger 1913 than 1914, directly because of the cash account we must look for the
in
of
working capital was about per cent. the
10
to
clue
dustrials.
larger. For although cash assets alone were
II
to
the previous year, Table contains what the writer's
in
to
knowledge
of
is
excess
determine what part
of
abilities; the company owed nothing the industrials'
to
the
banks, and was evident that money could earnings have been actually available for
it
Companies—Excluding
S.
52
Steel.
1917 1917
- (Excluding (Deducting
1915 1916 Taxes) Taxes)
Earned for Common Stock... $208,918 $382,065 $496,491 $381,133
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81.5%
of
*Decrease.
of
far different proposition from The figures represent the aggregate over
is
1917
a
all
the
is
1913.
banks for large sums; the inventories and stocks for which complete data obtain
is
liquidation;
no
receivables show
and the plain fact that the company's from this compilation, because—for reasons
is
re
its
American Steel Foundries has not been fore, have nearly neutralized the combined
Ob
all
its
On the contrary, the writer believes that the table how each year smaller
in
serve
a
ultra-conservative structure
cash. Note finally that
as
as
of
profits make this stock exceptionally had the war taxes been due December
tractive from the investment standpoint. $166,000,000
of in
of
show
a
that even
six
this very
Of
of
course
prosperity—which make for cash stringency fore tax payments June the companies
in
by
drawing
on
cash account in better shape for the ordeal. rate their treasury funds.
Undistributed Profits? Class III
contains all other companies.
Being relatively short cash and with re
of
But where have the large undistributed ceipts less than requirements, these are nat
profits gone if not into the cash account? In urally re
as
the most precarious position
in
plant extensions, slightly; in accounts re gards the continuation the present rate.
of
ceivable, largely; but in inventories most of
In
examining this classification by
all. Table II
shows clearly how most of groups industries, one particularly im
of
is
the missing earnings are accounted for by pressed with the strong showing
of
the
the yearly growth of inventories. The total coppers. Of eleven companies represented
figures for 1914-18 given in the graph indi I–i.
e.,
all but one are Class are receiv
in
cate that stocks on hand have almost exactly
doubled since the beginning of the war.
its
U. S. Steel, however, has held increase
GROWTH OF INVENTORIES
only 40 per cent., wherein lies the
of to
down
52 CO’S U.S.STEEL.
8.
exceptionally strong cash posi
its
secret
Obviously |9|4 1915 1916 |9|7
the growth
of
tion. inventories
due only slightly larger quantities, and
to
is
so to
sheds well
it
listed com
in
additions
cash and current assets position, the table
an
each com
is
Grouped Three
in
Classes
receipts 1917 exceeded present dividends ing more cash than they need. Their posi
in
and 1917 tax requirements. tion even more favorable than indicated
is
These should
maintaining
no
large part
of
in
because
a
consists
siderably. much more liquid asset than the average
Class embraces those whose cash re
II
manufacturer's stock
ceipts were less than required for dividends are equally divided between the first two
and taxes, but which are nevertheless classes, and hence are sound financial
in
in
strong financial condition. The latter fact shape. On the other hand the rubber com
by
ar
an
determined
bitrary standard—which we have fixed the motors (except General Motors), and
to, as
the possession cash assets about equal varied list of other concerns fall into Class
of
to
or
total current
cash receipts should in ticularly susceptible develop
be
to
ments.
in
574
III. 1,215
14,182 2,498 5,384 11,281 10,358
Kennecott 11,732
...
I
.
.
.
.
.
III
.
.
Lackawanna 13,901
#9
National Acme ..... 3,000 est. 2,350 1,302 5,563 9,514 1,971
National Biscuit .... 2,746 2,368 3,618 10,467 19,026 2,319
III Nat’l Cloak Suit... 1,124 603 1,630 5,757 7,837 3,728
&
Pond Creek Coal. ... 1,018 743 962 3.11 1,625 841
Railway Steel Spring 4,175 2,053 4,411 5,113 13,601 4,420
Ray Consol. Copper. 9,322 2,926 7,800 12,936 1,801
6.132
Republic Iron St’l 10,743 18,728 13,476 39,091 13,145
&
10.227
III Sears-Roebuck ...... 9,977 7,800 5,789 36,873 52.792 32,998
Shattuck-Arizona ... 539 1,785 1.981 883 2,870 661
-
II I
||
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U. ..
.
S. ..
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.
.
.
it
“conserving cash” impressing
of
is
the public, the banks
and the Government. self upon many directorates. The writer
an
open only the scrip dividends—either
of
in
The sale
to
as by of
securities foresees era
is
strongest enterprises, and almost prohibi stock, paid Cosden Company, con
or
as
at
of
vertible notes, the case American
in
such as the Armours—find more feasible Tobacco or Maxwell Motors.
it
borrow from the public than from the The general dividend situation must
to
institutions
as
to
therefore
unwieldy total. important
so
in
to
If
an a
a
or
the value stock.
A
a
a
The huge lines credit already extended reduced rate may signify better business
of
to
most industrials have bred cautious spirit rather than worse. Each case must be
a
on
its
banks; increases—although
If
difficult
to obtain. significant unfilled orders) and well protected accounts
to
It
recall the
is
.
warning receivable, relatively low dividend return
of
of
of
Company, might
be
to
business rather than borrow more money. Republic Iron Steel. Here the investor
&
are
There left the Government as last re of disbursement.
is
in
by
rectly through the War Finance Corpora creased war taxes will exert their influence
tion, Washington can make matters easier
as
for al
an
of
it
grow more general. The War Finance Cor the Government through its various agen
poration has thus far confined Some dividends will certainly suffer
its
activities cies.
public utilities, and
to
in
If
a
cient
to
carry all the companies unscathed above taxes large and the surplus earn
to is
through another year feverish activity ings devoted safe and profitable uses, the
of
and increasing financial strain. Signs are investor might welcome resultant decline
a
market quotations
in
in
as
T 1
|
HE War Revenue Act of last Oc-
tober established certain rela
tions between the Invested Capi •
into semi-investment and even pure in
vestment issues. Hence the public is
gradually coming to apply investment
tal, the Net Earnings and the standards to determine their value, and
Excess Profits Tax of a corporation, so the question of their tangible asset back
that if any two of these elements are ing is finally assuming considerable im
known the third can be deduced from portance. A dozen times a year we are
them. Consequently in those cases regaled with analyses of U. S. Steel
where a company has accurately reported Common's tangible asset value, showing
its earnings and tax reserve, a set of that all the pristine water has been care
formulae can be employed to determine fully evaporated and replaced by "bricks
what figure it has used for its Invested and mortar." The Goodrich balance
Capital in making its tax return. sheet is now eagerly scrutinized to find
Needless to say, the Capital reported out what progress is being made towards
to the Treasury Department is often very substantiating the once completely
different from that shown in the balance etheral common.
sheet. The published valuation of a com There are many circumstances to jus
pany's plant account will rarely reflect its tify the newly awakened interest in tan
original cost, but includes usually un gible values. The most obvious of these
stated amounts of a commodity variously is the tax law which differentiates
termed "good will," "intangible assets," sharply between real and imaginary as
or simply "water." But the Invested sets, penalizing water heavily through
Capital figures we obtain from the War higher levies. But this is only one as
Tax Reserve are based upon the actual pect of the whole fabric of government
cash outlay and thus enable us to deter control, which in fixing prices and com
mine the tangible asset value of the pre pensation looks behind the balance sheet
ferred and common stock. figures to the actual cash investment in
Before considering the individual is volved in each enterprise.
sues it might be well to discuss the im A perhaps more important element is
portance of the information we are seek also involved. With the largely in
ing. creased capacity of our plants we may
Only a few years ago the average in eventually enter a period of severe com
dustrial common stock was little more petition in which profits will be restricted
than a vehicle for speculation. Its market to a reasonable return on the value of the
price was determined primarily by man producing assets.
ipulation. The only factors of intrinsic For these reasons the question of real
worth that received any consideration
capital invested must be differently re
were current earnings and future pros
garded than in 1912. It is no longer a
pects. It was taken for granted that the matter of slight importance that Good
issues had little or no tangible value ; the
rich reveals and U. S. Rubber conceals
exact amount of water in the capitaliza the tangible value of its common stock.
tion was of small importance; and it
Whatever clues the 1917 Tax Reserve
made little difference whether the good
can afford us towards securing such in
will was plainly stated — e.g. as by Good
formation should therefore be entitled to
rich — or concealed in the plant account
clue attention, even if in some cases they
as in the case of U. S. Rubber.
be incomplete or approximate. We pro
Importance of Tangible Values pose, therefore, to work backwards from
But the war has rapidly been trans the Tax Reserves of leading industrials,
forming these out and out speculations to see what we can learn therefrom as
(772)
SECRETS OF INVESTED CAPITAL 773
FORMULA A
lOOXtotal tax— 6Xnet income
Excess profits tax=
94
FORMULA B
3500Xnet income— lO.OOOXexcess profits tax
Invested capital
275 +20X exemption
In this instance, the exemption evi account on December 31st, 1916, con
dently stands at the maximum, —9%. tained practically $70,000,000 of water—
Where the pre-war profits fall some an amount equal not only to the entire
where between 7% and 9% of the Cap common issue, but to half the pre
ital, the exact rate of exemption must be ferred stock as well. The accumulated
determined by trial and error. Readers surplus, however, had created a dollar
interested in checking over results can for dollar backing in tangible assets for
easily do so by applying the proper rates the preferred and about $20 per share of
of tax to our figures for Invested Capital real value for the common. The 1917
given herewith. The Excess Profits and earnings have since raised this value to
Income Tax levies thus obtained will be $30 per share.
found to correspond almost exactly with These figures are startling and may
the company's stated Tax Reserve. well be challenged as inaccurate. It hap
pens that they are substantiated by fig
Method Employed
ures contained in the official circular de
With this article appears a table scribing the U. S. Rubber 5% bonds sold
showing the invested capital of a in 1917. The appraised value, as of Oc
774 THE MAGAZINE OF WALL STREET
tober 31, 1916, of the tangible assets than $120. In this case, however, the
securing the $60,000,000 issue is here market price has more than kept pace
given as $124,000,000. In other words, with the growth of tangible assets — an
the margin of tangible assets for the exception to the general rule, explained
common and preferred stocks was only by the strong technical position of the
$64,000,000— leaving but $2,000,000 or issue.
$6 per share for the common. These National Enameling & Stamping af
figures are even less than our own — the fords another example of the influence
difference being accounted for partly by of recent prosperity on tangible values.
our inclusion of the earnings from Oc We find that about one-third of the plant
tober 31, 1916, to the end of that year. account — i.e. $9,700,000 — represents
With this adjustment made the two ap good-will, and that therefore the asset
praisals are close enough to indicate the value of the common in 1914 was about
substantial accuracy of our method. $60 per share. Since then over $40 per
Company
I -
C-—
ilf |5>> °
•9
III
,* .
rt u !
t—
c tJ,o
i
W P3 GL>£
if
1
II
14,126 3,000 63.700. ,900, 71*404 19,500.00
65
1 r
52+ 37
Nat'l Enameling . 5,345 1,100 25,100 20,280 29.985, 9,705,00 100
Sears, Roebuck .. 9,002 3,977 80,200, 66,600 60,000
1
1°0
Underwood Type. 3,017' 500 2,600, 10,100 10,100
1
.
1
1
U. S. Rubber .... 18,800 3,465 90,000 70,000 140,000 70,000,00 32 61
Virginia Car. Chem . 10,885 est. 2,500 36,100 26,400 62,400, 36,000,00 50 55
turns out finally that Goodrich — de share has been added to surplus and re
It
spite its $58,000,000 of acknowledged serves,so that the common has today a
good-will — has a greater tangible asset dollar for dollar backing in tangible as
backing per share than U. S. Rubber. In sets.
1913 this value was practically nil.
It
sue had tangible asset value not exceeH- common. Substantial profits have accu
a
ing $20 per share, which three years of mulated since those early days, however,
prosperity has since increased to no less and the writer would now set the real
SECRETS OF INVESTED CAPITAL 775
turn over to the Government a much 000 and $700,000,000 of good will (of
larger percentage of its profits than any which not more than $175,000,000 could
similar company? Our computation be included in Invested Capital because
showed that using the above figures for of the 20% limitation). But Secretary
income and taxes, the capital indicated McAdoo here places the Invested Capital
would be only $462,000,000 against a at $1,427,000,000, actually a larger figure
book figure of nearly $1,400,000,000. than that claimed by the balance sheet.
This discrepancy was so striking as to
Here are two mysteries indeed, and
prove conclusively that either the tax has
important ones — because if we accept the
been greatly overstated or earnings un
apparent significance of the Treasury's
derstated — or both.
data, we should have Steel earning $105
A new factor has been injected into before taxes and over $68 per share after
the situation by the recent publication of taxes — compared with the recognized
Secretary McAdoo's testimony on Aug figure of $39.15. Not only that, but we
ust 14th last before the House Commit should have an asset value of $1,067,000,-
tee on Ways and Means. Here he an 000 behind the common — or more than
alyzes a number of actual returns made $200 per share at the beginning of 1917.
to the Treasury Department by large A careful study of all the ramifications
Corporations, whose names are replaced of the War Revenue Act as applied to
by letters. For the first of these, Cor U. S. Steel results in the following pos
poration A, he gives the following data : sible explanation of the wide divergence
Invested Capital for 1917 $1,427,233,403 between the figures given by the Treas
Invested Capital for Pre-War ury and by the annual report. The Steel
Period 1,132,459,896 Corporation is a holding company, its
Net Income, 1917 568,964,090 property being the securities of its sub
Excess Profits Tax for 1917.. 173,504,430 sidiaries, and its income the dividends
and interest received from them. Ac
There is only one enterprise in this
cording to Article 78 of Regulation 71,
country — or in the world — to which the
construing the Excess Profits Tax, -af
above figures could apply. Since this
filiated companies may, and sometimes
is a real and not a fictitious example, it must, make a joint return covering their
is undeniably a transcription of the tax
combined capital and income. If this had
return of the U. S. Steel Corporation.
been done by all Steel subsidiaries to
We immediately remark that Steel gether — but excluding the Corporation
paid a smaller war tax than it reserved. itself as merely the holding company —
Adding in $23,728,000 for Income Tax, the large net income reported to the
as easily determined, the total levy is Treasury would be explained as suggest
"only" $197,230,000— $36,234,000, or $7 ed in Table I.
per share, less than the published figure. The close correspondence of this total
There is nothing astonishing about this with the Treasury figures lends plausi
discovery since we have pointed out that bility to our explanation. It is strange
the reserve set up in the report was in that the $75,000,000 deducted from earn
explicably large. The really extraordin ings for reserves has escaped general at
ary aspect of Mr. McAdoo's testimony is tention. These allowances — equivalent to
found in the statement of Invested Cap $15 per share
— represent in principle an
ital and Net Earnings. The accepted fig appropriation of surplus against possible
ure of Steel's 1917 earnings was $457,- eventualities, and as such are not rec
684,000 subject to tax; but according to ognized by the Treasury as charges
the Treasury Department taxable earn against the year's operations — although
ings were fully $111,000,000, or '$22 per they are thus treated by the Corporation.
share, more. Again the Capital, Surplus There would seem to be a disadvant
and Reserves at the beginning of 1917, as age in the subsidiaries' making the return
shown in the balance sheet, totalled about instead of the Corporation itself as a
$1,360,000,000, which was generally held unit, because by doing the former, the
to contain somewhere between $500,000,- interest on the Steel Corporation's bonds
872 THE MAGAZINE OF WALL STREET
cannot be deducted from earnings. But Lackawanna Republic
this is more than compensated for by the Book Capital $52,912,000 $70,945,000
fact that the assets represented by these Taxable Income .... 26,147,000 24,454,000
ital, since the bonds are not the liability Since Lackawanna's book capital is so
of the subsidiaries. This fact would ac much smaller — due to the absence of pre
count for the large Invested Capital re ferred stock — it would be thought to pay
vealed by the Treasury Department. In a very much larger percentage of its
Table II we show how the latter figure earnings in taxes than does Republic. On
might be reconciled with the Corpora the basis of book capitals, therefore, we
tion's own statement, as modified by should expect either a smaller tax for
prevalent notions as to the original good Republic or a larger tax for Lackawanna.
will included therein. Here is an opportunity to bring our
Of course, in this table the good-will algebraic formulas into action. Sure
has been arbitrarily valued so as to make enough, the Tax Reserves indicate an In
the final figures correspond — but it is vested Capital of $61,200,000 for Repub-
TABLE I
DEVIATION OF THE TREASURY FIGURES FOR U. S. STEEL'S
1917 EARNINGS.
Net before Taxes, as stated in the report . ., $457,700,000
ADD:
Interest and premium on Corporation's bonds (not a charge against sub
sidiaries' earnings) 22,100,000
Profits of subs, on sales to other subs, of material still held by latter— ex
cluded from Corporation's Income Account • 14,100,000
Increase in Contingent and other Reserves $19,300,000
Less charged to Surplus 4,000,000
$15,300,000
(Note: Last three items have been charged to Income, but are not allowed
as Deductions by Treasury Dept.)
TABLE II
DEVIATION OF THE TREASURY FIGURES FOR U. S. STEEL'S
INVESTED CAPITAL, DEC. 31, 1916.
Total Assets shown in Balance Sheet.. $2,083,000,000
LESS:
Current Liabilities $ 92,900,000
Obligations of Subs, owned by Public 174,000,000
Carnegie bonds owned by Corporation 159,500,000 426,400,000
$1,871,800,000
Less: Original Good Will included in Assets est. 594,100,000
might seem unlikely at first, but when it not as positive statements of fact, but as
is recalled that the readjustment in 1908 tentative estimates based on available
reduced the capitalization by $15,000,000, data. We will indeed vouch for the suf
the approximate correctness of our re ficient accuracy of our results provided
sults is again substantiated by external the companies' figures from which we
facts. The tangible value of Steel Foun started are themselves accurate. What
dries on January 1st last appears to have we have said in effect is that if X Corpo
been well over $170 per share. ration has really earned the income and
Railway Steel Springs — which has re paid the tax it has reported, then it must
cently shared with Steel Foundries in a necessarily have used our specified figure
belated recognition of intrinsic value — for Invested Capital — and the present
provides an interesting example of over tangible value of its common stock must
stated taxes. The reserve here is $3,500,- consequently be so much per share. Some
000 against earnings of $8,808,000 ; which of our figures, therefore, may have no
results in a capital of only $18,000,000, value whatever, merely because the com
against a book figure of $34,000,000. pany in question has made i accurate
Allowing for permitted good-will in the or misleading reports. But w< do claim
former amount, the intangible assets in sufficient reliability for our insults in
Railway's balance sheet should then total general to prove that that market value
$21,500,000 — all the common and over of American industrials no longer ex
half the preferred. When the writer ceeds their tangible assets; and that
called this fact to the attention of an of whatever burdens they may have to
ficial of the company, the latter admitted bear in the future, over capitalization
that the Tax Reserve was overstated — will not be one of them.
RAILROADS AND INDUSTRIALS
American Agricultural and Virginia-
Carolina
Are They Selling Out of Line? — Causes of America's Pre
eminence — Fertilizers as War and Peace Essentials
By BENJAMIN GRAHAM
OM the standpoint of invest companies had been almost exactly
ment rating American Agricul reversed.
tural Chemical maintains a VC AGR
marked superiority over Vir High, 1906 58 34#
ginia-Carolina Chemical — a fact which High, 1914 34Ji 59%
is most clearly shown by our grouping
The original cause for this market
of their respective securities (Table
adjustment was a decline of about $2,-
I/ 000,000 in Virginia's net for the fiscal
Not only does "AGR" common sell
year ended May 31, 1911. Peculiarly
at almost twice the price of "V C," but
enough, this reduction occurred in the
all its other issues are quoted on a
face of a gain of nearly $6,000,000 in
lower income basis than the corre
gross business. But for some reason,
sponding securities of its less favored
not fully explained, V C's margin of
rival. The price of the bonds is af
profit on sales contracted sharply in
fected somewhat by their various con
that year, and has since been main
version privileges, but the preferred
tained at a low level — so that while net
stocks certainly reflect the public's
available for interest charges was over
estimate of the relative standing of the
two concerns. We propose to examine 10% of gross in 1910, in 1911 it only
the reasons for the preference
slightly exceeded 6% ; and the highest
ac
ratio since has been 8.5%, this last
corded to American Agricultural, first
year. There is reason to believe that
determining to what conditions iri the the decline in the percentage of net
past it owes its origin, and then in
profits have been partly due at least
quiring whether — and to what extent
— it is still justified by the present to the adoption of more conservative
accounting methods, and particularly
situation.
to the establishment of adequate re
It may surprise some readers to serves for doubtful debts, etc.
learn that not only is Virginia-Car
olina the older concern, but also that AGRto the Fore
for many years it was far more highly Whatever was the cause thereof, in
regarded than American Agricultural. 1911 Virginia entered upon a four
"V C" began operations in 1895, four year period of very mediocre net
years before "A G R" was organized profits, during which the highest
under its present name. In 1902 Vir amount earned on the common was
ginia common was regularly selling at $3.40 per share in 1914, and the lowest,
twice the price of American — the highs 53c. in 1913. In the meantime, however,
for that year being 76^ and 32% re the record of American Agricultural,
spectively. Virginia-Carolina main while not exactly brilliant, had been
tained its lead well into 1912, but after far more substantial and encouraging.
that year American Agricultural In 1910 both companies had earned
forged ahead rapidly, as shown in our $10.42 per share of common stock.
first graph. Observe how in eight During the next four years A G R's
years the relative position of the two earnings did not fall below $5.23 per
(970)
AMERICAN AGRICULTURAL AND VIRGINIA-CAROLINA 971
share and reached as high as $9.05 — its bank loans. In 1913, when V C had
a very much better showing than that notes payable of $9,900,000, A G R's
of Virginia-Carolina just mentioned. debt to the banks was only $3,219,000.
But the chief cause of American Ag-
ricultural's market progress lay in its Recent Record
dividend policy. Although almost from Having thus analyzed the original
the very first it had been earning a causes of American Agricultural's as
very substantial sum for its common, cendancy, we must now turn our at
it was twelve years after organization tention to the effect of the war upon
before it began disbursements on the the two companies. Our second graph
junior shares. But since the initial shows the development of earnings in
rate of 4% was established in 1912, it the past four years. The first point
has never since been passed or re we emphasize is that these fertilizer
duced, and in the last two years it has companies were immune from the gen
been steadily advanced to the present eral business prostration immediately
figure of 8%. Virginia-Carolina's rec following the outbreak of the conflict.
ord has been much less regular, as is The fiscal periods of V C and AGR
shown in full in Table II. It was par end May 31 and June 30 respectively,
ticularly unfortunate for the Company so that their 1915 year coincides al
that it advanced the rate to the high most exactly with the first year of
est figure of 5% in 1911, the very year hostilities. Yet Virginia-Carolina
that earnings suffered so pronounced a (which alone reports its gross busi
decline, so that profits were insufficient ness) enjoyed a larger turn-over than
by $530,000 to meet dividends. Again in the previous year, and its earnings
in 1913 the 3% rate was maintained on the common were the best in its
although earnings on the common had history, except for 1910. American Ag
practically vanished, an even larger de ricultural's showings were even bet
ficit then resulting —and it was found ter, and in the next four years the
necessary to discontinue common div profits of both companies recorded
idends entirely for the next three steady increases culminating in the
years. 1918 reports— which showed $35.00
American Agricultural record of earned on A G R common and $24.25
earnings and dividends was thus suf on V C common.
ficient to establish its investment su Since 1914 Agricultural has earned
periority, but two other factors — of $86.50 for each share of common and
more or less importance — contributed has paid out $18.50 in dividends, leav
to this result. Not only did Agricul ing $68 added to surplus — about 70%
tural possess a consistently larger of the present market price. In the
working capital than Virginia, but it same period V C earned $53.10 per
was far more successful in restricting share and disbursed $4.50, making
972 THE MAGAZINE OF WALL STREET
is
and prospects for the immediate future most essential and farmers are being
urged on every hand to increase their
output through the use of soil en-
richers. The demand for the food
. CHEMICAL & AM.AGRI.CHE.M.
products made by the Southern Cot
'17 '18 ton Oil Company —Virginia-Carolina's
'II
is
AveraqeJIarket Priqe
90 heavy.
Common Stocks On the other hand the particular
80
strength of both companies lies in the
70 benefits they will experience from the
60
return of peace. They can look for
ward not only to regaining their fairly
50 large export trade, which the war has
40 almost completely suspended, but espe
cially to tremendous foreign demand
a
30 for their phosphate rock, inspired
by
20 the long continued shortage of phos
phoric acid. The recent prosperity of
oi
is
peace.
bound up with the food supply, and the
period of intensive cultivation which
is
certainly ahead of us will mean an in
creased use of fertilizing material. We
would point out here, as evidence of
the stability of the business under all
conditions, that as far back as our
records go Virgina-Carolina's gross
sales each year but one (1912) have
exceeded the previous record.
From the comparative standpoint
I9W-I9I8 this survey of the recent record and
o{
I9I5E
in their status since 1914 and so favor
able their outlook, that we assert
is
tremely favorable — the only drawback we must disregard the record before
being the great scarcity of labor. 1915 as ancient history, and base our
AMERICAN AGRICULTURAL AND VIRGINIA-CAROLINA 973
conclusion solely on their recent ach taken into the property account at
ievements and present position. $18,000,000, at the time of consolida
The capitalization of both companies tion in 1907, although their book value
(shown in Table III) is so nearly iden was less than $10,000,000. On the
tical that we are spared those difficult other hand the absence of intangible
questions that arise in comparing two assets in the case of A G R is due to
enterprises with very different charges a bookkeeping adjustment. Patents
ahead of their common stock. While and good will were originally carried
V C has a smaller issue of preferred, at over $16,500,000; but in 1912, $12,-
its 8% rate makes its dividend require 000,000 was transferred to the min
ment almost exactly equal to that of ing property account as a result of the
A G R preferred. The same can be said re-valuation of the latter asset. The
of the fixed interest charges. The two remaining $4,500,000 was charged off
common stocks can, therefore, be com against surplus, chiefly in 1916.
pared by direct reference to their as The point is that Virginia-Carolina's
set value and earning power. phosphate lands have probably also
It might be said in favor of V C that greatly increased in value since their
its business is better diversified than acquisition, so that if it followed the
Agricultural Chemical's. The former's same procedure here as did the AGR,
products include not only fertilizers its good will account would also be
and similar chemicals, but cotton seed greatly reduced. Of chief importance
oil, lard, soap, etc. — which are made is the fact that the V C's property ac
and sold by the Southern Cotton Oil count — good will and all — stands at no
Company. In 1914, the only year for higher a figure than A G R's; and
which detailed figures are available, with these assets it has been able to
the gross business of the Southern earn a larger net profit last year than
Cotton Oil subsidiary constituted over did its rival. We would say, there
60% of the total. In other words, the fore, that V C common at 53 is backed
fertilizer department actually con proportionately by at least as large an
tributed less in the way of sales than asset value as is A G R. It has al
did the food products and allied lines. ready been stated that in the past four
years alone Virginia has increased the
High Asset Values assets behind the common by 90% of
The asset value of A G R common its present market price, against 68%
is $189 per share and of V C common in the case of American Agricultural.
$165 per share — in one case nearly In the matter of working capital
200% and in the other 300% of the the advance of V C has been particu
market price. Virginia's balance sheet, larly noteworthy. Our third graph
however, includes an unstated amount shows that A G R's 50% advantage in
of good will in its property account, 1914 has now practically disappeared.
while American Agricultural ostentati Virginia's net current assets now cover
ously carries this asset at $1.00. V C's all its bonds and preferred stock, ex
good will certainly stands at a sub cept for $4,000,000 ; whereas in the case
stantial figure. The plants of the of Agricultural this difference is $11,-
Southern Cotton Oil Company were 000,000. While we have stated that in
974 THE MAGAZINE OF WALL STREET
previous years A G R's bank borrow that V C is quoted possibly 12 points
ings were always much less than V C's, too low in relation to the present price
they are now $3,290,000 greater— $17,- of A G R.
020,000 againjt $13,729,000. Finally, on
Investment Value
May 31st last Virginia-Carolina had
$6,776,000 cash on hand, against only
A similar verdict applies to the pre
ferred stocks. V C preferred has a rec
$2,785,000 for A G R on June 30th.
ord of 8% paid continuously since 1895.
As regards current assets and liabili
In 1915, however, the first two quar
ties the advantage appears now to have
terly installments were paid in scrip,
swung to Virginia-Carolina.
redeemed the next year. This event
Liberal Earnings seems to have hurt the investment rat
We come next to the all important ing of the issue considerably. The fact
consideration of earnings. Last year is that in the year the scrip dividends
V C earned after taxes 45% of its were paid, over 18% was earned on the
market price against 35% for Amer preferred — a better showing than A
ican Agricultural. The average for the G R's. The company had more than
past four years has been 25% and 23% $4,000,000 cash on hand, its current
respectively. Year by year Virginia's asset position was quite comfortable,
profits have been increasing at a more and the recourse to scrip appears
rapid rate. merely as a measure of conversatism
The increase in the dividend rate on at the time when the early stages oi
Agricultural common to 8% which has war had made the outlook exception
just been announced, has for the ally uncertain. V C preferred is now as
present raised the income return on well protected by assets and earnings
this issue slightly above that of V C as A G R preferred; it is more nearly
common. To our mind, however, the covered by working capital alone; and
current dividend return is often an considering that it yields fully 1% 'n
over-rated factor in determining val excess of the other issue, we believe
ues, particularly nowadays — and in it a more attractive investment.
these very instances — when disburse No one can study the recent rec
ments are being changed almost from' ord of these two leading fertilize!1
quarter to quarter. companies without being impressed
Having examined the question from with their strong exhibit. They have
all angles, we reach the conclusion more to hope and less to fear from
that V C common is a more attractive the future than perhaps any other in
investment proposition at 53 (despite dustry ; and their issues rank high
its slightly lower dividend returns) among the so-called "peace stocks.'
than is A G R at par. We think, in While both companies are, therefore.
fact, that it ought to sell more nearly in an enviable position, our anlysis
on the basis of its comparative earn wnuld indicate that at these levels Vir
ing power of last year — that is about ginia-Carolina Chemical common and
two-thirds of the price of American preferred constitute decidedly the more
Agricultural. Our view is, therefore, attractive purchase.
Sad Case of M. K. & Ts Bond Issues
Reorganization Long Delayed — Fine Progress Obscured by
Receiver's Stringent Policies — Some of Its Thirty-Three
Securities Appear Very Cheap for the Long, Long Pull
TABLE I
M. K. & T.'s MORE IMPORTANT BOND ISSUES
A — First Mortgage Bonds— Main Lines.
Amount Market Last
Outstanding Price Coupon
Maturity (000 Omitted) About Paid
Missouri, Kansas & Texas 1st 4s... 1990 40,000 Dec. 1917
Missouri, Kansas & Eastern 1st 5s.. 1942 4,000 37 Apr. 1916
Missouri, Kansas & Oklahoma 1st 5s 1942 5,468 60 Nov. 1917
Kansas City & Pacific 1st 4s ........ 1990 2,500 58 Feb. 1918
Dallas & Waco 1st 5s .............. 1940 1,340 60 Nov. 1917
M. K. & T. of Texas 1st 5s ........ 1942 4,505 50 Mar. 1916
Texas Central 1st 5s ............... 1923 1,850 80 not in default
Wichita Falls & Northwestern 1st 5s 1939 2,110 70
San Antonio Belt & Terminal 1st 6s 1919 1,750 98
B — First Mortgage Bonds — Branch Lines.
Missouri, Kansas & Texas 1st ext 5s 1944 3,253 32 Mar. 1915
Texas & Oklahoma 1st 5s ........ 1943 2,347 30 Sept. 1915
Sherman, Shr eve port & So. 1st 5s. . 1943 1,643 25 June 1915
*Wichita Falls & Northwest'n ref. 5s 1940 3,000 35 Jan. 1917
C — Junior Liens
•'Missouri, Kansas & Texas ref 4s.. 2004 9,992 40 Sept. 1915
Missouri, Kansas & Texas 2nd 4s. 1990 20,000 32 Aug. 1915
M. K. & T.-St. Louis Div. 4s ....... 2001 1,924 20 Oct. 1915
Missouri, Kansas & Texas notes — 6s 1916 19,000 40 Mar. 1915
Missouri, Kansas & Texas gen 4'/2s 1936 10,421 27 July 1915
* Also a second lien on other mileage.
f Also a first lien on terminals, etc.
this supposition) then Katy's cash re $1,500,000 annually, thus clearing all
quirements for working capital are less fixed charges with something to spare.
than were 'Frisco's, Missouri Pacific's As long as the receiver continues to
or Rock Island's. pay for betterments out of the bond
It is particularly unfortunate that holders' money, there seems little hope
the reorganization was not consum of regular interest payments being re
mated last year, because the advent of sumed. But when the final day of
Federal operation has plunged the sit reckoning arrives, the security owners
uation into even greater uncertainty- should reap some of the fruits of this
than before. The fate of the road is rehabilitation policy.
now in the Director-General's hands ;
and considering Mr. McAdoo's mani M. K. & T. 1st 4s Due 1990.
fold duties, it seems too much to hope This is at once the largest and the
that he will be able to pay much at best secured issue of the system. Out
tention to the intricate readjustment standing at the rate of $25,300 per mile,
problems presented by Missouri, Kan- it is a first lien on about 1,600 miles of
SAD CASE OF M. K. T.'s BOND ISSUES 1059
road, covering the greater part of the man. At 32, the 2nd 4s seem to have
North and South trunk line. Against discounted the worst, and if fairly
the $1,000 per mile interest require treated should prove a very profitable
ments of these bonds, the entire sys purchase for the patient investor.
tem averaged $22.50 per mile net in Missouri, Kansas & Eastern 1st 5s 1942
1917. But since the 1st 4s are secured
on the most profitable part of the road, The extraordinary market history of
it has been determined that the earn this issue is brought out strikingly by
ings of this mileage are well in excess
the graph. From the highest priced
of the above average. of all the system's securities, these
lien covers exactly the same property 1 1 Mo. Kansas & Eastern 1st 5s 1942
TABLE II
OPERATING RESULTS 1912-1917
ous document, was not given general bondholders to whom it was com
distribution, but since it was placed in municated, and it is significant that
the hands of the various protective the sudden market collapse of the se
committees, it is evident that its con curity followed close after the filing of
tents became known to practically all the report. But the reasoning in
the large security holders. The writer, volved in this analysis certainly in
although not in the latter category, volves a new and very disconcerting
was also privileged to read the report. reorganization principle. Investors
have already learned to their sorrow
No comment can be made here upon
that there is no magic in the word first
the general analysis of the road's posi
mortgage, and bonds secured on spur
tion — which later led to a controversy
lines get scant consideration in read
with Mr. Kendricks. another railway
justments, despite the "priority" of
expert. Regarding the M. K. & E. 5s,
the engineers found as follows : Since
their lien. This is probably as it
should be, since the mileage covered
the mileage covered by this issue car
by these divisional lines usually had
ried all the system's traffic into and
contributed nothing but deficits to the
out of St. Louis, its earnings on a pro
system's results. But the M. K. & E.
rated basis were quite substantial — in
5s are not secured on a jerk-water
fact, in the very poor year taken as
branch, but on an important part of
criterion, the interest on the 5s were
earned three times. On the other
the main line. To deny its value to
the system on the ground that an al
hand, the amount of traffic originating
ternative route might be constructed
on this line was relatively small and if
between the same terminals, would
this item only were considered, the
mean that no investor could buy a
earnings would have been much lower
— not quite sufficient to meet the railroad bond without first making' an
elaborate engineering investigation of
$200,000 interest requirements of the
its merits. Such a conclusion is pal
issue. Going still further, the engi
pably absurd.
neers pointed out that by a combina
tion of new construction and trackage A Deceptive Resemblance
rights the company might be able to Two issues that might be thought
substitute another route in place of to hold a very similar position are the
SAD CASE OF M. K. T.'s BOND ISSUES 1061
antee that its railroad income, until twen ly cross the price of U. S. Steel common,
ty-one months after the war ends, shall and that before very long it will cross the
be not less than the three-year average, is price of Union Pacific.
worth over par on this basis alone. It Those of my readers who hold Union
sold above 139 only a few years ago with Pacific, Atchison, Great Northern, North
out regard to its oil lands, and when its ern Pacific, N. Y. Central or Pennsyl
earnings were only half what they are
vania would do well to exchange it for
now. Its earnings as a holding company Southern Pacific now.
are more than Union Pacific's were when
I would rather own Southern Pacific
Harriman put it on a 10% basis and it today than U. S. Steel common or pre
rose to 1953% and later to 219. ferred.
As Southern Pacific's oil properties are
further developed, and the investment Its dividend is not limited to 6% be
public begins to learn something of the cause it is the Southern Pacific Co.—a
holding company—and can therefore pay
vast potentialities with which it is
packed, its shares will be considered larger dividends whenever the manage
cheap at a figure far above their present ment so decides.
quotations. In subsequent issues of this magazine
I believe Southern Pacific, which, as I there will be presented further facts and
write this, is selling under par, will short figures about Southern Pacific.
By BENJAMIN GRAHAM
º
ºSº
Sºlº
has already been felt in the
bond market. Unlike the stock
list, with its divergent move
vidual merits of the issue; second, the
general course of interest rates. That
bond yields will decline from their
ments, bond issues of every class have present high levels is the universal ex
recently been headed in but one direc pectation, and this is of course equiva
tion—upward. Yet a careful analysis lent to asserting that the price of
of recent price changes discloses that bonds must advance. This conclusion
the rate of advance has not been uni is based on the law of supply and de
form for all types of investment se mand—with the cessation of Govern
curities—bonds of certain kinds have ment offerings the chief depressing in
responded with more enthusiasm than fluence is removed, permitting prices
others to the new market influence. to work back gradually toward their
While practically all bonds may be former levels.
said to be “peace bonds,” in the sense While this argument is fundamental
that their value should rise at the end ly correct, it may be well to point out
of the war, it is the purpose of this that certain more complicated ele
article to discuss the relative extent to ments are involved. The withdrawal
which obligations of different classes of the Government from the bond
should be benefited by the return of market will not in itself automatically
normal conditions. effect a complete recovery in prices. A
The price of a bond is determined by considerable amount of deferred and
ATTRACTIVE PEACE BONDS 7
speculative buying indeed may result But conversely, if the close of the
in a sudden advance immediately upon war should by any chance be followed
the conclusion of peace; but the ulti by a period of intensified commercial
mate rate of interest after the war activity, the recovery in bond prices
must depend primarily upon the rela may not take place to the extent an
tion of new capital requirements to ticipated. Besides, the influence of the
current savings. To the extent that tremendous increase in the volume of
the accumulation of funds will exceed outstanding securities must be borne
expenditures for new construction, the
in mind. After the war the issues of
consequent surplus of the former will
tend to force interest rates down and the leading nations—the United States,
England and France, at least—will
bond prices up. Furthermore the cur
tailment of the need for banking cap rank pretty much on a parity. There
ital now employed in financing com will thus be an unimaginable quantity
mercial and industrial operations would of new obligations of the highest grade
in corresponding degree release funds which must be advanced substantially
BOND-PRICE. AVERAGES.
r1914-, a 1915— a-1916— r—1917— r—1918 —)
–I-I
APR JULY APR JULY OCT JAN APR JULY OcT JAN APR JULY 007 JAN APR JULY 007 00III/h
ſo Public Urſifies E
; 10 High Grade Rails|[T
wº
for security investments — which above their offering price, the old
if
of
value
8 THE MAGAZINE OF WALL STREET
In truth the market has been recog be placed investment stocks, preferred
nizing this fact all along—witness the and common, which react to changes
circumstance that in the past year in interest rates exactly like bonds of
short term issues have regularly sold very remote maturity.
on a higher basis of yield (i.e., at a In this way the American Tel. and
proportionately lower price) than the Tel. new 6s, due 1925, have enjoyed a
longer term bonds of similar grade. rise of six points through their conver
To take one of many examples, Great sion privilege, while the collateral trust
Northern 5% notes, due 1920, are sell 5s, due much later, were gaining only
ing at 97%, a 6.50% basis, although two points. To discuss in detail the
secured by 120% in First and Refund possibilities of this and other individual
ing 4%s of 1961, concurrently quoted issues, we must now turn our atten
at 86%, or a 5% basis. The notes are tion from bonds as a whole to the var
surely at least as well secured as the ious types of investments.
4% s, but the latter sell at a lower rate
I. Government Obligations
of return because they have prospects
of a much more substantial advance. Government bonds are naturally the
If both issues should sell next year on peace securities par excellence. These
a 4.50% basis, the notes would reach will immediately feel the effect of the
a price of say 100% a gain of only 3 sudden curtailment of those enormous
points—whereas in the same time the and continuous offerings which have
long term 4% s would be recovering 8 steadily depressed their price in the
points to 94%. The very factor that past. The favored position of Liberty
made note issues so stable in declin Bonds—the best peace investment on
ing markets makes them relatively un earth—deserves extended considera
attractive when prices are turning tion, and for this purpose the reader is
strong. referred to our Liberty Bond Depart
ATTRACTIVE PEACE BONDS 9
ment, in which the subject has been rate is here fixed at 5.60 francs to the
treated at greater length than the dollar, so that at the present quotation
limits of this article will permit. this privilege already has a value of
The bonds of other nations dealt in about 2%. There is more than a year
here will benefit in various ways from left in which to take advantage of fur
the return of peace. The Anglo ther progress toward the normal rate.
French 5s should advance because their The latter figure—5.19 francs to the
present price of 95 represents a yield dollar—would give these Municipals a
of over 7.50%—entirely too high for value of no less than 107% at matur
an obligation which the end of the war ity. One does not need to expect a
should make gilt-edged in every re full recovery in exchange in order to
spect. The United Kingdom 5%s regard these 6s as an excellent short
“new,” maturing next February, are term peace investment.
convertible into twenty-year 5%% Among the longer term bonds good
bond at par; and despite the short opportunities are held by the Argen
85
period remaining in which to exercise
at
tine 5s, due 1945,
this privilege, a very sudden peace anese 4%s “German Stamped,” due
might give it value after all. 83. The gap between the Ger
at
1925,
On the other hand the premium of man Stamped and the regular bonds
1%% on the French Republic 5%s due this issue has already narrowed
of
next April results not from a conver from ten points only four, and
it to
at
the
Being should disappear en
of
change has given substantial value to with this article should give the reader
the latter option. At this writing very illuminating idea
as
to
how the
a
above the exchange parity for this is the past four years. The
in
have acted
In other words, were the present chart based on the Wall Street
is
sue.
rate still in effect next April, these Journal averages, which date from
5%s would be worth 105%—delivered April, 1915, but they have here been
in Paris. The latter clause is impor the beginning
of
carried back
to
1914
tant since insurance costs must figure obtain comparison with pre-war
to
French exchange continue advance, reached their lowest level, 79.9, on Oct.
the premium on these 5%s might At this time
be
greatly augmented ma
of
1917—less than
The same conditions hold good for two years before—and the same dis
“French Municipals”—Bordeaux, tance below the pre-war figure
of
the
Lyons and Marseilles—now selling April 1914. The 1% point recovery
at
1,
99,
and due Nov. 1919. The exchange that has taken place up
1,
to
11
Oct.
is
-
10
points in case the stock breaks, neces might benefit from peace conditions is
sitating redemption at par instead of represented by the Virginia-Carolina
conversion. Chem. 6% Debentures, convertible into
The Third Ave. Adjustment 5s, al preferred stock at 110. At 98 they are
though of course a speculative bond, now selling on a parity with the stock.
have good peace prospects and at 35 Should the latter increase in value the
are a much better proposition than the bonds would gain proportionately.
stock at 19. In fact their cumulative Chile Copper 6s, selling at 85, belong
feature is sure to bring their net cost to both of the above groups. Brought
below that of the stock, before divi out late in 1917, they suffered much
dends can possibly be restored on the from unfavorable market conditions
shares. Moreover, the tangible invest attending their flotation. With peace
ment behind the 5s should make them ful times restored, their merits should
worth their present price. win better recognition. Again, their
conversion privilege into Chile stock
IV. Industrial Bonds
at 35 (which really means 29% at this
The graph indicates that the average price for the bonds) may turn out to
of industrial bond prices is exactly at possess substantial value, because,
the level of April, 1915, and that there given the opportunity to consummate
fore this class has done far better long-planned enlargements, this prop
marketwise than the railway and util erty can be made one of the largest
ity group. As a result of the splendid producers in the world.
and
high yield safe investments
by
Opportunities Created Unfounded Prejudices—Instances
Six Per Cent, Safety, and Probable Ten Point
of
a
Bonds, Preferred Stocks, and
of
Profit—List
Common Stocks
By BENJAMIN GRAHAM
ITH the bond market moving too just possible 4% and safety—
as
as
is
photographed—to say only requires greater care and dis
to
be
fast
it
nothing being analyzed—in selecting the investment.
of
crimination
in
vestment suggestions are out The fact that whereas ordinarily
of
is is
a
In
date almost before the ink dry. high yield uncertain security,
to
the due
is
very course writing this article, many particular instances the reason
of
in
has
it
no
been necessary change the viewpoint may have connection with the intrinsic
to
It
is
order conform
or in in
to
to
bond quotations; and whereas week careful investor will find his opportunity
a
two ago the term “High Yield” would and the signs whereby these bargains
7% re
or
be
have denoted 6%% may
at
least
a
above
a
or
to
the
excellent opportunity at justified.
an
This
to
is
tack that ancient and deep rooted mis Some Cheap 6% Bonds
conception—namely that high yield An excellent example high grade
of
a
a
LIST I—ATTRACTIVE BONDS YIELDING 6% OR BETTER
Due Price Nov. 12 Yield
Armour Co. conv. 6s. 1924 99% 6.10%
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1931 95 6.55%
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
must necessarily signify greater risk than bond selling on high income basis be
of a
cause
is
a
enough—one hundred bonds picked this writing can bought below par.
be
true
at
percentage defaults than the same did earnings record recent years,
in
very
be
6s
due 1932,
obligations which are really better pro which having been brought out
at
the
on
tected than many others selling worst possible time speedily sustained
a
lower basis.
(184)
HIGH YIELD INVESTMENTS 185
which they have only recently been re continued the entire financial resources
covering. The present earnings of the of the country would stand solidly be
mine cover interest charges with a wide hind the Allies. What else could these
margin to spare; and any possible reduc facts mean but that every French and
tion in the profit per pound during the English loan placed in this market was
next few years is certain to be more than absolutely safe—because either the war
compensated for by the increased output would be over when they matured, in
which peace will make possible. It is which case they would easily be taken
important to recognize that, first, Chile care of ; or else the United States itself
Copper is an enormous property with the would assume the burden, as part of its
strongest bankers and the best engineer financial aid to the Allies. It might have
ing talent behind it; second, there are been observed that our advances to
3,800,000 shares of stock with a market France and England were running at the
value of about $90,000,000 standing be rate of six billions a year, while their
tween these bonds and trouble. The his– net imports from this country were less
tory of mining shows that the convertible than four billions. Evidently our loans
bonds of good copper companies have in to the Allies were covering not only their
variably been exchanged for stock—and purchases in this market, but their ma–
there is little doubt but that the holders turing obligations as well.
of Chile Copper 6s will some day find it In the long months when the United
to their advantage to exercise their con Kingdom 5%s ranged below 90 and the
version privilege. French Municipals sold in the “early
The list of bonds which have been eighties,” the writer presented these ar
depressed marketwise by unjustified pre guments to investors time and time
judice is a very long one. Contrary to again. Did they dispute his reasoning?
general opinion, prices do not always No. But how many took advantage of
anticipate changed conditions, nor even this extraordinary opportunity? Very,
immediately reflect them. The Law of very few. Most of them “did not like
Inertia holds in finance as everywhere foreign bonds”—which meant that the
else, and broad intervals often elapse be handful of level headed investors who
fore investors accommodate their judg were superior to prejudice were enabled
ment to the new order of things. One to make a veritable killing.
or two examples from the past may win One other example, which has a bear
better attention for our comment on the ing on the recommendations to be made.
present situation. At the end of 1915, when railroad issues
The Lesson of Allied Bonds were quoted on a 4%% basis, Railway
Steel Springs, Inter-Ocean Plant, 5s could
When the United States entered the be bought at 92. The company was then
war in April, 1917, two things must have
its
the
the end. Secondly, as long as the war guarantee them against harm.
to
bonds
186 THE MAGAZINE OF WALL STREET
But no bond house would have dared the equity of this issue measured by as
recommend them to an investor seeking sets and earnings is so enormous that even
conservative investments. The customer,
oil
a total collapse of the industry could
finding this issue on the list, would have scarcely destroy its value.
sniffed, “I ask them for high grade bonds very similar case supplied by the
is
and they try to palm off this low priced New York Air Brake also selling
6s
industrial. Fine people to trust my money around par. The old-line investor thinks
to !” Whereupon he would have jour the company
of
mushroom war
as
a
neyed to another house and selected a proposition, and views its bonds with
list of railroad bonds beginning with cold suspicion. Yet this issue
so
small
is
Atchison general 4s at 94, and perhaps Air Brake's net current assets are so
so
including some Saint Paul refunding 5s large, and even its pre-war earnings
at 107 to bring up the yield. greatly interest require
of
in
excess
ments, that the safety its first mort
of
The wisdom of this typical investor is
now independent any
of
shown by the sequel. In September last gage bonds
in is
-
when railroad bond prices were at their fluctuation the company's earning
lowest ebb, and the St. Paul 5s were power.-
Granby
6s
selling at 77—a decline of nearly thirty
points—the Railway Steel Springs Co. re Again there are the Granby Copper
1163%
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
deemed its remaining mortgage bonds convertible 6s, also due 1928, and sell
in
at at
105, thirteen points above the price ing around par. Many investors would
be
which they couldn't sold because their not consider them because they don't like
yield was too high mining company bond; others recall
a
!
Perhaps this veracious tale may Granby's checkered career many years
be
of at
a
ent day conditions. Here are Texas Com the suggestion. But there an issue
is
pany debenture selling par and only $2,500,000; which being retired
6s
at
is
U.
at
the rate
a
pany bond,” and picks out one terest on which should be earned ten
of
the old
favorites (which sell five points too high times on 14%.c copper. Since the sink
just because they are old favorites). But ing fund must retire the entire issue be
the level headed buyer investigates the fore maturity, the owner get
to
certain
is
issue. He finds that these debentures 110 for his bonds—the maximum price—
on
holds
to
if
issue with
a
a
ginning operate—that the company safety, six percent and ten points profit.
to
and convertible
its
creasing funded debt; and that finally ferred stock par. Some investors are
at
HIGH YIELD INVESTMENTS 187
The new 7% preferred stock into which sound and desirable investments, which
the Armour notes are convertible should eventually should show a profit of from
eventually sell at 110; so that here is an four to ten points.
other instance of safety, six percent, and Superficially regarded, the second list
a probable ten point profit. might present a rather nondescript ap
Virginia-Carolina Chemical 6% de pearance. All these issues yield over
bentures due 1924, also sell at par. Four 7%, and some of them may shock the
years of unprecedented prosperity has staid investor. But a careful analysis
placed these bonds in the conservative would demonstrate that every one of
investment class. The issue is small, the these high yielding preferred stocks is
equity large, a sinking fund maintains well protected by both asset value and
the price, and a conversion privilege earning power. The three motor issues
into 8% preferred stock at 110 (below have come through a trying period with
the present price) carries prospects of a out hint of danger; their backing in fixed
nice profit. and current assets is relatively larger than
In the railroad group, there are not many of the standard issues; and theirs
many issues yielding 6% which can is an industry which peace is expected to
stand the acid test of analysis. The Mis stimulate rather than contract.
souri Pacific reorganization has been so In the same way, the tremendous equi
skilful and thorough, and the road's re ties accumulated for the benefit of such
cent exhibit so encouraging, that the stocks as Republic pfd, American Loco
First and Refunding 5s due 1923 and motive Pfä., and Bethlehem Steel 8%
the Iron Mountain devision refunding Pfd, in the past three years should carry
4s of 1929 can now be recommended them safely through a temporary period
without hesitancy. of depression—if that is in store and
188 THE MAGAZINE OF WALL STREET
should ultimately be reflected in a per equanimity. The first two have come
manently increased earning power behind through the ordeal of Government Con
the senior shares. trol unscathed—i. e. with dividends
Common Stocks guaranteed. The third can look forward
with especial confidence to coming in
The best investment is a good common
stock. dustrial developments.
Westinghouse is in much the same
The stockholder, as a partner in a position as General Electric, but belongs
sound enterprise, may expect not only
rather to the second group because its
an attractive return on his capital, but an investment status is of more recent crea
appreciation in value as the business ex
pands and a surplus accumulates. Many tion. A long article could be written
about the transformation wrought in this
an investor has remarked to the writer,
company's affairs by the prosperity of
“I never buy stocks. Let the other man the war period. With negligible funded
speculate. All my money goes into
bonds.” debt and preferred stock, with current
assets available to liquidate its note issue
This is perhaps the best policy for
at maturity, Westinghouse comes into the
those who are unable or unwilling to
reconstruction period with practically no
exercise care in the selection and periodic charges ahead of its common stock.
scrutiny of their investment. But num Its
bers have found to their cost that the 7% disbursement has been earned with
a greater margin than many bond inter
word “bond” contained no magic charm
guaranteeing against loss—and others as est requirements, and a plentiful surplus
has been set aside to stabilize its dividend
they gained experience have learned con
policy, should any lean years intervene.
versely that “stocks” do not always sig
nify speculation. Westinghouse like General Electric pos
sesses limitless possibilities, and the
Conservative investments among com
stockholder need never fear that the
mon stocks may be divided into two
First, those that represent an claims of prior issues may at any time
classes.
endanger his interests.
unquestionably stable industry and pos
sess a long established dividend record.
There is a dangerous fascination about
Second, those whose prosperity is of high yields which leads many experi
enced bankers to caution against them.
more recent date, but which are placed
on a solid basis through the (practical)
It is perfectly true that unless shrewd
judgment is exercised, the gain in income
absence of prior obligations.
Examples of the first type are Atchi return is likely to be offset by painful
son among the rails, American Telephone ‘losses in principal. Yet, given the op
& Telegraph among the utilities, and portunity to investigate and select, six
General Electric among the industrials. per cent and safety becomes perfectly
The holder of these stocks can view the feasible—a fact which it has been the
past with satisfaction and the future with aim of this article to demonstrate.
--
selling them; it is a disloyalty to trade
for the extraordinary profits which they them in for unnecessary purchases or for
have made in dealing with this individual. speculative purchases.— Samuel Crow
A close inspection of the letters demon ther in System.
PUBLIC UTILITIES
Hidden Assets of Consolidated Gas
Will It Sell at 150 Again?—Definite Statement of the
System's Earnings and Asset Values—Analysis
of Important Bonds
By BENJAMIN GRAHAM
HAT the public utilities have facts P”This is the crux of the mat
most to gain from the return ter. The investor is no longer willing
of peace is obvious to all those to take values on faith. The old re
who have watched the unequal liable stories of hidden assets, over
combat between mounting operating stated earnings, etc., that did such
expenses and stationary rates. Of staunch service in maintaining Con.
course, the signing of the armistice Gas at a level certainly unjustified by
cannot act immediately as the magic its dividends, appear to have died out
restorative of the pre-war margin of very suddenly when the stock broke
profit. The scaling down of material under par. An attempt to revive them
prices and wages may be a lengthy
process, and many think that the levels
TABLE I–COMPANIES COMPRISING
of 1914 will never be seen again. More THE CONSOLIDATED GAS SYSTEM
over, there is the likelihood of a con
traction of industrial activity which, by A—Gas Companies
reducing the utilities’ gross earnings, Consolidated Gas . . . . . . . .. . . . . . . . . .
would somewhat neutralize the ben Astoria Light, Heat & Power. . . . . .
efits of lower costs. Central Union Gas . . . . . . . . . . . . . . . . 100%
New Amsterdam Gas . . . . . . . . . . . . . . 99.9%
Such considerations may restrain New York & Queens Gas. . . . . . . . . . 100%
speculative enthusiasm in the public Northern Union Gas . . . . . . . . . . . . . . 100%
utility stocks, but they cannot over New York Mutual Gas . . . . . . . . . . . . 55.3%
throw the basic proposition that these
companies have seen the worst and
Standard Gas Light wºmen #3%
should gradually regain their former B–Electric Companies
prosperity. What does this fact mean New York Edison . . . . . . . . . . . . . . . . . 100%
in the case of Consolidated Gas, which Pfä. 65.6%
York & Queens Elec. Common 83.5%
three years ago sold above 150, a few New
United Elec. Light & Power. . . . . . . . 99.9%
months ago around 83 and is currently Yonkers Elec. Light & Power. . . . . . 100%
-mm
quoted near par? If we were to assume Brush Elec. Illuminating . . . . . . . . . . 100%
that its former earning power will
C–Gas and Electric Companies
Westchester Lighting . . . . . . . . . . . . . . 100%
eventually be regained, then ought not Northern Westchester Lighting .... 100%
its intrinsic value be fully as great as D—Conduit Company
before—since the last two years, diffi Consolidated Tel. & Elec. Subway. . 99.7%
cult as they were, could not have sap
ped its resources to any appreciable ex
tent? If Consolidated Gas was actual
ly worth 150 in 1916, then it should
now will doubtless find a coldly scep
tical audience, waiting “to be shown.”
again be worth very nearly that figure
Now that the public is at last dis
in 1920. posed to take a properly critical atti
At this point the reader interrupts tude toward this issue, the time would
sharply to inquire, “But was the price seem ripe for a real analysis of the
of 150 three years ago justified by the Con. Gas situation. Instead of vaguely
(291)
292 THE MAGAZINE OF WALL STREET
estimating the subsidiaries' earnings for this issue in the past. These asser
and assets, let us compile definite in tions may be summarized as follows:
formation on this subject, so that we 1. Elements Adding to Earning
can determine the value of Consoli power.
dated Gas stock in a logical manner— A. Undistributed profits of sub
on the basis of a combined income ac sidiaries.
count and balance sheet covering all B. Excessive reserves charged
the companies as one system. to operations.
Annual Report Inadequate C. Excessive taxes charged to
The source of our information will operations.
not be the ludicrously inadequate re II. Elements Adding to Asset Value.
port that Con. Gas issues annually to A. Excess of par of sub
its stockholders. Toward the Public sidiaries' stocks over valua
Service Commission the company is far tion in Consolidated Gas bal
more confidential; in fact, it fairly ance sheet.
$121,000,000. In the past two years, gent confidence in the intrinsic merits
however, the assessed values have been of this issue.
increased by fully $60,000,000, chiefly Another point of great importance is
through the marking up of the “Special the continued strong liquid asset posi
Franchise” account. The latter item tion of the system, which reports cash
takes into consideration the system's assets alone in excess of the total cur
“incorporeal rights”—in other words, rent liabilities. It is interesting also to
it includes an official valuation of the Observe that the bond interest of the
good-will. companies as a whole has been covered
The 1917 tax figures indicate an with a good margin, even in this un
over valuation of about $56,000,000 in favorable year. In Table IV we list
plant and franchise account. To this a few of the more important bond is
sum ought to be added the $12,500,000 sues. The Convertible Debenture 6s,
stock of the Westchester Lighting which can be exchanged for stock par
Company, which is carried by Con. Gas for par, are not selling on a straight
at a nominal figure and no doubt rep bond basis. But regarded as a one
resents nothing but water, since the year call on the shares, with the pos
HIDDEN ASSETS OF CONSOLIDATED GAS 295
sible loss limited to four points, they situation. Current earnings are un
are fairly attractive, although the doubtedly poor; but the company is in
writer prefers the American Tele strong shape to meet this temporary
phone & Telegraph Convertible 6s. The setback. Unless the expected improve
mortgage security of the N. Y. & ment in operation results fails utterly
Westchester Lighting 4s is not espec to materialize, there seems no reason
ially strong, but the guarantee of Con to anticipate a cut in the dividend. If
solidated Gas should make them per normal conditions return, the earnings
-
fectly safe. After their recent twelve should gradually approach the level of
point rise advance from 59, they are 1916—in which nearly $13 per share
not quite as desirable as the N. Y. Gas was earned on the stock.
& Electric 4s, due 1948 (a N. Y. Edison Consolidated Gas has never been the
Company obligation, which is well pro gold mine that Wall Street liked to
tected directly by earnings). The New think it; but it is a financially sound,
Amsterdam Gas 5s are not guaranteed well managed utility, enjoying excep
and this particular company reports , tional advantages through its unique
only a slight margin of earnings over location. There is a hundred dollars
fixed charges. per share and more of real value be
hind this issue and with better times
Conclusion ahead, the investor at these levels
Coming back to the stock, our should find the stock a very satisfac
analysis has disclosed both the favor tory purchase—although a little pa
able and unfavorable aspects of the tience may be needed.
MARKET STATISTICS
Dow-Jones Avgs. Breadth
40 20 50 stocks Total (No.
- Bonds Inds. Rails High Low Sales Issues)
Monday, Nov. 18. . . . . . . . 81.98 85.01 89.91 76.85 76.07 561,500 212
Tuesday, “ 19. . . . . . . . 81.76 84.68 89.56 77.66 75.80 456,000 200
Wednesday, “ 20. . . .. . . . 81.70 84.33 89.45 76.28 75.49 541,400 200
Thursday, “ 21. . . . . .. . 81.68 83.84 89.28 76.54 75.53 564,800 210
Friday, “ 22. . . . . . . . 81.42 82.60 88.45 76.13 74.76 673,600 238
Saturday, “ 23. . . . . . . . 81.35 81.83 87.51 74.91 73.97 334,700 206
Monday, “ 25. . . . . . . . 80.96 79.87 85.10 74.17 72.06 984,700 245
Tuesday, “ 26. . . . . . . . 80.69 81.43 86.06 73.80 71.96 647,600 221
Wednesday, “ 27. . . . . . . . 80.78 80.16 85.56 74.02 72.64 727,900 191
Thursday, “ 28. . . . . . .. THAN KSGIVING
Friday, “ 29. . . . . . . . 80.82 80.93 87.16 73.93 72.17 661,300 205
Saturday, “ 30. . . . . . . . 80.91 81.13 87.03 74.05 73.48 277,500 175
$1,000.00 REWARD
For information leading to the arrest and conviction of the person or persons who
broke into my office and my private files at 42 Broadway, New York, and extracted
or copied or examined my correspondence with my attorney in connection with my
$100,000 libel suit against Louis Guenther, Editor of the Financial World.
RICHARD D. WYCKOFF.
BONDS AND INVESTMENTS
Bargain Hunting Through the Bond List
Gilt Edged Railroad Issues at Attractive Prices—Some
Cheap Industrial Bonds—Peerless 6s—The Invest
ment Mystery
By BENJAMIN GRAHAM
its
teen points below minimum price
in
& Texas Central 1st 5s, interest guar the past.
anteed, due 1937. Outstanding $1,389,
To make assurance doubly sure, the
000. Quite a few of these bonds have
are additionally pro
H.
T.
5s
C.
&
1st
sold recently at 96; the last sale, how
as
tected by the guarantee
to
interest
ever, was noted at 97, at which price
the Southern Pacific Co.—which,
of
the yield is 5.25%. Not such a wonder while quite superfluous this case, in
ful return you say; but let us first see intensify the attractive fea
of to
serves
in what class the issue belongs. tures the issue. All told, this
is
According to the Railroad Manual, about as safe an investment as can be
Houston & Texas Central 5s are a first
found anywhere, and its yield sub
is
lien on 453 miles of road, running in stantially higher than that many
of
to Houston. The bonded debt per mile other gilt-edged railroad bonds. Hold
figures out therefor at only $3,128.
the New Pennsylvania General
of
ers
This is an extraordinarily low rate in 5s, Chicago North Western General
&
5s
1st 5s gen. 4s
1st 5s.
Yield .................... 5.25% 4.70%
Outstanding per mile. ... $3,128 much the same type
of
is
due
&
to
6.3 times
(527)
528 THE MAGAZINE OF WALL STREET
5.60%. This is an underlying obliga his loss much more easily by switching
tion of the Southern Railway and is
O.
into the convertible 4%s. The
C.
&
secured by a first lien on the very im latter bond, constitutes an excellent
portant line running through Nashville business man’s investment. -
and Chattanooga. The issue amounts The higher yield
N.
Y.
of
the Central
to but $3,106,000, so that it is outstand debenture 6's compared with the
C.
by&
ing at the rate of but $5,650 per mile.
5's
explained first
Q.
is
convertible
For some peculiar reason these bonds the fact that the former are deben
a
are listed on the official Quotation ture, while the latter have mortgage
Sheet as “divisional 5s” and on this ac
a
lien. Secondly, the Chesapeake 5's are
count there seem to be a widespread now convertible into stock at 75
notion that they are junior to another against 110 for the N. Y. Central 6's.
issue, called East Tennessee, Virginia This means that O. shares need
C.
&
& Georgia Consolidated 5s due 1956. advance only eight points
of to
show
a
Exactly the reverse is the case; in fact, profit the purchaser
to
the 5's,
the 5s of 1930 precede no less than four Central must rise thirty
N.
Y.
whereas
other mortages as follows: one points—a much less probable con
1st Lien E. Tenn., Va. & Ga. 1st 5s. ... 1930 tingency.
2d “ E. Tenn., Va. & Ga. Con. 5s. ... 1956
3d E. Tenn. Reorganization 5s. 1938 Cheap Industrial Bonds
“
4th 1994
“ “
of
5th Southern Ry. Devel. 4s. 1956
.
.
.
.
.
in
6th Southern Railway Preferred Stock for industrial bonds, which,
in
sharp
“ “
in
the rails” but above their pre-war level. Real bar
to
“close surrounded
is
padding pos
of
unearth;
no
to
to
a
to
purchased place Southern Rail
of
Out.
in
tention
bonds. conservative and profitable investment
Chesapeake and Ohio Issues afforded by this issue. Granby 6's pos
sess all the qualities
of
desirable bond
The yield returned by the bonds
a
of
the Chesapeake and Ohio appears very —as witness the following enumera
tion:
the great progress
of
1.
to
bonds
2.
cess
Central, the bonds which sell rela
of
5.
a
I
Conversion privilege
of
the Chesa
peake issues the convertible 4%’s, The fourth point ordinarily escapes
is
1930 yield 7%. An investor who has most significant index the real se
of
in
purchased the New York Central ref. curity behind bond issue. Where the
a
4%’s value
BARGAIN HUNTING THROUGH THE BOND LIST 529
funded debt, there is room for a severe stock, selling at 75, paying $8 divi
shrinkage in the company's assets and dends, and earning $20 per share. Evi
earnings before the safety of the bonds dently the company could meet a year
is in any way impaired. In the case or two of depression without the
of Granby 6's there is $15,000,000 stock slightest danger to the bonds? When
with a market value of $12,000,000, Union Bag succeeds in living down its
junior to but $2,500,000 of bonds. In past reputation, these 1st mortgage 5s
other words, the mortgaged property should easily sell ten points higher.
is here pledged at only 18% of its cur
rent realizable value. Chile Copper 6s.
Perhaps the most interesting feature Chile Copper Convertible 6s, due
1932, have lost about half of their
of this issue is the large sinking fund ten
of 10% of net earnings plus the fixed point gain following the declaration
sum of $40,000. This provision is al of the armistice, and are now selling
most certain to retire the entire issue at 84%. This means a straight yield
before maturity, and since the trustee of over 7%, which the amortization of
must pay 110 for the bonds, if not ob the large discount brings up to about
tainable for less, the patient bondhold 8%. So liberal a return for a bond is
er could successfully hold out for the sue would imply more or less serious
top price—and again a ten point pre doubts as to the safety of principal or
mium in addition to his excellent interest, yet an analysis of this under
return. taking reveals elements of fundamental
&n iść
.
.
.
.
.
.
.
Convert. Conv. 6s... 1935 99% 6.05% Conv. 5s. 1946 87% 5.90%
.
.
.
.
Union Bag and Paper 1st 5's strength which should entitle the 6%
few years higher investment rating.
to
of
pany's bond issue. The Union Bag and price can be traced primarily
to
their
Paper Company ill-times offering par April 1917.
of
an
in
overcapitalized, more
or
ket
of
the
and simple. But the reorganized Cor
in
the hands
poration has worked itself into excel. and the process investment absorp
of
tion,
or
mortgage
up
under critical analysis—although they that the foreign location the prop
of
to
by the
it
the deal
a
original re
of
long
it
to if
we have
a
per year. Secondly, they are fully cov educational process undergo before
ered by net current assets, which fact Yankee dollars will respond readily
to
one
ofis
of
Wladikawkas
ability repay. Both For here
to
1917 and
is
1918 interest charges were earned prise originated, financed and managed
no
the bonds are protected $10,000,000 more amenable our control than any
to
530 THE MAGAZINE OF WALL STREET
European state—which can contend made an excellent showing at the time.
with only meagre success against the The three annual reports published
provincial spirit of American investors. since then have all been very favorable
The bases of Chile Copper's strength as fas as the notes were concerned.
are its huge ore reserves, its large pro The company's accounting methods
ductive capacity, and its ability to pro seem to have been extremely conserva
duce at relatively low cost. With four tive; nevertheless interest charges
hundred million tons of developed ore, have been earned at least five times
the exhaustion of the mine can be ig over during this period. Furthermore,
nored as a factor. Current production the working capital position has been
is approximately 100,000,000 pounds kept consistently strong, and on Dec.
per annum, the projected output is 31, 1917—the last report available—
300,000,000 lbs. Since the interest cash assets alone exceeded all current
charges on the $35,000,000 6s and the liabilities. Considering the fact that
$15,000,000 prior 7s aggregate $3,150, the bonds were covered one and one
000, a profit of three cents per lb. on half times over by net current assets—
the present scale, or only one cent on entirely outside of the Plant Account—
the ultimate output, will serve the it is difficult to imagine how they could
funded debt. In this connection it ever get into trouble.
should be noted that only about 50% But most important of all is the fact
of the principal of the 6s has been paid that the company last year retired well
in, so that present interest charges are over $1,750,000 of these bonds, leaving
about $1,000,000 less than the above hardly more than $3,000,000 now out
calculation indicates. - standing. The funds were obtained by
The method of dealing in the part the sale to the Government of the un
paid receipts is somewhat peculiar. If profitable Long Island plant.
a bond is purchased at 84%, the trans In view of the excellent showing that
action would be settled as follows: this security makes from every stand
point, it is difficult to understand the
Price of $1,000 bond at 84%%. . . . . . . $845
extraordinarily low price at which the
Less unpaid installment. . . . . . . . . . . . 500
notes have sold since shortly after
Net Cost. . . .. . .. . . . . . . $345 their issue. For one thing it is known
that the underwriting syndicate have
It should be pointed out that the part never made an effort to maintain the
paid receipts are dealt in “flat,” so that quotation. Again certain losses sus
the accrued interest is not added to
tained by a subsidiary on shell con
the purchase price. The company has tracts appear to have frightened bond
the right to call the second installment
-
holders, but these were all charged off
on May 29. against the earnings of 1916.
Peerless Truck and Motor 6s. The writer has investigated the af
Bonds have their misteries no less fairs of the Company as thoroughly as
than stocks. The prize puzzle of the available data will allow, and has been
bond field does not appear on the Stock totally unable to discover an adequate
Exchange Quotation Sheet, but is prob reason for the large discount at which
ably presented by the unlisted First the notes are now selling. Either there
Mortgage Notes of the Peerless Truck is a particularly elusive dusky gentle
Motor Corp., which are now sell man hidden in this wood-pile—or else
-
and
ing at 87% to yield about 8%%. the Peerless 6s are one of the greatest
These Notes were brought out in bargains to be found in the wide realm
mº-m
1915 by a very reputable syndicate and
MISUNDERSTOOD
of corporation bonds.
Willis—Ourcompany was getting 1000 barrels a day when suddenly on December 1st
our production stopped.
-
Gillis—That's funny. I never heard of an oil-well acting like that before.
Willis–Who's talking about oil-wells? This was a brewery.—Judge.
- º
An Advisable Exchange–B.S.O. for C.&O.
Great Transformation in Relative Status of the Two Sys
tems—C. & Q. Bonds Now Better Secured—Com
parison of Revenue, Expenses and Charges—
Position Under Government Control
By BENJAMIN GRAHAM
&
by time are nowhere so evident higher public estimation, even though
a
as in the securities market, where the common stock has fallen well behind.
an accurate comparison of the The preference for
B.
of
O.'s bonds
is
&
present with the past is afforded by the long standing and based upon the strik
is
price record over a period of years. The ing defect Chesapeake's capitalization
in
spectacle of Chesapeake & Ohio selling structure—namely, the preponderance
of
nine or ten points higher than time funded debt, which par value aggre
in
honored B. & O. must indeed excite gates three times the capital stock. While
wonder in the minds of those veterans itself has always been plentifully
O.
B.
&
who recall that about fifteen years ago supplied with obligations, the fact that
it
the latter issue was quoted regularly at
º
its
O.
&
by
In
lead.
What were the causes underlying this
complete reversal market position?
in
by
been
We would call particular attention
to
of
&
as
Chesapeake. From the investment stand protection; and the graph indicates,
point this question even greaterim its interest requirements five years ago
of
is
portance than the percentage earned on were earned with much larger margin
a
safety
of
C.
comparison
of
&
Table indicates
(733)
ammº
734 THE MAGAZINE OF WALL STREET
its
rapid increase in fixed charges, has com rapid gain upon rival
to
due the
is
its
pletely undermined this solid investment fact that per mile gross increased dur
ing this period from $15,130
to
advantage. The bondholder should note $22,650,
or
carefully that in both 1916 and 1917 over 50%—while O.'s rose only
B.
to &
or
Chesapeake's interest requirements were 22%, from $23,190 $28,300. This
earned with a substantially larger margin development cannot
be
tem
to
ascribed
of safety, and furthermore that the guar porary war activities, which must have
anteed compensation under Federal con benefitted B. O. as much as Ches
&
trol affords relatively better security to apeake. Nor can the demand for coal
be
the primary cause, since bi
is as
this company's bonds than to B. & O.'s. regarded
important part
of
as
tuminous almost
a
Baltimore's traffic as of C. O.'s.
is
&
it
TABLE I–TEN-YEAR DIVIDEND gain
of be
The
in
the latter's revenues must
RECORD
the rapid upbuilding
to
ascribed rather
its territory, which has afforded much
a
better field for expansion than the al
ready highly developed regions traversed
by
the Baltimore Ohio.
&
-mm
Operating Expenses
Of equal significance with the greater
gross revenues, Ches
in
increase
is
Present rate. . . . . : its transporta
of
. - apeake's better control
*2% paid Feb. 1, 1919.
tion costs. Its advantage this respect
in
dates far back as can be observed from
the data for 1912, given our second
in
So radical a transformation in financial
We should expect that just
C.
as
table.
results requires a more thorough exami
O.'s lower traffic density
in
1912 gave
it &
its
better opportunity
to
whether it has been due to merely local increase
a
O.'s higher op
so
gross business,
B.
systems. achieve.
pear unlikely, in view of their close Nevertheless the opposite has been the
case, and the table shows that Ches
proximity and the similar nature of their
apeake's substantial advantage
in
tonnage. Except for some advantage 1912
really extraordinary
to
has increased
its
figure
in
---
it of
control
being over 10% gross.
of
were
lines would experience the same vicissi
tudes and their fortunes would fluctuate TABLE II—RATIO OF TRANSPORTA
together.
TION, TRAFFIC AND GENERAL
EXPENSES TO GROSS
Further study the subject discloses
of
C. O.'s
&
Chesapeake's present
of
B. O. O.
C.
three-fold:
&
is
&
1.
volume traffic.
2.
.
.
.
.
.
.
.
.
.
.
.
.
,
.
.
.
.
.
.
.
.
In
1913
&
&
further
to
course,
is
AN ADVISABLE EXCHANGE-B. & O. FOR C. & O. 735
of
age
coal traffic handled, which makes enor 10.2%. While this growth
is
creased
mous train-loads possible—as shown by somewhat larger than O.'s (for
C.
&
Table II. Yet this factor is more than which the two figures are 5% and 7%)
it
offset by the 40% higher rate per ton will not go far account for 48%
to
a
mile enjoyed by B. & O. augmentation interest requirements.
in
The crux of the whole matter lies in Does represent new equipment?
2.
it
C. & O.'s lower cost of operation per Since June 30, 1912, the total tractive
train mile. Numerous factors contribute power
of
B.
O.'s locomotives and the
&
to this result, an analysis of which would total capacity its freight cars each ex
of
be too technical for our purpose. We panded 14%. During this time the loco
would refer merely to the much larger
O.
motive power
of
C.
rose 18.3% and
&
payments by B. & O. for loss and dam
age, and to the excessively large sums it
spends on traffic expenses (superintend
ance, outside agencies, etc.). The figures
700
seem to show very clearly that the greater
economy of Chesapeake's operation is
due to greater efficiency.
The importance of this subject should
[]
be evident from the fact that had B. &
5
O.'s transportation traffic and general ex
penses been held down to the same ratio
its
1917
would have been fully $13,500,000 larger
$9 per share for the com
of
—a matter
i
mon stock.
O.'s
be
B.
&
5
0
s|
5
of
in
B.
no
its
Here
in
of is
a
O.
be
for spite
B.
of
&
favor Chesapeake,
in
to
Fixed Charges
O.'s apeake enjoyed net revenue from
B.
&.
equipment hire
of
B.
$1,484,000, while
&
no
000.
$3,101,000 for this service—a truly re
ning 1918 were $19,250,000 against
of
1912—an advance
During the same Chesapeake's traffic had grown much
or
faster than
&
would seemingly
its
17%. Let
or
or
fixed charges.
in
heavier increase
O.'s equipment.
of
C.
efficient use,
&
has
&
by
represented
Is
increased
736 THE MAGAZINE OF WALL STREET
of
total investment $62,630,000,
By December Ohio has acquired 397 miles
of
assets were $28,135,000. more
&
31, 1917, this amount had been reduced main line—at cost therefore of over
a
to $15,571,000. If
materials and supplies $150,000 per mile. claimed that this
It
is
are excluded—as the more logical ac so-called Toledo and Cincinnati division
counting practice demands—then the de every respect profitable
as
as
in
the rest
of is
cline in working capital is indeed ominous Yet the exceed
B.
the O. system.
&
—from $20,225,000 to $893,000. During ingly unsatisfactory record this prop
of
this period Chesapeake had been steadily erty past years makes quite apparent
in
it
its
H.
improving cash position; but large that the C., venture has proved
D.
&
expenditures extremely costly one—the loss on
an
for new cars
in
1917
by
which not adequately measured the
is
$10,892,000 written off the investment
and charged surplus
to
in
1916.
INTEREST CHARGES TIME3 EARNED
Status Under Federal Control
'4
-
'I5
'I6
'Iſ
3
of
Government
is
determining the carriers' ability
as
ance,
pay interest charges and dividends
to
under present conditions. But the
rental gains added significance
of
amount
based upon
an
from the fact that
is
it
average past income—and
an of
therefore
is
.6,0.
as
good
of as
of
EARNED ON COMMON STOCK the two
systems during the period immediately
prior Federal operation. From these
to
two points
of
in
our Table IV should be of considerable
interest. The computation for
B.
O.
&
based upon official estimate pub
an
is
or
includes some extra compensation
#
count
&
:
The results for Chesapeake are based
upon the Bureau
of
Railroad Economics'
figures and the interest charges and
on
“other income”
in
respect bal
as
as
to
1918
Figures that have just come
to
hand
The C., H. D. Investment
&
&
&
issues cannot all recognized the cash roads that reported larger net income
in
or
additional mileage
B.
new
in
in
1917. the
&
these funds
A
went into investments—particularly the net after taxes being less than one-third
Cincinnati, Dayton road, the previous year's figures.
be of
Hamilton
of It
must
&
& up
$39,380,000 more
in
in
is
the
&
tion tributable
to
tions aggregating $23,250,000. For this for maintenance, these having increased
AN ADVISABLE EXCHANGE–B. & O. FOR C. & O. 737
sº
its
from 30% to over 42% of gross in 1918. income account the $362,000 surplus
But as our second table showed, this earnings one subsidiary—the Sandy
of
company has continued to fall behind Valley and Elkhorn R.—while the
R.
Chesapeake in operating efficiency. $411,000 suffered by the Chi
of
The deficit
exhibit of C. & O. is particularly en
R.
R.
of
cago Terminal (all whose stock
couraging as indicating the ability of this owns) does not appear the parent
in
it
system to operate successfully under the company's statement.
Finally, reference should
be
to
made
O.'s large bank loans, aggregating
B.
&
TABLE III–CORRESPONDING SE $22,500,000, for which constant exten
CURITIES OF THE TWO SYSTEMS sions have been necessary, and which,
Ohio
with the $7,500,000 notes maturing July
Baltimore &
Price
next, constitute disquieting feature
in
Due about Yield
a
1
Common stock, 4%. . --- - 46 8.7 the company's financial situation.
Preferred stock, 4%. . -- - - 55 7.3
Prior Lien 3%s. . . . . . 1925 88 3.9 Conclusion
First 4s. . . . . . . . . . . . . . 1949 77 5.2
Ref. and Gen. 5s. . . . 1995 82 6.1 The cumulative
effect of all the above
must inevitably
be
Convertible 4%s. . . . . 1993 78 5.8 verdict
in
evidence
a
favor Chesapeake Ohio against
as
of
Chesapeake & Ohio
&
Price B. O. The market has already re
Due about Yield &
corded this judgment the relative price
in
Common stock, 4%. . - -- - 55 7.3
the two common stocks—although the
of
& to
General 4%s. . . . . . . . . 1992 80 5.6
O.
Convertible 5s. . . . . . larger margin for But the bond
C.
. 1947 86 5.8
Convertible 4%s. . . . 1930 80 5.6 market slower reflect changing con
to
.
is
B.
&
ancy still continues—though much im
very unfavorable conditions of the past paired.
year.
We would particularly recommend the
Certain peculiarities of B. & O.'s book
keeping in recent years call for brief
comment. In the first place, since 1912 TABLE IV—COMPENSATION GUAR
ANTEED UNDER FEDERAL
no less than $10,082,000 has been charged CONTROL
directly against surplus for discount on B. O. C. O.
&
&
1,100,000 575,000
had been taking into
Balance for common
terest accrued on advances the C., H.
to
&
Earned on common
to
were carried as bills receivable under 1930, and Refunding 5s, due 1995, for
current assets.
O. Conv. 4%s and 5s, due 1930 and
C.
&
Again
B.
O.
to
1917
&
under Glass.
at
is
it
RAILROADS & INDUSTRIALS
Industrial Balance Sheets
Before and After the War Comparisons–Steady Growth
of Equities Contrasted with Market Fluctuations—Im
portant Companies Discussed—Melon Prospects
By BENJAMIN GRAHAM
in
lack throughout this period of any real three-quarters the current
of
cases
standard of investment value. The re quotation represented by these ad
is
surplus.
to
lations established between price and ditions
earnings, and price and assets, have Expansion Fixed Assets
in
been remarkably inconsistent and il whole,
as
we examine the table
If
a
logical.
we are impressed first all by the
of
Now that the great drama is prac moderate expansion fixed assets.
in
tically ended, we are enabled to de Despite the tremendous increase
in
termine the war's effect on the financial gross business during the war, one
position of the industrials—and inci quarter the companies report an
dentally to note the sharp contrast of
plant account for
in
actual decrease
between the steady development of Moreover, good part
to of
the period.
a
new equities and the widely fluctuat the increase offset by isadditions
ing market movements which accom the depreciation reserve. There are
panied this rule,
it.
of
sporadic exceptions
to
this re
in
The writer has compared the 1918 course. Bethlehem Steel
reports requires
of
in of
many others,
as
so
a
important companies, order de special classification. But general
to
in
term 1me— we observe low reluctant have been
up
How much has the tangible value these companies large part
in to
tie
1.
their
?
What has been done with these and, where additions have been neces
2.
much
2
applied goodly
of
their
in
have
a
t
what for
working reduc
or
for capital, for the plus earnings, however, has been added
bonded debt and preferred directly working capital. How sig
of
to
tion
stock. nificant has been the growth
is of
net
This data supplemented by Table current assets recent years evi
in
is
II, which briefer but perhaps more dent from the fact that increases
a in
is
$40 $50
to
is
in
the increase
the present market price 1917 the working
of
the
to
capital
U.
of
the
S.
It
crease in working capital, and at the inventories has more than accounted
same time find itself in a much less for the entire increase in surplus.
comfortable cash position. The rea The possibilities of this situation are
;
Fixed Net Cur’nt
Assets Assets . Inventory Stock Bonds Reserves Surplus
Company Inc'd Inc'd Inc'd Inc'd Inc'd Inc'd Inc'd
American Can. . . . . . $5,956 $12,765 $26,522 ... —$2,119 $5,196 $15,644
American Linseed. . 1,506 3,275 -- - — 315 383 $4,713
–—
298
Amer. Locomotive... —7,994 13,974 21,447 1,000
(
Amer. Steel Fdries. 557 5,825 4,344 ... 3,447 -- 9,829
-
Bethlehem Steel.... 158,366 68,059 68,465 $74,586 108,538 —7,198 50,499
Central Leather. —5,364 27,565 20,715 -- - — 4,425 4,168 22,458
.
.
.
.
–
Continental Can. 7,028 1,580 7,612 4,984 - -- 1,581 2,203
.
.
.
Goodrich
––
6,556 24,433 23,657 —3,600 -- - 3,547 *31,042
.
.
.
.
.
.
.
.
.
.
Internat’l Paper'. ... —2,095 4,828 5,217 4,611 7,758 1,003 4,067
Kelly Springfield. 4,150 — *8,477
–
1,938 5,922 346 270 -- -
.
. .
570 -
-
Pittsburgh Coal. 2,834 13,461 –888 9,097 — -
4,948 ... *12,146
.
.
. .
. .
—46.187 45,441
.
.
.
.
.
.
.
-
-- -
.
.
.
.
.
.
.
.
.
No provision for 1918 taxes. *Years ended June 30. *Added June 30-Dec. 31, 1918.
*
*March 31, 1918, figures used. “December 31, 1917, figures used. *Added in 1918.
"December 21, 1915, compared with December 31, 1918. "Restoring $15,800,000 charged
off against good-will account and surplus. —Decrease.
son for this distinction lies the in immensely interesting. At the end
in
of
this moment the inventory carries four times the pre-war figure. Cer
at
no need
per
as
liquidation his future prospects large manent policy; the energies the
in
depend.
to
measure directed
The headlong growth their liquidation. But how soon, and
of
inventories
staid, enter what prices, can this operation
at
be
P
1010 THE MAGAZINE OF WALL STREET
-
The Various Problems He may not realize at face value or
The public is familiar with the prob
it,
near but whatever brings will
it
lem of the copper producers, saddled belong Within very short
to
him.
a
with increasing stocks of metal which time huge quantities
in of
cash should
can be disposed of only at a disconcert begin these com
to
accumulate
ing loss. But here is Baldwin with panies’ treasuries—for the direct bene
more of locomotive ma
us
fit, let hope,
of
$26,000,000 their fortunate
terial on hand than in normal periods, stockholders.
and Sears, Roebuck with a merchandise But there are many industrials
stock $34,000,000 larger than before whose inventories have grown faster
the war, not to mention a host of than their cash assets. In other words,
Strange and perhaps perilous they have been compelled
to
others. assume
of
& of
Per Cent
Increase Increased Surplus Increase Reserve
Market Price Over Price 1914-1918 to Present Increase to
Company March 18, 1919 Dec. 31, 1913 Per Share Market Price Market Price
American Can. $47.00 $17,25 $38.00 80.8% 107.4%
.
.
.
.
.
.
.
81.50
Sears Roebuck. 179.00 —1.50 —3.75 - - - ---
.
.
.
.
.
.
.
.
.
.
.
.
.
Table I.)
to
(See notes
store
their balance sheets only through the sale their products
of
|
evident that not all the com on hand. For such companies
It
is
50%
a
panies are similarly situated with re shrinkage value—if that were pos
in
sible—would prove
to
matter. Some
ample, are tremendous, but they have been Baldwin and presumably Beth
as
such
financed chiefly from surplus earnings. lehem Steel, should be well protected
Current liabilities have grown, by the cancellation clause their war
in
is
it
by
true, yet the increase offset ad contracts. The status of the two Can
is
The inventory
so
of
be noted
It
is
INDUSTRIAL BALANCE SHEETS 1011
that the corporations dealing in com lies not alone in the expansion of its
modities for immediate consumption surplus by more than $100 per share,
(Sears, Roebuck, Cluett Peabody, and of its reserves by another $40 per
Woolworth, National Cloak and Suit) share. Equally important is the liquid
have found the financing of their grow form in which these earnings have
ing business most difficult. been maintained—available for invest
Notable Instances ment or distribution as occasion may
require. There is recorded an increase
Two issues attract attention be in current assets—erclusive of inven
cause of a decline in their inventories. tory—equivalent to $50 per share. The
These are Distillers Securities and large additions in plant are offset in
Pittsburgh Coal. The former already good part by corresponding credits to
shows the effect of partial liquidation, depreciation reserve; yet it is well
with substantial reductions in both
known that physically the corporation
property and bonded debt. Pittsburgh
is far better equipped than ever before.
Coal has placed itself in surprisingly
strong condition.
It will be interesting from now on to
Its pre-war earning compare Republic's production cost
power was nothing to brag about ; but
with those of the Steel Corporation,
with large accretions to its working which it now rivals in relative financial
capital it should make a different strength. In fact, if it is borne in
record in the future.
mind that Republic has only one
Much light is thrown by our Table twentieth the capitalization of its
on the reason for Bethlehem Steel's great competitor, its progress as an
market collapse, in contrast with the alyzed here with must be deemed to
relative firmness of U. S. Steel. Beth have been even more brilliant. From
lehem has increased both stock and standpoint, Topping
the dividend the
bonds enormously, the proceeds of management “has said nothing and
which, together with all the acum sawed wood.” The fruits of this ultra
mulated profits, have gone into uncer conservative policy should be apparent
tain channels—plant extensions and in the coming years.
inventory. Will these new facilities
pay their way in normal times? Will
To return to our original topic—
the discrepancy between market move
the huge line of steel products be dis ments and industrial conditions dur
posed of without undue loss? To ing the war—general comment has
these questions, despite Mr. Schwab's
optimism, the market has vouchsafed ascribed the recent price recovery to
the expectation of a great business re
a gloomy reply. U. S. Steel, on the vival, to follow a brief readjustment
other hand, comes out of the war with
period. If this is so, we might record
cash resources enormously enlarged,
still a fourth reversal of opinion—
with bonded debt reduced, with only making peace a bullish argument after
an 8% addition to plant account, and
all. But when the light is finally
a 40% increase in inventory (using thrown upon the conditions underlying
the Dec. 31, 1917, figures). For Beth last month's advance, it is more than
lehem Steel it must be said, that heroic
possible that it will be found to be
charges have been made against earn
based, not so much upon the hopes of
ings for depreciation of its war-time
extensions, future prosperity, as upon the be
and the $85 per share
lated recognition of the tremendous
which has been added to surplus may
benefits reaped by our industrials from
turn out to represent tangible and not
paper profits. the war. The typical corporation is
now in such splendid condition that it
A Brilliant Exhibit can look beyond a temporary spell of
But of all the companies in the list, depression to a new standard of earn
Republic Iron and Steel undeniably ings far in excess of the pre-war
makes the finest exhibit. Its strength average.
ATTRACTIVE INDUSTRIAL
PREFERRED STOCKS
Importance of Exemption from Normal Tax-Recent
Improvement in Investment Status–Various
Elements in Judging Values-Attractive
Issues Recommended.
By BENJAMIN GRAHAM
shares, the great improvement in the four years during the war; that 1911
standing of preferred issues has not es 1914 and 1915-1918. All the companies
caped market recognition. Despite the considered make excellent exhibits for
the latter period—whereat
no
prices of fixed income bearing securities nificant divergence between the pre-war
the various industrials; some
of
fore the war. The comparative figures consistently large margin, and others
or
(1085)
1086 THE MAGAZINE OF WALL STREET
be claimed that post-war conditions are ket value of the junior issue to the par
going to be identical with pre-war condi amount of the preferred stock. For if it
tions, yet the investor will in general feel is assumed that the market price reflects
safer with those issues which have always fairly closely the intrinsic worth of the
given a good account of themselves in the common shares, then we have here an
past. accurate measure of the equity protect
#2;
T. *
;
;
;
;
;
3. -º --: ă ºsu
º
ă. 3 :3 2. #5 #3, #3, #3, #3: #53
*Westinghouse Elec.. 7% 63 5.56% 58 $271 92.5% 282.0% $490 1625%
General Chemical. ... 6 103 5.82 108 119 22.8 *57.2 74 185
Sears Roebuck. . . . . . 7 120 5.83 121 103.0 176.0 312 1312
.
.
.
American Tobacco. .. 6 101% 5.96 102% 17 29.3 25.1 100 156
Am. Agric. Chem. ... 6 100 6.00 91 29 11.1 20.6 37 111
Woolworth . . . . . . . . . 7 116%. 6.00 112% 107 41.3 63.3 135 496
Am. Sugar Ref. . . . . . 7 116%. 6.00 114 21 12.7 21.8 81 117
U. S. Steel. . . . . . . . . . 7 11434 6.07 106% 121 14.8 49.2 -- 138
Am. Car & Foundry. . *7 115 6.09 114 45 11.8 22.3 109 91
-
Barrett Mfg. . . . . . . . . 7 115 6.09 102 95 19.7 44.8 141 253
Liggett & Meyers. ... 7 111% 6.28 11.1% 41 41.3 41.6 58 195
United Cigar Stores... 7 111 6.31 111 95 46.3 67.7 198 265
Lorillard . . . . . . . . . . . 7 109 6.42 110% 76 33.2 43.4 130 318
Central Leather. . . . . . 7 108 6.48 95 80 11.4 32.2 136 95
May Dept. Stores. .. 7 108 6.48 100 99 26.1 37.0 142 166
Cluett-Peabody . . .. . 7 108 6.48 96 48 °21.5 32.5 117 162
Railway Steel Spgs.. 7 108 6.48 97 60 7.7 25.4 37 78
Goodrich . . . . . . . . . . . 7 108 6.48 80 135 13.0 46.5 170 158
Am. Cotton Oil. . . . . +6 91 6.59 93 33 11.2 17.7 49 98
General Motors. . . . . 6 90%. 6.63 -- - "43.0 100.0 *310 500
.
.
of
the
a
ºr
of
irrelevant because radical changes assets, nor upon the previous earning
company's position, another very power; but takes into account also the
in
the
value may
be
of
as
Overland recommended because,
is
that it is not only the price per share of compared with its 7.50% return, its ex
common that counts in this analysis; hibit remarkably good.
is
equally important is the relative size of Although Westinghouse preferred
the two issues. The equity behind West yields only 5.55%, nevertheless in
is
it
inghouse Pfä., represented by the com two factors—its gilt
of
cluded because
mon selling at 46, is much larger than participating privi
its
edged security and
that behind Cities Service Preferred, the issue, rela
of
lege. The small size
though the common is quoted at 350. For
its
common, protection
to
tive the makes
in the first case there are fourteen times by assets and earnings easily the strong
as many common as preferred shares; in est on the entire list. Failure pay the
to
the latter there are nearly twice as many meagre $280,000 dividend requirement
is
preferred as common. This standard of almost inconceivable. Consequently the
value is applied in column 6, in which the security can well compared with that
be
market value of the entire common issue many medium grade bonds yielding
of
an
is divided by the number of preferred no more. For the investor pays
if
shares, to show the additional equity be 8% normal income tax next year, the
hind the latter.
TABLE II—SELECTED LIST OF AT
Another element usually referred to TRACTIVE PREFERRED STOCKS
in appraising preferred stocks is the BASED ON TABLE
I
amount of net current assets applicable Rate
to the senior issue. This factor is of Cum. Price Yield
significance indicating Westinghouse Electric
chief as the com
pany's general financial condition. But (Par ). 7%. 63 5.55%
Woolworth ...........
.
.
.
.
.
.
.
..
.
.
116%. 6.00
in the case of preferred shares selling at
7 7 7 6 6 7 7
United Cigar Stores... 111 6.28
a considerable discount this element often General Motors....... 90%. 6.63
assumes direct importance, as establish Am. Beet Sugar....... 90 6.67
ing a minimum liquidating value. The Republic Iron Steel... 103 6.79
&
5.55% return
is
working capital, exclusive of plant, equivalent over 6% on
to
non-tax-free
a
preferred stock values, we next proceed ering that earnings have averaged 18%
to select those issues which meet the re 20% on the common, with every indi
to
continued prosperity, an 8%
of
tion their dividend yields. The results rate—or even higher—on Westinghouse
to
is
a
edged,
sues, arranged dividend re United Cigar Stores, Pfd. should make
of
in
order
more desirable than Woolworth, Pfä.
of of
safer investment. General Chemical rent asset value, and common stock pro
a
Pfä. omitted because there are more tection—the Whelan issue makes an
is
attractive issues
1088 THE MAGAZINE OF WALL STREET
excellent as is the latter. The key to the in capitalization. But during the past
strength of Cigar Stores Pfd. is the small four years—not altogether clear sailing
size of the issue, only $4,527,000, com for the automobile companies—preferred
pared with $27,000,000 common, selling dividends were earned 4% times. There
above 130. If the common stock earn is also a very substantial equity repre
ings dropped from $13 to only $2 per sented by $41,000,000 common stock sell
share, preferred dividends would still be ing at 116% of par ($25).
covered 2% times. Since one can never be certain of the
Dissimilar as they at first appear, Am. future, it is idle to ignore the non-cumu
Beet Sugar Pfd. and General Motors lative feature merely because the com
Pfä. have several other points in com pany has always paid dividends in the
mon besides their price and yield. Both past. This was the attitude of those who
are characterized by absence of funded paid fancy prices for St. Paul Pfä. a few
debt, a strong working capital position, years ago, and have now seen a year's
and a really excellent earnings record. payment withheld—never to be recov
Because of recent fundamental changes ered. On this account we prefer Amer
in the company's organization, it is diffi ican Beet Sugar Pfd. to American Cotton
cult to find an accurate basis on which Oil Pfä., and we would rather own Vir
to value the present General Motors Pfä. ginia Carolina Chemical Pfä. than U. S.
(or debenture stock, which is essentially Rubber Pfä. (The latter's excellent
the same). The approximate figures earnings record is offset by its top-heavy
given in the table indicate a technically capitalization and somewhat unsavory
stronger position than that of American market reputation.) American Car &
Beet Sugar Pfä. If either of the two is Foundry Pfd. is so strongly entrenched
compared with so highly regarded an in that here the non-cumulative provision
vestment as American Agricultural would appear entirely insignificant.
Chemical Pfci., it must be admitted that Still, why take even an infinitesimal
the latter makes a less brilliant showing— chance, when there is Barrett Pfä. or
despite its ten point higher price. More United Cigar Stores Pfä. to buy instead?
over, if the pre-war record of Corn Prod Returning to our selected list, the next
ucts Pfä., or the non-cumulative feature issue is Republic Iron & Steel Pfd., which
of American Cotton Oil Pfci. is consid requires little comment in view of the dis
ered, it becomes evident that either Gen cussion in the March 29 article. Amer
eral Motors or Beet Sugar Pfd. affords ican Sumatra Pfd., like Willys-Overland.
greater security, without sacrifice of Pfd. (already discussed above), must be
yield.
its
objected that
is is
it
pended in bad years can never be recov Am. Sumatra's prosperity all war-won,
ered, no matter what prosperity follows. reply that even the 1912–4 pe
in
the
is
On this account we would select Amer riod preferred dividends were earned
ican Linseed Pfä. as a shining example of about twice over—a 45% better exhibit
Tobacco Products, and fully
of
as
could shown
it
total payments averaging about 1% per that Lorillard Pfä. cheaper than
or is
annum. At the beginning of 1914 this Liggett Myers Pfd., Goodrich Pfd.
&
fair idea
to
all odds the better investment. Pre-war the relative desirability his security
of
figures are not strictly comparable for carefully examining the figures given
Willys-Overland, of the changes Table
1.
because
A Profitable Switch — From Saint Paul
At 41 Into Big Four At 43
By BENJAMIN GRAHAM
Interrupted, but Definite, Progress Compared with Steady
Decline — Big Four's Disaster and Come-Back —The
Puget Sound Illusion — Dividend Prospects
(222)
A PROFITABLE SWITCH 223
In a general way, the relation of these basis — i. e., bond interest plus or minus
systems is quite similar to that of B. & O. the net balance of miscellaneous income
and C. & O., discussed in the Feb. 15 and deductions). These charges are now
issue. Here again the larger road has being earned more than twice over (a
been gradually losing its market prefer comfortable margin) and the earnings on
ence, until finally Big Four has crossed the common have jumped from $2 to $10
St. Paul, just as Chesapeake crossed Bal per share.
timore and Ohio. (See graph.) In the St. Paul's showing for these eight years
latter case, the explanation of C. & O.'s is very different. It is true that gross
ascendancy could easily be found in the has increased over 75%, against 73% for
steady progress of this road and the Big Four. But this advantage is due
equally continuous decline of the other. solely to the much larger expansion in
The present comparison is complicated, mileage. In fact, the revenues per mile
however, by the apparently checkered have grown only 28%, against 43% in the
career of Big Four, which has given it case of Big Four. The progress in net is
the general reputation of an unreliable much less satisfactory. In 1912, St.
and speculative enterprise. Paul's ton-mile rate averaged 84 cents
Big Four's Misfortune. against only 55 cents for Big Four. Of
course, the Railroad Commissions found
But we must distinguish between the St. Paul an easy victim, so that by 1917
accidental and the fundamental. In the average had fallen to 76 cents, while
March and April, 1913, the Ohio River Big Four's had risen slightly to 57 cents.
flood overwhelmed the company's prop Since St. Paul, despite its better oppor
erty, causing heavy damages which were tunities, could make but little headway
not finally repaired until the end of the against Big Four's heavier train-load, the
following year. The direct result was a natural result was a much larger increase
net loss after charges aggregating $4,- in the latter's train mile earnings — the
600,000 in 1913 and 1914. The Profit basis of operating results. To this must
and Loss surplus of $2,500,000 was be ascribed the more rapid growth of St.
changed into a deficit of the same Paul's transportation expenses.
amount; notes payable increased $5,000,- But by far the most significant and
000; and preferred dividends were sus disquieting feature of St. Paul's exhibit
pended. is the extraordinary growth of fixed
This catastrophe dealt a heavy blow to charges in recent years. In 1910, "Other
the company's credit, from which its Income" exceeded deductions by $1,156.-
securities have been slow to recover — 000; in 1917 there was a balance in
despite the radical improvement in its the other direction of fully $17,500,000.
operating results. If the very abnormal What has been going on in St. Paul?
years of 1913 and 1914 are, therefore, The writer's analysis of a somewhat
disregarded, it transpires that Big Four similar situation in B. & O. traced the
has really been making continuous and root of the trouble to the disastrous G,
substantial progress since 1911. This H. & D. investment. St. Paul likewise
fact is brought out by the graph showing has its white elephant— in the shape of
how many times fixed charges were cov its Pacific, or Puget Sound, extension.
ered and how much was earned on the
common stock in the period 1910-1917.
A Popular Illusion.
As in the case of C. & O., rising expenses Wall Street has a beautiful collection
in 1917 made that year's exhibit some of very ancient and often very incorrect
what less favorable than the record show traditions. If a few years ago you were
ing of 1916. to inquire why St. Paul sold so high
The full extent of Big Four's improve despite the low earnings per share, you
ment since 1910 is evident from Table 2, were sure to get this reply : "Of course,
which indicates that in eight years net St. Paul's earnings have suffered tempo
earnings have doubled while charges in rarily by the opening up of its new
creased less than 50%. (The writer pre Puget Sound extension, but after the de
fers to compute fixed charges on a net velopment period is over, its profits will
224 THE MAGAZINE OF WALL STREET
be much larger than before." This 1913, when the Puget Sound branch was
sounded very plausible, but— merged with the parent company, there
If you take the trouble to analyze had been addel 2,344 miles to property
the exceedingly intricate account cover and $279,000,000 to capitalization— e.,
i.
ing the construction and initial operation $120,000 per mile. (This certainly rem
is
of the new line, you will find exactly the iniscent of the C, H. D!) The Pa
&
opposite condition to Obtain. Instead of cific extension itself was taken over at
the Puget Sound extension's being tempo net cost of $176,000,000—over $85,000
a
rarily a burden but eventually very profit- per mile. The charges ahead of the com
mon accordingly jumped to $1,990 per
mile, an increase of 131%, although gross
ST. PAUL VERSUS BIG FOUR.
per mile had risen only 23%.
'13
'12
'14
'15
'16
'17
'II
Sr
Lorncd on Com.
10 sion showed large book profits. This
may not appear so strange when re
is
it
called that new line obtains much busi
a
ness by transporting its own construction
material, and furthermore has very
small maintenance requirements. Hence
tTimes'pharqes
x^- appears that in 1912 the Pacific line's
it
pjicji ijiiil
-earned Shrbul gross per mile was only $567 less than
that of St. Paul proper, and its net was
fully $1,130 greater. All the profits of
*0rher Income exceeded chorges on ShPoul.
the new branch were included in St.
'14'
"13
'12
'18
"IS
18
17
'II
Com. Stocks.
$12,075,000 and greatly exceeded interest
and other charges.
At the time of the merger in 1913, the
abnormally low operating expenses of the
Puget Sound extension were already
commencing to increase. Due, however,-
to the unprecedented traffic offered in
1913, the system was able to make
a
deceptively favorable showing for the
first year of combined operations. But
the subsequent growth in business has
been slow, and the steadily mounting in
ToMou9, 919
«r terest charges have cut heavily into the
balance available for dividends.
able; in reality, was temporarily very
it
exceedingly heavy handicap. Since 1913, St. Paul has suffered not
The many who will immediately ques only from its rapidly increasing funded
tion this statement are first referred to debt, but also from sharp decline in its
a
Table which shows how the Puget miscellaneous income, which has fallen
5,
Sound extension swelled the company's off fully $2,000,000. This development
capitalization. In 1906 — the year before due partly to the loss of interest be
is
work on the new line was started — St. cause of decreasing bank balances, but
Paul's total capitalization averaged only chiefly to the fact that certain subsidiaries
$30,000 per mile, and the charges ahead no longer pay interest on the large sums
of the common only $862 per mile. In advanced by St. Paul. To make matters
A PROFITABLE SWITCH I 225
worse, hire of equipment and miscel neither company pays common dividends
laneous deductions now require a million at present, Big Four
has good prospects
dollars more. Here, then, is a reduction while St. Paul has none. While the last
of $3,000,000 (or nearly $3 pe,r share) report shows the former road to be by no
in the profits applicable to dividends, in means over-strong in cash, there has been
addition to the $5,000,000 expansion in a gratifying improvement since the heavy
bond interest. drain caused by the flood. The large
After carefully analyzing the develop earnings now being retained in the treas
ment of St. Paul since 1906, the writer is ury should very soon result in the re
forced to the conclusion that the system's sumption of common dividends. (The
troubles are not temporary, but organic preferred has received regular payments
and permanent. The belief that the since 1916.) St. Paul, on the contrary,
Puget Sound extension will in a few reports a continuous impairment of its
*
years return a large profit on the invest once so affluent cash position. The 1918
ment has no foundation in fact, because report admits that even preferred divi
the cost of this addition is entirely too dends are out of the question, and the
heavy for the territory it serves. In fact, writer believes that the common stock
St. Paul's gross per mile is even now holders have a long and weary wait be
larger than that of Great Northern, and fore they receive another distribution.
there is no more reason to expect a rapid Despite the drastic decline in St. Paul
expansion of traffic in one system than in common, it may be doubted if the market
the other. Furthermore, St. Paul has has fully realized how complete has been
the unenviable distinction of spending this property's fall from grace just as it
less on its roadbed and more for trans has been slow to reflect the remarkable
portation than any system in the North improvement in Big Four's operating re
west. The comparative figures for main sults and financial conditions. Instead of
tenance of way (in Table 3) show how idly dreaming of vanished glories or
far St. Paul ranks below a similar road clinging to their stock with the blind
in this respect, whereas Big Four's show apathy of despair, holders of St. Paul
ing is fully as good as the average. common should save what they can from
the ruins, and transfer their interest into
Dividend Status.
a road with a future as well as a past.
Taking up again the comparative mer As time goes on the difference in value
its of Big Four, it should now be evident between Big Four and Saint Paul will
that its troubles have been much less be more fully expressed by their market
serious than St. Paul's and its present price —and the spread should then be
condition far more fortunate. Although more than two points!
ern or the jointly owned C. B. & Q. In stands it in good stead when it comes
1918, for example, with the same traffic to transportation costs. This is the
on both roads, Great Northern ex chief source of N. P.'s advantage, since
pended $745,000 (or nearly 7%) more Great Northern's expenses are here
for this purpose than did N. P. In 1916 $4,550,000 larger. Just how Northern
the difference was $1 ,704,000— in other Pacific does the trick cannot be fully
words, 12.41% of gross for Great explained, particularly since the other
Northern, against 10.47% for N. P. road does not publish detailed figures
From this incriminating evidence at of its operating expenses. In looking
hand, one would straightway conclude through some State Commission re
that N.P.'s operating expenses have ports, the writer came across the sig-
been held down by neglecting its cars
and locomotives. Yet on further in TABLE II— NORTHERN PACIFIC'S
LAND SALES
vestigation it transpires that North Price per
ern Pacific's unkeep costs per unit of Year Acres sold Proceeds Acre
equipment are actually higher than 1912-13 526,374 $ 3,040,126 $ 5.75
Great Northern's; and that the lower 1913-14 588,734 3,458,379 5.88
1914-15 1,004,018 4,124,580 4.11
expenditure in the aggregate is due to 1915-46 1,283,069 6,432,518 5.01
its owning a much smaller number of 1916(6mos)741,863 3,789,570 5.11
engines and freight cars. But how — 1917 994,635 7,775,603 7.82
one asks — can Northern Pacific handle 1918 162,315 1,989,261 12.25
as much traffic as the parallel line, Total
when it has 20% less freight capacity 1912-8 5,301,008 $30,610,007 $5.77
and 10% less locomotive power? Sure
ly it must hire more equipment from nificantfact that during 1916 Great
other roads, or lend less to them. Northern's fuel bill for train locomo
Wrong again! In 1917, Northern Pa tives was $1,000,000, or 20%, larger
cific's net income from hire of equipment than Northern Pacific's figure, al
was $1,237,000— against only $511,000 though its gross business was but
for Great Northern. 1^4% greater. This is a big item, and
Here is a company with the same there are doubtless similar reasons to
traffic and much less equipment, yet it account for the remaining difference.
can spare more cars and engines to Under Federal Control
other lines. What is the reason? Does The word has gone forth that the rail
it get more freight in a car, or more ways are to be returned to their owners —
cars to a train? Not at all: its train- willing or unwilling — at the end of 1919.
load has regularly been less than Wall Street thus appears in the unprece
"GNR's," although in 1917 the differ dented position of putting its trust in
ence was only 9 tons. After careful Congress to stand between the stockhold
search, the answer finally appears. In ers and the alarming deficits now being
1917 the average haul per ton was 385 rolled up by their properties. It is de
miles, or 111 miles more than for Great voutly to be wished that such childlike
Northern. This is in itself a peculiar confidence will not be misplaced. And
circumstance, since the latter operated yet — January 1 is but six months away,
8,232 miles of main track against only Congress has much to do, and a definite
6,522 for the other line — a difference of plan of relief is still far from passage.
over 26%. With a 40% larger haul This is not an especially pleasing position
for its traffic, Northern Pacific must for the security owner who sees the 1918
evidently be able to keep its equipment earnings of his railroad about 50% of
in use a larger proportion of the time, the 1917 figures. The writer has al
and thus get along with a smaller ways claimed that there is much mental
quantity of freight cars. satisfaction— if not eventual financial ad
Greater Transportation Efficiency vantage — in holding stock of a carrier
Northern Pacific's heavier traffic which has prospered under Government
density ($13,526 per mile against $10,- control, rather than one of the numerous
504 for Great Northern in 1917) also "lame ducks."
316 THE MAGAZINE OF WALL STREET
Now, while it cannot be said the 000. The actual excess of Great North
Northern Pacific has made a brilliant ern's interest charges in 1917 was only
showing under Messrs. McAdoo and $1,217,000.
Hines, its setback has indeed been rela But even this difference has practically
tively slight — for the net earnings after disappeared because of the sale by Great
rents, as shown in Table 1, were only Northern in Sept, 1917, of $20,000,000
$1,921,000 less than the guaranteed com 5% notes. On this account, the 1918 re
pensation. Great Northern, on the other port will show an additional charge of
hand, has been a very poor proposition $667,000, while Northern Pacific's inter
for Uncle Sam, returning a deficit of no est payments decreased $100,000.
less than $15,775,000, after charging the As for the future course of interest
rental paid to the stockholders. charges, attention must here be directed
The extraordinarily poor showing of to the large land holdings of Northern
"G. N. R." is due chiefly to its very heavy Pacific, through the sale of which an an
maintenance expenses, which were more nual reduction is made in the amount of
than $7,000,000 in excess of Northern prior lien bonds outstanding. Because of
Pacific's outlay for this purpose. But its importance, this land grant will be
even in transportation costs, N. P. has given further consideration below. We
continued its progress, and reports a rel would merely remark that indications
ative saving here of over $6,500,000. It point to a speedy disapppearance of
is difficult to determine the exact signifi Great Northern's present slight advan
cance of Great Northern's far heavier up tage in the matter of interest charges.
keep expenditures in 1918. But the ad In fact, in a few years "the shoe should
vantage in transportation economy is be on the other foot."
certainly of prime importance — and Miscellaneous Charges and Income
promises to show up strongly after the But the question of fixed charges does
roads are returned. not depend solely upon the companies'
bonded debt. There are several other
Fixed Charges
items — often of great significance — which
So far, we have been considering only serve either to increase or reduce the
the question of gross and net revenues. burden of interest payments. Take the
An equal influence on the dividend bal question of rentals; both of leased lines
ance is exerted by the fixed charges, and of equipment. Where these rentals
which must next claim our attention. are paid, they are practically equivalent
Even experienced investors are quite to interest on the money which would
generally under the impression that have been necessarily borrowed if the
Great Northern's interest requirements properties had been built instead of
are much lower than Northern Pacific's. leased. Similarly, where a road derives
But an examination of the past, the income through renting its property to
present, and the future status of the others, this is properly an offset against
roads in this respect, reveals the inaccu the interest it pays on the investment in
racy of the popular ideas on the subject. volved.
The 1917 report of the two systems The writer has always believed, there
showed interest charges of $12,244,000 fore, that in order properly to study the
for Northern Pacific, compared with element of fixed charges, the difference
$6,773,000 for Great Northern. But between "other income" and "other de
much of the significance of this contract ductions" should be added to or sub
disappears when it is remembered that tracted from the interest payments.
Great Northern excludes from its income When this practice is applied to the two
account the interest paid on its share of roads under discussion, Northern Pacific
the C, B. & Q. collateral 4s, due 1921, is found to enjoy a great advantage. For
offsetting it against the dividends received in 1917 its other income (excluding C,
on the Burlington stock. Northern Pa B. & Q. dividends) was $1,350,000 more,
cific more properly includes both items and its rentals and other deductions
in its statement, thus making an appar $209,000 less than in the case of Great
ent but not a real difference of $4,254,- Northern. The final result was that a
NORTHERN PACIFIC OUTSTRIPS GREAT NORTHERN 317
been enjoying a steady income of large margin of $4,996,000 in net after taxes
proportions through the sale of its farm was increased to an advantage of $6,463,-
000 in surplus available for dividends
—
lands, which are located principally in
Montana and Washington. On Dec. 31 equivalent to $2.66 per share.
last there remained 4,800,000 acres avail The Land Grant
able for sale. Assuming these holdings Northern Pacific's land holdings have
have an average value of $6 per acre — ■
in 1918 the land brought $12.25— there is
COMPARATIVE PROGRESS Of H0.PAC.& GREAT NORTHERN
here a "hidden asset" worth $30,000,000, No Pac Figures Minus Great Northern Figures
which is steadily being converted into
cash. The funds so realized are applied
to the retirement of the prior lien bonds
and so increase the net income available
for dividends. Great Northern's land
holdings, however, are entirely negligible.
now aggregating only 101,543 acres.
Conclusion
Every Wall Street man is aware that
Great Northern "preferred" is not a pre
ferred stock at all. When the old com
mon was retired in 1901, the present is
sue was left as the only class of stock,
and thus became common in everything
but name. The retention of the old title
is generally regarded as illogical, but
harmless. Yet the writer has seen not
only experienced investors, but even Wall
Street brokers themselves, list Great
Northern among their preferred stocks.
When the common stock of National
Sugar Refining was retired in 1913, the
old preferred was exchanged for new
common stock.. The same should have
been done long ago in the case of Great
Northern preferred.
The above is not entirely a digression,
because the writer feels that Great
Northern may be favored by some read
ers over Northern Pacific on account of
the "preferred" in its title. With this
error corrected the superior merit of
Northern Pacific should now be entirely
clear.
For on the basis of its operating and
financial results we have shown that
Northern Pacific is entitled to sell on at
*Achjol earnings
least as high a level as Great Northern
•— in fact should command a better price.
r
Three Switches in New York Tractions
By BENJAMIN GRAHAM
Securities Selling Out of Line–Suggestions to Holders of
Third Avenue Stock, Interboro Preferred, and
Diº
Interboro Rapid Transit Fives
ISCREPANCIES-and hence op dividends until all accumulations on the
securities originate adjustment 5s are discharged.
most often when events move Third, This cannot happen for another
faster than quotations. The kaleidoscopic year at least.
change in the New York traction situa It follows therefore that present pur
tion since 1916 is an instance of this kind; chasers of the adjustment 5s must in
for while all the issues have naturally evitably receive at least 15% in interest,
suffered, the declines have been strangely before the stockholders can even think of
uneven and the resulting relative prices getting a dividend. By selling the stock
decidedly illogical. at 25 and buying the bonds around 40, the
Let us consider first the peculiar situa stockholder is really able to switch from
tion in the stock and 5% adjustment the junior to the senior security at the
bonds of the Third Avenue Ry. At this same price. If traction conditions im
writing (June 21) the bonds are selling. prove, it is evident that the adjustment
at 39% and the stock at 25—a difference 5s will reach 60 much sooner than the
of 14% points. The interest on the
adjustment is a contingent charge—i. e. TABLE I–PRICE RANGE OF THIRD
it is payable only if earned—and conse ADJUSTMENT 5s AND STOCK
quently no payment has been paid since Adjustments Stock
Year High Low High Low
October 1st, 1917. Nevertheless the inter . . 80%
1912 . . . . . . ... . 70 53%. 33%
est charge is cumulative and all arrears 1913 . . . . . . . . . . . . 79 63% 43%. 27%
must be paid up before the stock can be 1914 . . . . . . . . . . . . 74% 72 4334 33
eligible for dividends. Now, as of July 1915 . . . . . . . . . . . . 82 75 64% 35
1916 . . . . . . . . . . . . 843% 75 68%. 48
1st, 1919, there is exactly 10% accumu
1917 . . . . . .. . . . . . 73% 27 48%. 14
lated on the adjustment 5s, so that a year 1918 . . . . . . . . . . . . 38%. 27% 213%. 12%
from now there will be either paid or 1919 to date. . . . . 42% 25 25% 13%
accrued a greater amount of interest than
the present difference between the bonds stock. The appended price record of the
and the stock. Needless to say dividends two issues shows that the average price
on the stock are out of the question dur of the bonds in more prosperous times
ing this period, so that in effect the pur was about 20 points higher than that of
chaser of the adjustments at their pres the stock.
ent level is getting a 5% income bond The longer it takes for Third Avenue's
(equivalent to a cumulative preferred prosperity to return, the more there is
stock) at a net price lower than the non to be gained by changing from the stock
dividend paying common. into the bonds; since the claim for ac
To give the matter a concrete bearing crued interest will steadily grow larger.
let us take the case of an investor who If matters turn for the worse and a re
has bought Third Avenue stock around ceivership is necessary, the bondholders
60 and is patiently waiting for the public are of course in a far stronger position;
utility muddle to right itself and his in since they are certain to retain their
vestment to return to its former level. equity, while the stockholders would face
Now three facts must be self-evident: elimination—or at best an assessment.
First, Third Avenue stock is not going Under the most favorable circumstances
to sell at 60 again unless dividends are for the stock, the bondholders are sure to
resumed, or at least are in immediate be receiving interest over a considerable
prospect, period while nothing whatever is paid
Second, There can be no thought of on the shares.
(509)
510 THE MAGAZINE OF WALL STREET
An Opportunity in Interboro portunity to the stockholders to save
Consolidated more than they deserve from an un
The relation between Interborough- fortunate situation. For even if a bank
Metropolitan Collateral 4y2s and Inter- ruptcy sale is avoided and the relative
borough Consolidated preferred stock is position of the various securities remains
very similar to that of the Third Avenue substantially unchanged, dividends on the
issues. The respective prices are here preferred shares are sure to be deferred
41 for the bonds and 29 for the stock. In for many years during which the bond-
this case the weakness of the shares lies owners will be receiving their interest.
not in the accumulation of prior charges, Interborough 5s versus 7s
TABLE II— PRICE RANGE OF INTER- The numerous holders of Interboro
MET. 454s AND INTER-BORO CON Rapid Transit 5s have now an excellent
SOLIDATED PREFERRED opportunity to improve their position
Inter-Met. 4^s I. B.C. Pfd. greatly from the standpoint of both se
Year Higb Low High Low curity and yield, without in any way
1915 7954 7354 82 70
i9i6 76y2 ny2 69
sacrificing the possibility of complete re
7754
1917 7354 50 7254 39}4
covery of the original cost of their invest
1918 585/6 38 47J4 1754 ment. This can be done by switching
1919 to date 43?4 27 3154 \\% from the 5% bonds at 75 an equivalent
but in an actual
amount of the Interboro Rapid Transit
default. The failure to convertible secured 7% notes, due Sept.
pay the April 1st. interest on the Inter-
Met. 4y2s gives the bondholders the 1st, 1922, at 90. The 7% notes are
secured by deposit of 15% of their face
right, through foreclosure sale, to take
value in 5% bonds, and are therefore bet
complete possession of the holding com
ter, protected proportionally than the Re
pany's property (chiefly the stock of the
funding 5s themselves. They are con
operating company), and thus to wipe out
vertible into the 5% bonds at 87% and
altogether both the preferred and com
can therefore share fully in any recovery
mon issues of the Interboro Consolidated.
This is precisely what was done in the of the bonds to their former levels.
bankruptcy of the old Rock Island Co.,
To make the matter clearer, let us
when the bondholders foreclosed on their again consider the concrete case of an
collateral and eliminated the old stock owner of say $8,000 I. R. T. 5s of 1966
holders.
It is clearly in his interest to sell these
The fact that IBC pfd. sells at 29 al holdings at 75 and buy in their stead
$7,000 par value of the 7% notes. He
though threatened with utter extinction
will have the right to exchange the seven
may be taken to indicate that such drastic
action will be avoided, and the stock notes back into the eight bonds he sold
holders permitted to retain some equity at any time before Sept. 1st, 1922. (Of
in the reorganized company. Yet the TABLE III— PRICE RANGE OF INTER
plain facts are that the shareholders are BORO RAPID TRANSIT 5s AND 7s
entitled to no consideration whatever, I.R.T. Ss I.R.T. 7s
and only the traditional helplessness and 1913 98^-98
stupidity of the bondowners can prevent
1914 99J4-96
1915 9934-9654 -v'.V..>...
them from asserting their right to com 1916 ■ 4*5.
9934-9754
plete possession. The Interboro Con 1917 99^-7654 ,JL
solidated stocks have represented nothing 1919 to date 7554-65 92 -83'4
1918 85 -69
but water from the beginning, and the 9954-90
payment of preferred dividends in course he would make the conversion
1916-7 was in effect a crime against the only if
the 5% bonds are? selling above
bondholders. 875^ ; otherwise he would take par in
In view of the danger of foreclosure, cash for his notes and repurchase the
the difference of but 12 points between bonds in the market.) It is true that he
the bonds and preferred shares of the realizes only $6,000 for his bonds, while
holding company appears ridiculously in the notes will cost $6,300. But the an
adequate, and presents a wonderful op nual interest on his new security would
THREE SWITCHES IN NEW YORK TRACTIONS 511
be $490 against $400 on the 5% bonds— are slow to return to their pre-war levels.
a gain of about $200 by the maturity of In other words, assume that on Sept. 1st,
the notes. Under the most favorable 1922 the 7% notes are paid off at par, but
conditions for the bonds therefore, the the bonds are selling about 80. The in
maximum loss through making the ex vestor would then gain $700 on the cost
change could not exceed $12.50 per bond. of seven notes, whereas his eight bonds
But let us pass now to the other ex would be worth only $400 more than he
treme and assume that the improvement sold them at. Moreover the $700 profit
in the traction situation is so long de is certain if the company keeps out of re
ferred as to necessitate default on these ceivership; while any advance in the
notes ; either of interest or principal. The bonds must depend on general market
noteholder would then become entitled to conditions.
receive $1,560 in 5% bonds for each To summarize : the exchange from the
$1,000 note: so that at 90 for the notes, 5% bonds into the 7y2 notes is clearly
the collateral, if distributed, would cost desirable because (1) under the most
him only 57^4 — or 16J4 less than what probable conditions it will show a con
he can now obtain for his bonds. In the siderable profit; (2) if bankruptcy
event of default it is evident that the gain should intervene — which is at least pos
through the proposed exchange would be sible — the switch would prove extremely
very substantial. advantageous; and (3) under the most
But let us consider finally the third unfavorable conditions it can show only
possibility — which lies midway between a very nominal loss. Surely a maximum
the other two, and in the writer's opinion cost of $12.50 per bond is a very small
appears most likely — namely, that de price to pay for the favored position held
fault is avoided, but that the 5% bonds by the noteholders.
FUTURE OF OIL
A banker who has a broad view says : "I believe the oil boom is here to stay. Not only
are increasing current demands for oil products keeping well up to the advance in production,
but European stocks which were exhausted at the time the armistice was signed must be built
up to former levels.
"The extent of this European demand is not wholly appreciated. It is estimated that
Germany alone will require 1,100,000 tons of petroleum and petroleum products within the
next twelve months. Other European countries are little better off in this respect. It will
probably be a long time before production catches up with consumption, and the demand
created by the necessity for building European surplus stocks up to former and normal levels.
"For this reason I believe active development of new oil fields should proceed vigorously
and there is every reason to believe such a program can be followed out with success and
profit.
"In this connnection I am of the opinion that too much money has been made out of oil
development by a few individuals and not enough by the general investing public. The public
should be given an opportunity to share in the profits from development of oil lands, whereas
the rule has been that the opportunity for big profits has come to only a few men of large
capital resources.
"My opinion of a legitimate and equitable oil development is to secure well located leases
in proven or partly proven territory after consultation with the most expert oil men and
geologists that money can procure. Then reputable men of the highest standing should take
an interest in this development and give the general public not only the benefit of their
ability and business experience, but an opportunity to benefit from the discovery of oil,
should development prove successful.
"Every mine and every oil development is in its initial stages a prospect. The public, if
assured that men of ability and integrity are conducting the affairs of such a company, would
gladly invest their funds in a development which, under these circumstances, would promise
the most favorable outcome within the limitations of the situation."
CT /O
r^S>pS
The Goal Situation and Goal Stocks
Is a Coal Shortage Imminent? — Speculative Versus Invest
ment Position of the Leading Issues — Pittsburgh
Coal and Pittsburgh & West Virginia
By BENJAMIN GRAHAM
market history of soft coal sumers, apparently still obsessed by
THE during the past few years has
closely followed that of copper.
the hope of cheaper coal, are doing
practically nothing now to provide for
In 1916 and 1917 war demands induced next Fall's requirements. For this rea
a continuous advance in price, which son experts in the coal trade confi
was finally checked by Government dently predict a fuel shortage next
price fixing. The signing of the armis winter rivalling that of 1917-18 in
tice resulted in a radical curtailment of severity.
consumption, which in turn has com When the public finally awakes to
pelled substantial concessions by the the situation, the sudden rush of de
sellers. But even the decline in quota- mand is certain to result in feverish
lions has so far failed to stimulate activity and rising prices. If the stock
buying to any extent and hence the market runs true to form, it will have
output still remains well below last anticipated this development by activ
year's figures. ity and strength in the coal issues,
The shrinkage in demand since last which hitherto have been lagging
November has been due to three somewhat in the general upswing.
causes: (1) Reduced requirements, From the speculative standpoint there
(2) Expectation of further price reces fore, such stocks as Pittsburgh Coal,
sions, (3) Seasonal lull in consumption. Pittsburgh & West Virginia and Pond
With all three factors in operation at Creek Coal should soon offer inviting
this moment statistics show that pro possibilities.
duction is now fully 30% below the But when we come to analyze their
1918 figure, and practically no surplus investment statue, the position of the
stocks are being accumulated. Con coal issues is found to be much more
y^#^
0
\ re
1
Thin Illustration Conveys An Adequnte Iden of the Extent to Which American Mine
Owner* Supplement Hnnd Work With Mechanical Time Saving- Device*.
(601)
602 THE MAGAZINE OF WALL STREET
complicated. The above mentioned the average. Allowing the 1918
companies are all producing bitumin amount of 30 cents per ton for all fixed
ous or soft coal, and we shall accord charges (other than war taxes) it is
ingly confine our attention to that evident that the present earnings must
commodity. be very small.
Prior to the war the margin of profit A study of the exhibit of the past
in the soft coal trade was relatively years is not fruitful of encouraging
small, and the earnings on the issues in conclusions. In the period prior to
question were by no means encourag
ing, as we shall show in detail later.
War prices brought sudden prosperity PITTSBURG COAL
and large surpluses; but while current
"18
'14
'15
'16
'17
19
131? 13
assets have been substantially in
creased, it is not evident how this will
result in either expanded output or
lowered costs.
The fact is that production expense
has grown so rapidly that even a con
siderable advance over the pre-war
selling price might be inadequate for
profitable operations. Furthermore, +*•
the coal trade" has of late been greatly
disturbed by the menace of oil. competi 52
/J
tion, in which the actual cost of pro
^
1
duction is almost negligible, and which —
LOSrpernjn
threatens therefore largely to displace
i
coal, unless the price of the latter can
be reduced.
So while the immediate prospects
favor a boom in the coal issues, the
long range view is full of uncertainties.
This may be brought out more clearly
by a consideration of the individual
companies.
Pittsburg Coal
This company claims to be the larg
est producer of soft coal in the world.
It has now outstanding $20,500,000 of
bonds and mortgages, $36,000,000 pre
ferred stock and $32,169,000 common
stock.
The appended graph shows the pro
duction, selling price, and cost of its
coal since 1912, and also the earning
on its present stock capitalization.
Production costs are stated without
including interest, depletion, depreci
ation, or war taxes. Figures given by
Pennsylvania coal producers for April,
1919, show a slight increase over 1918.
At the same time the current selling *ToJuly7.
price of soft coal is well below the
$2.89 figure, reported by this company 1916, preferred dividends were cov
for the preceding year. Pittsburg ered in but one year, 1913, in which the
Coal's output is probably now fetching small sum of $1.76 was earned on the
no more than $2.25 to $2.50 per ton on common shares. further appears
It
THE COAL SITUATION AND COAL STOCKS 603
that the output has shown a declining parent company during the past two
tendency in general, while the curve years has been based almost entirely
of production costs has turned stead upon the supposedly large coal earn
ily upwards. The very large profits of ings, it is rather remarkable that no
1917 were due to an advance of 90 effort has apparently been made to de
cents per ton in selling price, and only termine the earning power of these
34 cents in costs. But in 1918 the shoe coal properties in the pre-war period.
was on the other foot, as a further ad The writer has consulted all availa
vance of 22 cents per ton in price was ble data regarding the Pittsburg Term
completely overshadowed by a jump of inal and Coal Co.'s operations since
51 cents in costs. 1912, and has accordingly prepared the
The only reason to expect a better annexed graph which shows the annual
post-war than pre-war record for output and also the earnings accruing
Pittsburg Coal would seem to lie in its to Pittsburg & West Virginia since
stronger current asset position. As 1912.
compared with 1913, its holdings of Detailed financial results are at
cash and Liberty Bonds show an in hand only for the years ended June,
crease of about $8,000,000, or $25 per 1914 to May, 1917. The 1912 and 1913
share. At the same time the present income is reconstructed from the bal
price of the common stock is about 45 ance sheet, and estimates for the last
points above the maximum quotation half of 1917 and the calendar year
of six years ago. From a purely in 1918 are taken from fairly reliable
vestment standpoint the market seems SOU11 CeS.
it,
owned by since the middle of 1917. be expected that sharp advance in
a
These dividends together with the in coal prices later in the year will greatly
terest received on its bond holdings augment the Coal Co.'s earnings,
brought total income from its coal which must now be running at very
it
a
a
subsidiary in 1918 of $1,100,000— equi
valent to the full preferred dividends PITTS. &W.VA. COAL PROPERTIES
and $2.20 per share of common stock.
1
Because of the very poor earnings
during the test period 1911-1913, the
■
standard compensation for the use of
^ ,*— ■—
\
\
■
V
the railroad properties amounts only
////
\
\f\\\
to about $300,000, or but $3.30 per
=
share of preferred stock. Because of
Z
the large expenditures made during the
receivership, the company would seem
to be entitled to some extra allowance, g
'15
'16
'14
1913 '17 '17*
but so far the Government has shown
V
.,
///
\
no signs of generosity to this road, or
'di
\
Earn
\\\\
ff/
in fact to most of the other roads
'
which have claimed special treatment.
A
///
The guaranteed railroad compensation
plus the coal earnings of $1,500,000 //
'
lo
*
would make total income of $1,800,-
a
31
preiiousyears endedJuneM-tW
While this exhibit would in itself
perhaps justify the present price of 40 low rate. It must be admitted, there
for the junior shares, the extremely fore, that the stock has good specu
poor record in pre-war years gives rise lative possibilities over the next few
to serious misgivings as regards its fu months but as long pull investment,
a
;
Some of the coal men predict miners are going back to Europe, Coal
that will be fully as serious as that production has fallen off considerably
it
buyer pays more interest to the situ tons looks probable. My advice to
ation than he doing at the moment. consumers to buy now while they
is
is
the National Coal Association, Harry Dr. Garfield had abundant reasons
A. Garfield, United States Fuel Admin for issuing this warning. While the
istrator, issued this warning Fuel Administration, of which he
is
:
"Buy now — in August or the au the head, early in the year, ceased to
r u
By BENJAMIN GRAHAM
immobility of the rails during the ferred shares of small equity and unsatis
THE excited advance of the rest of the factory records into better secured and
more desirable funded obligations.
market occasioned no little surprise
among investors. The truth is that all Drawbacks of Non-Cumulative Stocks
along there had been a fundamental weak as the most attractive form of in
ness in the position of the carriers, which
Just
vestment is theoretically the Convertible
had received much less attention than it Bond, so the least attractive is the Non-
deserved, until brought rudely to the fore Preferred Stock. The two
Cumulative
by the recent radical demands of the em types are diametrically opposed. A good
ployees. convertible can share fully marketwise in
For some months there have been three a company's prosperity, but is well protected
basic elements in the railroad situation, Its price can
against adverse conditions.
which may be summarized as follows: advance further and more easily than it
(i) After January ist next the stock can decline. The ordinary preferred shares
holders will be fully responsible for the can participate in no direct manner in in
finances of the carriers. creased earnings; and if they are non-
(2) If the present operating results cumulative, they suffer quick and irrep
were then to continue, a majority of the Their
arable loss when income diminishes.
systems would soon be in bankruptcy. value can never increase greatly; it often
(3) Remedial legislation by Congress
undergoes decided shrinkage.
has been confidently expected to avert the
These issues are especially vulnerable
otherwise inevitable disaster.
when the common stock is not receiving
Observe that otherwise the danger ex
dividends. For in the usual case where
pressed in (1) and (2) is a definite in the directors represent chiefly the junior
controvertible fact, the relief indicated in shares, there is no incentive to continue dis
(3) has been an absolute necessity, a near bursements on the preferred. The man
probability — but still not a certainty. With
agement is likely rather to cast about for
prudent investors probabilities — no matter
any plausible pretext to eliminate payments
how imminent — count less than actualities.
on the senior issue, and thus conserve earn
Hence the hesitation to purchase the rail
ings for later distribution to the common
road issues despite the buoyancy of the
stockholders. The weakness of the non-
general market.
cumulative preferred shareholders' position
The scare created by the uncompromising in this respect is strikingly shown by the
attitude of the railroad brotherhoods has
passing of the dividends on St. Paul Pfd.
intensified the element of danger to our soon after that of the common.
transportation system. The writer has When the inherent disadvantage of non-
contended that the railroad muddle has cumulative preferred issues are coupled
contained some possibility of financial with the present uncertainty in the trans
disaster, and that until this doubt is portation field, the status of such railroad
definitely removed, it would be wise for in shares becomes particularly unfavorable.
vestors to guard against trouble, even
Although all may still turn out for the best,
should it never come. Hence his repeated the writer believes that holders of B. &. O.
counsel to switch from roads doing particu Preferred, Southern Railway Preferred,
larly badly under Federal operation to the Erie, ist Preferred and similar issues are
few which have prospered — from B. & O. in a fundamentally unsound position. The
into Chesapeake; from St. Paul into Big
following definite suggestions for improve
Four; from Great Northern into Northern ment are, therefore, made on the theory
Pacific. that prevention is better than cure.
The purpose of this article is to suggest
means by which investors may strengthen Baltimore & Ohio Preferred
their position, through changing, not from The lesson of St. Paul should be of par
one railroad into another, but from pre ticular significance to holders of B. & O.
(759)
760 THE MAGAZINE OF WALL STREET
Preferred who have just seen the dividend into Buffalo & Susquehanna 4% cumulaiiu
passed on the junior shares. Since both preferred selling at 51. This issue, although
the bondholders and common stockholders listed in both Philadelphia and New York,
have now nothing to lose, and a substantial is but little known and not sufficiently
amount to gain, from the withholding of
preferred dividends, it would not take much Ry. Pref.
TABLE II.— Price Range of So.
of an emergency to result in such action. Gen. & Dev. 4s
The B. & O. situation has enough unfavor Pfd. Gen. ADeT.fc
able elements to make it unnecessary to High Low High U
Year
cast around for pretexts. Operating re 1912 87% 68% 79% :■-.
sults have been miserable ; interest charges 1913 81% 72 78% ::\
have been steadily rising, and the company 1914 85% 58 76% r>:
has recently obligated itself to lay aside the 1915 65 42 72%
sum of $3,500,000 yearly for additions and 1916 73% 56 78 w
1917 70% 51% 77 5(>',
working capital before paying preferred ss
1918 75% 57 73
dividends. 69 t>-
1919 to date 72% 66%
Holders of B. & O. Preferred who have
faith in the ultimate salvation of the system
and are averse to parting with their shares appreciated. In 19 17 — the last year before
at these low levels, can improve their posi Federal operation — preferred dividends
tion materially at slight cost by switching were earned four times, and $16 per share
was shown for the common.
The 4% dividend on the preferred haf
TABLE I.— Dividend Record of Southern Ry. been paid since the beginning of 1915 and
Pref.
the common has been receiving 7% since
Paid Paid Paid January, 1917. A peculiar feature of Buf
Year Per Ct. Year Per Ct. Year Per Ct.
falo & Susquehanna is that its fixed charge;
1897-8. 1907 4 1914 4% and preferred dividends combined are more
1899.. 1908-10.. None 1915-6... None
1900... 1911 2
than covered by its income from invest
1917 2%
1901.. 1912 4% 1918 5
ments and equipment hire, exclusive of di
1902-6.. 1913 5 1919 2% rect operating profits. It is extraordinarily
well supplied with cars and engines for a
road of its size.
into the Toledo-Cincinnati Division 4s, due Southern Railway Preferred
1959. These bonds were recently issued as
An interesting commentary on our gen
the result of the C. H. & D. reorganization.
eral idea of switching from non-cumulative
They are secured by general mortgage on
the latter mileage ; but what is more im
preferred stocks into junior bonds is found
portant, they are the direct and uncondi
tional obligation of the B. & O. They sell TABLE III.— Price Range of Erie 1st Pfd. and
at 61, only six points above the preferred 4s, "Series B"
stock. 1st Pfd. 4s,"Series B"
The strategic advantage of such an ex Year High Low High Lot
change is at once evident from the fact 1912 57% 47% 80% 75
that the bond interest must be paid or else 1913 49% 33% 77% 65
49% 32 76
receivership ensues, and hence the road will 1914 62
1915 59% 32% 86% 63%
do everything possible to avoid default.
1916 59% 46 84 6t
But the preferred dividend can be passed
1917 49% 18% 68% 37%
without inconvenience to any one except the 1918 36% 23% 59 42%
preferred stockholders, who are powerless 1919 to date... 33 24% 52 46
to protect themselves. It would need only
two years' suspension of dividends to bring
the cost of the 4% bonds below that of the in a colloquy recorded in the minutes of
preferred. On the other hand, even were the annual meeting of the Southern Rail
dividends continued, a mortgage obligation way held in 1917. A stockholder remarks
would surely be worth at least six points that the irregularity of the preferred divi
more than the 4% non-cumulative pre dend is a great disadvantage and that many
ferred of the same road. owners of this issue would be willing tc
To those who are anxious to part com have the nominal rate of payment reduced
pany with B. & O, and yet are averse to if they could be assured of a continuous
reducing their income or increasing their income. To this an investment banker re
investment, the writer suggests a switch plies that precisely this result can he ob
STRATEGIC SWITCHES IN RAILROAD ISSUES 761
ained by switching from the 5% non- than Missouri Pacific Preferred —despite
umulative preferred into the 4% General the difference in price — because the rail
ind Development 4s, then selling at the road situation hardly holds forth much
ame price. promise of early dividends on the stock.
At this writing the bonds are quoted two Erie First Preferred
>oints below the preferred, and the advan- No doubt there are many unwilling
age of the exchange is even more apparent owners of Erie First Preferred at much
han three years ago. Investors should not higher than present levels, who cannot sum
>e misled by the apparent difference of mon the courage to admit their mistake,
.% in the face return of the two issues. pocket their loss — heavy as it may be — and
\ glance at the accompanying dividend put their money into an asset in place of a
•ecord of Southern Railway Preferred will liability. For those who, like Mrs. Micaw-
:stablish that the 5% rate on this security ber, will never desert their Erie, there is a
las been pretty much of a snare and a delu chance to obtain at least a return on their
sion. For only six years out of the last capital and a prior claim on the road's
:wcnty has the full 5% been paid, and the earnings, by switching from the First Pre
iverage return for the two decades has ferred at 30 into the "Series B" 4% Bonds
aeen but 2.82%. at 46. The many who will hesitate to pay
There is significance in the fact that even the sixteen point difference involved would
this year — when the road's financial posi- do well to reflect that it is twelve years
:ion appeared so much stronger than before since Erie First Preferred has received a
the war — the April dividend was deferred dividend, while the bond interest has been
for three months. Despite the advantages paid regularly during all this period. A
brought by the great war boom in the similar switch made at a twenty point dif-
TABLE IV.— Price Range of M., K. & T. Pfd., St. Louis Div. 4s and Tex. & Okla. 5s
Pfd. St. L. 4s T. & O. 5s Pfd. St.L.4s T.&0.5«
Year High Low High Low High Low Year High Low High Low High Low
1912 66 57 78 76 — — 1916 24% 10 46 37 69 49
1913 64% 52 78% 77% 101% 101% 1917 20% 7 — — 49 45%
1914 60 26 — — 99% 97 1918 13% 6% — — 40 30
1915 40 10% 60% 51 69% 68 1919 25% 8% 27 25 50 50
South, the permanence of the Southern fcrence in 1908 would now show the in
Railway preferred dividend is still far from vestor forty point profit, because of the
a
L'stablished. But ever since the 4% bonds advantage of payments of interest over
were issued, their interest payments have prospects of dividends.
jf course been met promptly and in full. In 1916 the company's sudden prosperity
To paraphrase the Scriptures — better a 4% inspired high hopes in the oft-deceived
is,
aond where safety than 5% preferred stockholders, but these too were doomed
a
(O, 1918, and thus enjoys an important ad The traditional immortality of pussy cats
vantage over Southern Railway Preferred. again exemplified by the sudden recru
is
Jnder the present circumstances, however, descence of "Kitty," after all the financial
ve would much rather own the general 4's doctors had pronounced her dead. But
762 THE MAGAZINE OF WALL STREET
while the multitude may applaud the phe Needless to say, we are not dealing hen
nomenon, 'tis a spectacle to make the with the choicest liens of this many mon
judicious grieve. For those who have been gaged system. Our analysis of these
paying court to "K-K-Katy" common at 14, issues in the October 12, 1918, number of
and preferred at 23, are probably not aware The Magazine of Wall Street explah-
that a 4% bond, carrying 12% in accu why they rank among the lowliest of M. K
mulated interest, is selling at 27, and & T. obligations. But a bond, however
certificates of deposit for a 5% bond with six humble, enjoys unquestioned priority over
unpaid coupons have recently been offered the preferred stock of the same road. Thr
"over the counter" at 28. We refer re long deferred reorganization is expected c
spectively to the St. Louis Division Re be consummated soon after "Katy" is re
funding 4's and the Texas & Oklahoma turned to private operation. At that time,
First Mortgage 5's. It is worthy of note with assessments to be levied and holding
that in 1916 the former issue sold 25 points to be cut down, the advantage of a mort
and the latter fully 40 points above the gage bond over a stock issue should K
preferred stock. brought home in unmistakable fashion.
recent death of F. W. Wool worth out any serious attempt to draw helpful
THE has attracted general attention to the conclusions therefrom.
interested in
five and ten cent store industry, of The investor is chiefly
which he was the founder. While the knowing which of the four common stocks
is intrinsically the cheapest at present
organization that bears his name is at once
the oldest and largest of its kind, there are market prices. Now if we merely compare
the gross or net earnings of the various
several other systems of importance, the
common stocks of which are publicly held. TABLE I.
In order of gross sales, these are S. S.
Percentage of Earnings to Market Price
Kresge, S. H. Kress and McCrory. Kresge
1918
of Common.
and Kress (strange similarity of names)
enjoy with Woolworth the advantage of Balance
Net After After
II11
Gross Taxes Pfd. Divs.
m m
■
w W 1917 1918
Woolworth
Kresge
171%
227
9.4%
10.6
7.84%
9.76
1500
Kress 209 11.4 8.81
- •JMtt&fbOrSTORlS' McCrory 768 27.8 20.96
- 1-McCroryl-Kress
- i=Kre5ge- Q=Woolwor IK. enterprises we will not get far in our in
—n
1000
n vestigation, because a company's leader
ship in gross business may be more than
offset by heavier capitalization, or over-
■ discount by its higher market price. We
note for example that in 1918 Woolworth's
1
500 sales were eleven times, and its net profits
seventeen times, greater than those of Mc
Crory. For many readers this would seem
conclusive evidence that Woolworth is a
0
|l| nil much more desirable investment. Yet it is
of equal significance that the smaller com
pany has only one-tenth as many shares,
and that each share is selling at only one-
listing on the New York Stock Exchange, fifth the price of Woolworth common.
but McCrory is an inactive issue, dealt in In other words, while Woolworth may be
•over the counter" only. For this reason earning seventeen times as much as Mc
investors generally are but little acquainted Crory, its market valuation is fifty times
with the latter company, their knowledge as great. Consequently McCrory earned
being restricted to the vague impression last year 21 per cent, on its market price,
that this is a small and none too prosperous against only 7.48 per cent, in the case of
enterprise. Let us see to what extent this Woolworth. Despite the latter company's
opinion is justified by the facts. enormously greater business, from the
Since all five and ten cent systems oper standpoint of earning power, McCrory
ate under substantially similar conditions, would appear more than twice as attractive
they are especially well adapted to com at 25 as Woolworth is at 125.
parative treatment and a study of the bare
Comparative Earning Power
figures should yield more than ordinarily
illuminating results. But while the chain This primary of value is applied to
test
stores have of late supplied a favorite sub all common stocks in Table I, which shows
ject for investment house circulars, these the gross and net earnings (after taxes) per
have confined themselves simply to the dollar of market price. Since Woolworth
presentation of a mass of statistics, with- has not yet received its 1918 taxes, these
939
940 THE MAGAZINE OF WALL STREET
are arbitrarily assumed at the 1917 figure. form system in the accompanying graphs.
The table shows clearly that on the basis of But to return to McCrory it is indeed
last year's income account, McCrory com astonishing to discover that the tangible
mon is selling far out of line with the other asset value per share of this humble com
three issues— and in fact makes more than mon stock is fully as large as that of Wool-
twice as good a showing on its present worth, which sells five times as high.
market price as does its nearest competitor, Moreover, if allowance is made for 19 18
Kresge. taxes (which are not provided for in the
These results should be interesting Woolworth balance sheet), McCrory would
enough to tempt us further into an ex actually be found to have more dollars of
amination of the tangible asset position of real assets behind each share of common.
McCrory as compared with its more pre If the very low market price of McCrory
tentious rivals. These figures, given in is taken into account, its tangible asset
Table II, contain not a few surprises. In position — like its earning power — places it
the first place it is rather startling to note distinctly at the head of the four com
that McCrory preferred, which goes beg panies. It is the only one of all the com
ging around 92, has actually more tangible mon stocks which is selling for less than
assets behind it per share than Woolworth the real assets behind it. These represent
preferred, one of the highest priced and 160 per cent, of its market price, against
125
oo
0
1913 19U 1915 1916 19 7 1918 1913 19M- 1915 1?1b 1917 1918
* lifter Taxw. ■y&
best regarded issues of this type of invest only 33 per cent, for Woolworth and Kress
ment. In this connection attention should and 86 per cent, for Kresge.
be drawn to the excellent showing made by Reasons for McCrory's Backwardness
Kresge preferred, which — because of the
small size of this issue compared with the McCrory is selling so much lower than
common — is far
better protected than its statistical position would justify (as
many better known preferred stocks sell compared with the other companies) that
It is nothing short we are impelled to seek the reasons under
ing ten points higher.
of ludicrous that Kress preferred should be lying its apparent bargain-counter (or five
Kresge preferred, as the and ten cent counter) price. The first ex
quoted above
former has not a single point in its favor. planation that presents itself is the absence
Not only is Kresge in a much stronger of a common dividend. This is an im
position with respect to both assets and portant drawback, it is true, yet not a fatal
earning power, but its past record also defeat. The value of an industrial com
shows a healthier and more rapid growth. mon stock is rarely definitely determined
This is true whether we consider the in by its dividend rate at any particular time.
crease in number of stores or in gross sales Speculative issues have sold at fabulous
figures while returning nothing whatever to
per store or in net profits per dollar of
sales— all of which can be traced for the their owners. But a more cogent argument
A NEGLECTED CHAIN STORE ISSUE 941
is found right among the other chain store not that working capital insufficient—
is
issues. The price of 160 for Kresge is this could have been more logically argued
certainly not governed by against Kresge—but rather that
its
dividend,
Io $5
has
it
yield growth
of
so
which gives only per cent. few signs the past.
of
shown
in
3.
it
a
Even Kress, which pays $4, returns only Since December, 1917, net current assets
23
have increased only $236,000,
or
4.70 per cent. its present price—less than
at
about
per cent., while gross sales have practically
TABLE II. doubled. The surplus earnings have gone
up
Tangible Asset Values Dec. 31, 1918. chiefly into fitting additional stores, and
the subsidiary which ac
to
Per into advances
of
Mkt.
Ø
Per Share Share of Price of quires real estate for the new locations.
of Pfd. Common Common
so
With sales increasing much faster than
Woolworth ......... $265 $41 33% working capital, the company would doubt
Kresge .............. 490 138 86 spare the cash for com
to
less find hard
it
Kress ... 190 28 33 mon dividends.
.
.
.
.
.
.
.
.
.
.
.
.
to
not
is
.
.
.
.
.
.
.
.
.
to
Victory bond. Woolworth has the great them impartially,
he
of
has no intention
a
is
by
would indicate the realization investors Crory's extraordinarily low market price,
that, the last analysis, the current divi
in
dend rate
is
-
'17
'18
as
"14
possibilities future dividends,
of
meas
15
16
1913
ured by earning power and asset value. 15
-
McCrory, the withholding
In
of
the case
NHPROFITSpirpolar
of
i
build up the
it
junior issue.
In
TABLE III.
0
to
Woolworth ....... $12,500,000 116 7% few who are really familiar with the com
Kresge ...........
2,000,000 108
7 7 7
moved
is
92
tained with regard Kresge, less
to
S.
S.
Common
than two years ago. This company's stock
--
Yield Outstanding Price Yield was then selling which price
at
at
Rate 80,
of it
its
pro
to its
of
of
Hence
portion any
of
the investor need not fear that the 1918 sales than that the
exhibit may have been isolated and mis other chain store systems, McCrory in
an
is a
Working Capital
servative dividend policy. likely that
to It
would
it
a
942 THE MAGAZINE OF WALL STREET
it could spare the cash for liberal dividends in no year in the past seven has less than
—unless new capital was raised, which $4 been earned per share of common stock.
seemed improbable. Nevertheless, value — It ought to be asked further whether there
like murder — "will out," and although is any good reason why McCrory should
Kresge has added only $i to its dividend not be able to establish a ratio of net
rate, its market price has doubled, as in profits to gross sales, somewhat approxi
vestors have at last realized its strong mating that of the other three systems.
position and brilliant possibilities. With a $10,000,000 business this year, it
Will McCrory Follow Kresge? should not be greatly handicapped in its
purchases, and by skilful management it
Encouraged by this example, the writer should be able to achieve considerable im
is tempted to utter a prediction that Mc
provement in this respect.
Crory, marketwise, will prove a second
Kresge, despite its handicap of insufficient The Crux of the Problem
operating funds and consequent deferment Here we have the fundamental elements
of dividends. But a fundamental element in the McCrory situation. The stock is
in Kresge's success is lacking in the case of undeniably selling at much less than is
McCrory —namely, the steady increase warranted by its present asset value and
from year to year in the net earnings avail earnings. This would indicate the belief
able for the common stock. The graphs by investors that the company may be go
reveal that practically all the advantage ing backward —or at least is stagnating —
gained through the continuous expansion a belief strongly supported by McCrory's
of McCrory's business has been lost inability to increase its net earnings during
through the equally persistent shrinkage in the last seven years. But in the vitally
the net profit per dollar of sales. In 1913 important respects, the company has not
the net earnings amounted to 7.24 per cent, stagnated. Since 1916 its gross business
of gross, whereas last year the ratio had has increased faster than that of Kress or
fallen to 3.72 per cent. While some in Woolworth, and nearly as fast as that of
determinate portion of the poor showing of Kresge ; and it leads all the rest in the rela
1918 and 1917 is due to war taxes (not tive growth of the number of stores. Mc
stated separately by McCrory) comparison Crory is therefore in a fundamentally
with the other companies shows that this sound position, and there are possibilities
factor cannot account for all of the of a sharp expansion in net profits, de
trouble. No doubt the great increase in the pendent upon the capabilities of its man
cost of goods purchased, coupled with the agement.
necessity of retaining a fixed selling price, All things considered, it is difficult to
had a good deal to do with this unsatisfac imagine McCrory's being worth less than
tory showing. 25 under any circumstances, while there
It would be easier to grow enthusiastic are good reasons to look forward to seeing
over McCrory's future if, like Kresge, it its price much higher one of these days.
had doubled its net profits in six years, in It is a good stock for the patient investor,
stead of maintaining them practically un the kind that usually makes the largest
changed. But what McCrory lacks in pro- profits and incidentally isn't worried by day
gressiveness it makes up in stability, since to day fluctuations.
"The rehabilitation
of our own industries, land buying and payment for Liberty Bonds,
seem to be absorbingour surplus fairly well. On account of the newness of our country
and the development going on around us, we have never been large buyers of outside se
curities."
Switching in Interborough Securities
The 5% Bonds vs. the 7% Notes
following letter from the senior however, the more am I inclined to believe
THEmember of a well-known firm of that the whole merit of switching is a psycho
logical one rather than a financial one.
Canadian engineers raises some in
The psychological advantage which I see is
teresting questions, not only about Inter-
that a "switch" may overcome the inertia of
boroughs, but also in connection with the an ini'estor and induce him to sell a security
idea of ''switching" in general. We, there at a loss on a switching basis, which he would
fore, reprint it with copy of Mr. Graham's not sell at the same loss on a cash basis. Am
reply. I or am I not correct in this? — Judson F.
Editor of The Magazine of Wail Stkeet: Clark.
On page 511 of your July 5 issue it is
pointed out that in the ei'cnt of default on the Your contention in regard to the exchange
7 per cent Interborough notes, "it is evident of Interborough 5per cent bonds for the 7
that the gain through the proposed exchange per cent notes is apparently based on the idea
would be very substantial," the point being that the value of the bonds to be received by
made that in the event of the holder of the the note-holders in case of default would not
7 per cent notes realizing on the collateral be be larger than the present value of the notes
hind them, namely the 5 per cent bonds, "they themselves, and that, therefore, nothing would
would cost him only 57^4, or 16J4 less than be gained by the exchange.
what he can now obtain for his S per cent It appears to me that you missed the point
bonds." of my recommendation. The idea is not that
I do not see the substantial gain in the there is a profit to be made by purchasing the
event of default you refer to. My reasoning notes at 88 and then receiving 156 per cent in
is based on the following facts : 5 per cent bonds. It is merely that in such a
contingency the note-holder at 88 is much bet
Five per cent bonds at present outstanding ter protected than the bond-holder at 71. As
$160,585,000, worth as per current price in
suming your forecast of the value of the 5 per
article 75, giving a total equity for these
cent bonds to be correct, the note-holder will
bonds at this price of $120,438^50.
have lost nothing, whereas the bond-holder
For the security of the 7 per cent notes,
would find his security worth 14 points less
$52,187,000 5 per cent bonds have been
than the price at which he could have made
pledged as collateral security. These bonds,
however, are not a part of the outstanding
the exchange. This would represent a clear
saving of 14 points by selling the bonds at 71
issue of $160,585,000, but are additional
and buying the notes at 88.
bonds from the same issue not now in hands
I was very much interested by your com
of the public. ment on the general theory of switching. The
In the event of default on the notes there
impression that you gather that the one issue
will then be outstanding of the 5 per cent
should be sold under all circumstances and
bonds, $160,585,000 plus $52,187,000. making
the other one purchased, regardless of the
a total of $212,772,000.
element of exchange, is due to the fact that
Dividing the equity of the 5 per cent bonds
writers are usually averse to recommending
as above, namely, $120,438,750 by the total
exchanges unless they are absolutely convinced
outstanding after the assumed default,
of the superiority of one issue to another. The
namely, $212,772,000, we find that the equity
is most easily proved by showing that one is
for the increased issue of the 5 per cent selling too high, while the other is selling too
bonds is 57, which coincides closely with the low.
price of 57$i which you mention as a most
That the latter is not always the case, how
favorable cost of the collateral security to ever, might be shown by my suggestion some
the holder of the then defaulted 7 per cent time ago that American Agricultural Chemical
notes. at par be exchanged for Virginia Carolina
I agree with Mr. Graham that a switch to Chemical at 54. While both issues were at
the 7 per cent notes is desirable, for it would tractive investments and both advanced sub
appear that the current market quotations for sequently, the showing of "V. C." has been
the notes are figured on a defaulting basis. In very much the better.
the event, however, of such default occurring, You are absolutely correct in your idea that
I fear that the proposed exchange would not by suggesting a switch the inertia of an in
give the very substantial advantage hoped for vestor can be overcome much better than by
by Mr. Graham for the reason fully set forth merely advising him to dispose of undesirable
above. holdings at less than cost price. The investor
I have been very much interested in Mr. rarely does the latter, and this is one of the
Graham's articles on "switches" in securities chief reasons for the heavy losses so often
and have indeed profited by his B. & O. vs. C. ultimately sustained. I trust the foregoing will
& O. switch. The more I think of the matter, answer your queries.— Benjamin Graham.
963
r
-
-
-
------
-
-
---------------
-
-
-
-
- - - --- - - -
-
-
-- -- -- - -
--
-
-
- - - --- * **
\O
ch
*
Investors' Indicator of Public Utiliti
to
on
a
NOTE–The minus sign (–) before figures below, indicates DEFICIT for the year equal the per cent stock given. Additions and betterments
of
of
improvements the
in
are included earnings given, wherever, distinguishable from ordinary expenses maintenance, since earnings, invested,
its
by
inbe
of
a
position
of
property increase the equity the stockholders and therefore render the stock more valuable. The value stock cannot judged
as
as
A
be
amount.
as
with view.tº, stability and growth well
in
the talle ONLY. Earnings for successive years, given should carefully examined,
its
in
is
poor stock may sometimes stand up well this table because price low compared with latest available earnings.
Earnings
Last Fisc. INTENDING PURCHASERS should read all
Year
|-3 T.
Present on Dollars Earned Per Share: on and Comment.” We gladly answer inqui
tr;
of
High Low Div. Recent —— –––. Recent Recent ries yearly subscribers.
.
.
to
-
-
1916 Date Rate Price 1915. 1916. 1917. 1918. Price. Price. ---
-
-
--
-
V
55
..
Ohio Cities Gas. 144 3174 29.09 1.92 2.30 8.70 30.32 55.12 Qil developments dominant. Big equities.
2
89 1878 0.00 7.40 7.53 6.97 25 22.08 Fare, increases bitterly opposed.
Brooklyn, Rapid Transit.
its
-
-
-
11.70 9.57 10.18 12.96 .73 60
&
Am. W. W. El., 1st pſd - 17.71 Holds, own, despite high, cost handicap.
16O. 7
-
-
-
14
&
.. ..
Rep. Ry. Lt. com. 11.70 2.97 3.55 5.88 –2.37 16.92 New Cleveland, franchise plan helps: Q
3.15 5.03 3.70 6.7th 43
3: > >
Standard Gas Elec., pfd. #8 18.20 15.58 Going into “oil” and paying back dividends.
h
4
15.14
-
- - - -
-
- - -- -
6.51 43
....
...
4.41 8.68
&&
... 9.30 2.41 improved
-
- N
-
-
- º: K
s.s.,
3.3s
i""
44;
2,
0.00
3.06
Ry.
14.08 “...","ä", "ºº"
In
vºted mid.......... 39%. 10%
z
105% 76 8.10 10.19 13.59 14.40 11.64 86 13.53 Business, shows constant expansion.
Western Union Telegraph......
Cities Service, com. 478 100% 1.26 15.27 36.74 60.73 61.67 475 12.98 Qil developments still going forward. tr;
tº
Detroit United Railway. 128 80 7.80 15.69 23.05 14.50 12.96 102 12.70 Suffers from high labor costs.
Phila. Co., com. 47%. 21%. 17.10 4.44 5.14 6.22 4.26 35 12.16 Going into ‘oil.” Good showing consistent.
O
&
Columbia Gas Elec. 54 25.7% 6.30 .76 2.31 5.87 6.40 64 10.00 -
t
-
º§
Montana Power, com. 115 64 7.70 3.73 8.52 7.08 6.19 65 9.52 ºutailed
North American Co. 76 39 8.80 6.06 7.26 6.05 5.38 57 9.43 Rate increases have helped considerably.
8.81 100
........ .. .. ..
:
9.28
.. .
.. ... . ... ...
........ .. ... ..
Brooklyn Edison 131 87 8.00 11.66 11.88 9.28 Gross increasing. Net, well maintained.
7 $686 4 5 5 8 0
9.06
-
Lacleue Gas Lt. com......... 104 50 0.00 9.24 11.21 8.58 4.53 50 increases badly
>
"Sºlº",
-
-
-
-
rate
º º
-
-
-
-
-
8
&
9.93 101
sº
Amer. Tel. Tel..... 124% 90% 7.90 9.09 9.61 9.65 ſºlº uncertain New financins
-
-
"
...
t
&
W.
.
Detroit Edison 149 98 7.00 13.70 14.61 10.28 9.08 115 7.89 Conservative handling resources helps.
7 86
.....
Mackay Co., com. 91 8.00
t 3
-
ydro-electric
º: developments big. Stron gly 3.
&
9.10 5.20 7.64
Cortº 7.40 10.48 5.57 68
º º
}
:0
-
-
-
-
-
&
Amer. Power Light, com. --- 6.30 7.14 High operating costs factor. tr;
5 46
7.92 6.10 86
.. .... ... .... 82 7.88 11.77
.. .... .... ...
. ..... . .J.
137 7.00
-
Pub. Serv. Corp., N. 7.09 Zoning plan helps company and user.
tr;
&
H
14
ass
*
220
to
as
durins
...
...
4s
Cons. Gas of N. Y.
.. 145 76% 7.20 9.29 8.99 7.14 5.70 96 5.93 High operating costs severe handicap.
70
....
&
2.00
....
...
Pac. Tel. Tel., com. 44 17 0.00 0.56 1.25 1.79 38 5.26 Hºlding own despite handicaps.
in
as
|
produce
90
Twin city Rapid Transit, com.. 39% 0.00 6,83 9.22 6.04 2.19 4.87 "..."." "is"
--- 0.00 3.83 5.35 7.18 –0.62
gº,
–0.67
&
0.00 7.42 8.80 5.77 27
.. .
Comm. Pr. Ry. Lt., com. 0.00 Earnings show upward trend.
-
-
- -
2.11 0.00
.. ...
..
3.22 5.91 68
a
Northern States Power, com. 0.00 0.00 Aggressive expansion program feature.
&
as
People's Gas Lt. Coke........ 000 s.39 s.39 4.44 –3.5s 0.00 Wººl
0.
0.
4.
*
as is
o 0 0 0o
- -
By BENJAMIN GRAHAM
EBSTER defines “to hedge” as “to is evident that the bonds will not suffer as bonds about 4 point higher than the stock.
protect oneself from loss by bet severely, because their investment rating The supply of bonds was forthcoming
ting on both sides.” Hedging as alone assures them of a certain minimum from specialists who had been able to
a commercial operation is practiced quite value. In actual fact, at this writing the sell stock on rallies, above the correspond
generally among flour millers and cotton stock is down to 83, while the bonds hold ing price of the five per cent bonds, and
spinners. While the details thereof might firm around 94. We could therefore undo who were about to present the bonds for
appear rather complicated, in essence it our little operation by selling the bonds conversion. They of course were glad
consists of selling “futures” short at the for $9,400 and buying back our stock far enough to obtain an extra 4 point profit
time the staple is purchased, so as to $8,300. This would show a net credit of by buying the stock and selling the bonds
guard against fluctuations in price during $1,100, from which expenses and the instead of converting. As it turned out,
the period of manufacture. original difference of $25 are to be de the trader who took over the bonds on
In the securities market a form of hedg ducted, still leaving a net profit of over this basis would have fared better than
ing very common on foreign Stock Ex $1,000. the original owner, because on the subse
changes is the use of puts or calls against Here then was a venture which under quent break he could have bought back
long or short stock respectively. If a man the most unfavorable conditions could the stock and sold his bonds at a five
purchases one hundred shares of U. S. have shown a maximum loss of only points difference. This would have meant
Steel at 106, for instance, he might limit $56.50, but contained by no means remote about 4% points “easy money” for a
his possible loss by buying also a put possibilities of a thousand dollar profit. shrewd hedger.
good for thirty days at 102. This means Not a bad chance, was it? Add further Even experienced “hedge artists” often
that however low the stock may break, he that it required little capital (as the forego the chance of excellent profits be
has the right to sell it at any time within money really tied up was negligible), and cause they wait in vain for the possibility
the next month at 102, so that his maxi that the carrying charge was insignificant of loss to be reduced to too small a figure.
mum loss under the worst possible condi since the bond interest almost offset the For example, in the ill-fated boom of
tions would be $400 plus the cost of the dividends on the stock. How much safer Allied Packers stock last October, it sold
put (and commissions). This arrange this is than the ordinary market com at 66, while the convertible 6 per cent
ment is often preferable to a stop loss mitment is apparent when we consider bonds were quoted at 91. Each $1,000
order, because it guards against loss that the man who bought the 100 Lacka bond was convertible at any time for
through a temporary fluction. Should wanna at par is out $1,700, if he still holds thirteen shares of stock, so if bought at
Steel drop to 101% and then rally to 115 it; while on the other hand if Republic 91 they constituted a call on the stock at
during the month, the man with a stop had been sold short when it reached par, $70 per share. The purchase of eight
loss order at 102 would have been forced the speculator would soon afterwards bonds at that time, together with the sale
out at his limit, while a put would have have faced a forty point loss. of 100 shares of stock at 66, would have
carried him safely through to a large This is a good opportunity to point out subsequently shown no less than $3,200
ultimate profit. the technical difference between hedging, profit, for the stock sold down to 26 with
The purpose of this article is not, how as described above, and arbitraging. An the bonds at 82. On the other hand, no
ever, to discuss either hedging in com arbitrage is supposed to assure a definite matter how much higher the stock might
modities or the use of privileges in trad profit within a fairly definite time. If, for have gone, the loss on this deal was
ing, although both might well deserve ex instance, it had been possible (as no doubt absolutely limited to $400—the difference
tended treatment. We intend to discuss a it was for the bond specialist) to buy between 66 and 70. In this case, however,
similar class of market operations, which Lack. Steel convert. 5s at par, and simul the temptation was to buy the bonds, and
is little understood or appreciated even taneously sell the stock at 100%, such to wait for the stock to go a little higher
by professionals, and which nevertheless an operation would have constituted a real before selling. Alas! the wait would have
affords the opportunity of excellent profits arbitrage. For the bonds could have im been in vain.
with very moderate risk. mediately been converted and the new
Hedging Between Bonds Preferred Stocks
and Stocks stock delivered, with a $25 profit.
What we have in mind is the simul The arbitrageur always expects to ex Convertible preferred stocks present the
taneous purchase of one security and sale change the security he buys for the one he same opportunities for hedging operations
of another, because the first is relatively sells; the hedger will only do so if he as do the bonds. A current example is
cheaper than the second. Where the must, and usually suffers a small loss Gilliland preferred,
Oil which is ex
security bought sells lower than the one thereby. His profit is found in selling out changeable at any time for twice as many
sold, there must be good reason for be what he buys and buying in what he sells shares of common. On January 15, the
lieving that the price of the two will come at a more favorable difference, or preferred could have been bought at 100
closer together, and conversely for the “spread,” then at the beginning of the and the common sold at 49. The maxi
opposite circumstance. operation. The arbitrageur may of course mum loss, in case of a great advance of
Without further tarrying on the general delay converting in the hope of undoing the common, would have been two points
theory involved, let us hasten to a concrete his operation to better advantage in the per share of preferred, which in fact
example. On November 2, last, let us market. He then becomes a hedger, but would have been made up by the $2
say, we purchase $10,000 of Lackawanna with an assured minimum profit instead of dividend coming off the latter on February
Steel convertible 5 per cent bonds, due merely a miximum loss. 2. As it happened, two days later the
1950, and at the same time sell short 100 The relation of these two operations is common was down to 43, while the pre
shares of Lackawanna Steel stock at 100. very prettily shown by the Southern ferred was actually higher at 101. Thus
Should Lackawanna continue its head Pacific situation last October. At that on a hundred shares of preferred and two
long advance, we might be forced to con time any one could have sold a large hundred common, there was a chance for
vert our bonds into stock, in order to quantity of stock and replaced it by the $1,300 gross profit in two days, with
make delivery of the shares we sold. In convertible 5 per cent bonds at apparently negligible risk.
this case our operation would have proved % point cheaper. In reality, however, the If someone with a little nerve had sold
unsuccessful—we should have lost $25 and adjustment of accrued dividend and in Pierce Arrow at 99 against a purchase of
commissions. But if the stock declines it terest on conversion would have made the the preferred at 110, his courage would
in
a
greatest loss could not have exceeded portion cost, than the former into the latter would now be
to
their does the
eleven points, since the preferred is ex ordinary 30-day privilege. ahead exactly ten points, since the Stock
changeablefor common, share for share– the types hedging heretofore con Exchange has abolished the stamp dis
of
In
andin addition had the advantage of an
as
so
always position crimination entirely these bonds,
in
to
sidered the trader
is
a
8 per cent dividend against nothing obtain the security he has sold, that they all have exactly the same value.
to
at
on
a
of the
common. There today fixed price—either through conversion or The latter point in
to
made order
in
difference
is
is
in by
dicate that the three operations
of
about thirty-five points between the subscription. Yet one often justified switch
is
ing, arbitraging and hedging all have very
so
two issues, that this not especially selling one security against purchase
of
risky operation would now show profit another, with no other safeguard than the much common, and that we may easily
in
a
well over twenty points. definite knowledge that the two prices are pass from one They are all
to
of
another.
Rights far out of line. based upon exact information and analy
to
to
subscribe new stock can
sis, and their success usually entirely
be
29
R.
profitable
of
On December last,
T.
is
B.
sometimes made the basis certificates
independent of market movements. At
5,
hedging operations, especially when the deposit sold while the undeposited
of
at
the present time, when the outlook so
is
selling close the subscription stock was quoted above 10.
to
It
is
be
price. such cases the rights can that the deposit agreement made with
In
to
bought and the stock sold against them, drawal unusually difficult, but this was an while the
a
with the idea that should the shares fall entirely inadequate reason for the free unspectacular, but safely profitable, busi
hedging.
of
below the subscription figure the rights stock selling twice the price ness
of
at
the
can then be discarded and the stock certificates. The two represented exactly
bought profit. Unfortunately for the same property rights, and further
at
in
such schemes, inside manipulation usually there was enough stock Prices Move Upward
of
the control
it in
up
to
the committee enable
rights expire, stimulate sub force the undeposited shares accept on Vienna Exchange
to
to
to
order
in
the
Sinclair Oil and Pan American Hence the investor was running IENNA, The up
–
of
of
little after the
of T.
R.
B.
in ward trend
a
is,
and selling 100 shares Bourse has not ceased. While the
at
as
danger general economic collapse
of of
to
at
for value Studebaker and 10%.
a
Saxon Motors are recent instances of the porarily the spread might have widened result the peace treaty and the con
a
stock falling below the offering price
an
independent German-Aus
of
of
perhaps, but ultimately the two prices tinuance
the new stock before the last day for approach each other. The trian state draws nearer and nearer, while
to
were bound
subscribing. factories closing down be
of
as
latter happened very quickly effect,
in
the number
few days later the certificates had ad coal increases daily, and
of
of
cause lack
a
The “Straddle” vanced to while the stock remained at while the government,
at
to
loss how
7
a
Today the trader could sell his pay for food, deciding
to
10%. sell the art
is
Perhaps the best way operate with
to
10
of
at
to
that
is
is
market for both an advance and break. and cover his stock 13%—a loss
a
10
100%, and
to
to
tinue advance from
by
an
very modest commitment. some cases even more. To give idea
of in
stock corresponding
to
very similar opportunity was pre the movements during the last month.
A
sented last November, when Interborough have pictured the following table:
be
run.
a
that Simms
is
A
Price Price
in
in
sidering the priority lien “enjoyed” by Kronen, Kronen,
of
small.
the rights The latter entitled the Pfl.
to
1.
the privilege expiring February profit the man who bought the bonds
to
highly
at
&
3820 2998
bond issues—the St. Louis Division 4s, for
.
.
.
.
.
or
5100 3000
next two weeks. appeared good idea, example, can be bought only few points
It
re
.
.
.
.
.
.
view
in
1,
interest and their prior lien, The main reason for this wild advance,
of
right
be
in
at
a
a
a
make profit from wide move either wider spread. munication to THE MAGAZINE of WALL
to in
a
in
it,
calls
and difficult
it
them
leaving him still over $200 the good. see how Austria will emerge from this
to
advantage. But
in
to
of
can be availed
recovery 55, however (which hopeless chaotic situation.
to
the overvalued
his rights replace his short
of
necessary ingredient
of
to
of
–
the other 200 rights
of
made $300, less commissions. high have every reason the world for sation, and not by calendars, and each
in
involving
of
Operations kind, switching into the cheaper security. day, and the race life.—
In
this moment
is
a
the use
A
in
The disappointment
of of of
to at
than calls issued the company. But the ten point spread then existing between hope that the heritage old age not
is
practically speaking, these rights usually Japanese 4%s, “plain” and “German despair.—DISRAELI.
FEBRUARY
7,
By BENJAMIN GRAHAM
' HE potent influence of advertising Commerce owned 51%% of the total fore that each share of Am. Ship & Com
upon demand is clearly shown by Cramp shares outstanding. Since then it merce may be fairly considered as repre
the wide difference in popularity be has acquired additional shares in ex senting one-fifth share of Cramp. The
tween two issues closely related in both change for its own stock, of which 511,000 present price of 28 for the former is there
name and activity—to wit, the American shares are now issued. The original offer fore equivalent to 140 for the latter—as
Shipbuilding Company and the American to Cramp stockholders was five shares of ‘against 120, the last sale of Am. Ship
Ship & Commerce Corporation. As a re Am. Ship & Commerce for one of Cramp. building in Chicago.
sult of the very effective publicity attend— If we assume that the 50,000 Am. Ship 81 Wm. Cramp & Son is a very old ship
ing the launching of the latter enterprise Commerce shares issued since Aug. 21 building concern of Philadelphia, now
last July, its general features are fairly were exchanged on the same basis, then capitalized at $6,098,000 of stock, all one
well familiar to both traders and investors. the company should now hold $4,135.000 class, par $100. and $4,473,000 in bonds.
But what percentage of our readers know par value of Cramp stock, or about 68% American Shipbuilding Co. was formed
even of the existence of the American of the total. in 1899, and owns construction and repair
Shipbuilding Co. of the Great Lakes? And The first point to make clear is there plants at eight different points on the
what percentage of this percentage are
aware that its shares are listed on the
New York Stock Exchange, as well as in
Cleveland and Chicago?
Considering the almost complete igno—
rance of the general public in regard to this
company, it might be supposed that it is
a small and unimportant proposition, with
little in its record to attract the investor's
attention. Nothing could be further from
the truth. In its last fiscal year this con
cern turned out 109 ships of 422,800 gross
tons, which alone is considerably larger
than the pre-war output of the entire
country. The dividend record, the income
- statements, and the balance sheets of
American Shipbuilding in recent years
rank among the most remarkable exhibits
of the industrial enterprises of the na
tion. And yet its shares were selling only
sporadically and in small lots in Chicago,
while the public was growing widely ex
cited over Cramp Ship 8: Engine in Phila
delphia and American Ship & Commerce
in New York (the two being closely re
lated as will soon be explained). Which
of these issues was most worthy of mar
ket enthusiasm should appear from the
following comparison.
Amer. Ship. 8: Com. Assets
But first it is necessary to outline briefly
the nature of the assets of American Ship
& Commerce. According to the initial
balance sheet, dated Aug. 21, 1919, it own
ed $3,l35,400 par value of the stock of the
Wm. Cramp Ship & Engine Co. (carried
at $5,979,200, or $191 per share), and
76,000 "B" shares of the Kerr Navigation
Co. (new). For the latter it had con
tracted to pay $100 per share, for which
it held the requisite cash and a surplus of
$868,000. Its only liability was 461,615
shares of no par, which accordingly had a
book value of $31.50 per share. The in
terests of the new company are therefore
twofold, divided fairly equally between its
holdings of Wm. Cramp, a shipbuilding
concern, and Kerr Navigation, an operat
ing enterprise. The value of the latter
will be discussed below, but for purposes
of comparison with Am. Shipbuilding Co. A GREAT LAKES RECORD
of Cleveland, it is naturally the Cramp
holdings of Am. Ship & Commerce which American Shipbuilding Company of the Great Lakes in its last fiscal year
invite our chief attention. turned out gross tonnage considerably larger than the pre-war output of
the entire country
At the time of listing, Am. Ship &
291
for JANUARY 10, 1920
previous eight months, we arrive at the
Z50 comparative earnings on the common '12 '15 '14 15 '16 '11 '18 '19
shares shown in the appended Graph. In 5‘51910'11
@
the last three fiscal years Am. Shipbuild
AMLRIClN-SHIPBUHapl
Comjtocktarrurr A
PRlCERlllGE OF STOCK ing earned after all deduction an aggre
Z00 gate of $167.70 for its common stock,
llll
Amer.Shipbuilding
Wm. Cramp. compared with $77.70 for Wm. Cramp.
I
The Great Lakes Company thus exhibits
7.5
an earning power more than twice as
150
large as its Philadelphia competitor.
But the superiority of Am. Shipbuild 7.0
ing becomes much more remarkable when
100 the figures in the annual reports are ana
lyzed, as done in Table II. Strange to
is
say, the adjusted statements show exactly
the same earnings for the common in
1918 and 1919, before deducting mainten
ance, depreciation and taxes. In both
years these profits reached the astound
ing total of $18,480,000, or over $243 per
'15
'll
is
Years ended Apr. 30. .s'a'
for upkeep and amortization, these aggre
Great Lakes. Its capitalization consists gating practically $100 per share, against terprise with total capitalization of
a
of $7,600,000 common stock and $7,900,000
$57.50 in 1918. The tax deduction alone $15,500,000, reporting aggregate assets of
7% non-cumulative preferred, par value 1919 exceeded $96, or 80% of the
in
is
In comparing Cramp at 140 with Am. amount of taxes reserved by Wm. Cramp Liberty Bonds alone, against which there
Shipbuilding at 120, the first item'that not stated in the report, the balance
is
a
company its far more liberal dividend than in the case of Am. Shipbuilding, and
is
. fiscal years these have averaged only 337,000 advanced by the Government.
Dividend Record Since 1899
$360,000, or $6 per share, against $6,300, These figures indicate first the enormous
Am. Shipbldg. Cramp
1899-1901. . . . . . . . . . . . . . . — 000, or $43% per share, for the Great scale upon which the operations of the
$5
.
1903.. . . . . . . . . . . . . . . . . . . . —— The most extraordinary feature of all ondly that the entire financial burden in
3
.
1904.. . . . . . . . . . . . . . . . . . . — —
.
1905. . . . . . . . . . . . . . . . . . . . ——
4 7 2 6 2
.
1908-1909. . ... . .. —
Figures Given as Per Share of Common
.
.
.
.
.
1910.. . . . . . . . .. .. .. .. . —
.
.
.
.
.
. .
.
.
.
.
.
.
.
.
.
.
.
.4
was maintained throughout 1919, in the $47.2 $97.8 $22.7
form of 7% regular and 9% extra. In
1918 disbursed $27 per share, of which
it
share during these past two years. Another important entry appears under
densed form in Table III. Here an en
is
Of course the dividend rate alone may the title of “\Var Plant to be Amortized,"
be very misleading criterion of relative carried at $8,641,000, against which re
a
a
value, unless fairly reflects the com '11 '13 'u 115 ‘16 '17 '1a '19 serve of $4,500,000 has already been set
it
surplus account in the next year’s report. having been absorbed in the construction
The fiscal years of both companies do not expense of the ships themselves.
correspond with the calendar year, that of Considering that Wm. Cramp has en
Cramp ending April 30, and that of Am. gaged in very similar activities, one might
Shipbuilding June 30. Hence, consider make similar expansion in its balance
a
50
able additions to the tax reserves had to sheet. Quite the contrary, the latter
is
be made, as required by Revenue Acts remarkable rather for the very moderate
passed after the annual reports were pub increase in both the plant and materials
lished. These changes are stated clearly account. In place of $100,000.“ of work
in the reports of the Am. Shipbuilding process, the only corresponding
in
7.5 item in
Co. but we have to dig them out of the the Cramp statement “Materials and
is
balance sheet figures in the case of Cramp. Supplies" carried at but $2,726,011).
American Shipbuilding far more
is
a
Comparative Earnings
extensive proposition than Wm.
is
After making these tax adjustments, Cramp. The latter carries its property
and estimating the Jam-April, 1919. profits Years ended June '50. wJ account at $15,788,000 against $8,140,000.
of Cramp at the same rate as for the (Continued on page 322.)
292 THE MAGAZINE OF WALL STREET
The Two “American Ships”
(Continuud from Page 292.)
shares on especially favorable terms the mated by the writer. There will be out
American William holding company may have helped out its standing 40,000 shares of “A” stock, with
Year Shipbuilding. Cramp. apparently too expensive investment in out par, but entitled to a prior dividend of
1918-19 . ......... 109 21 The property of the Kerr Com
Cramp. $7 per annum, and therefore equivalent to
1917-18 . ......... 45 15 pany will consist of 50,000 deadweight a $4,000,000 preferred issue; also 111,000
1916-17 . ......... 31 7 tons of ships, eight in number, valued on shares of "B" or common stock, of which
1915-16 . ......... 4 9 Jan. 1 last at $3,900,000, and about $9, American Ship 81 Commerce owns 76,000,
1914-15 . ......... 1 6 000,000 in cash, of which $7,600,000 is be or 68%. Although the latter company
ing raised through the sale of stock and pays $100 per share for these holdings,
On 7157: so, 1019,77krnericwz; Shipbuild; the balance represents the net earnings of their book value figures out at only $80
ing still had uncompleted orders for 63 the predecessor company up to Aug. 1, per share.
vessels, more than the entire output of 1919, less accrued taxes as roughly esti For the seven months ended July 31,
19l9, gross receipts of the Kerr Com
TABLE III—BALANCE SHEET AMERICAN SHIPBUILDING CO, JUNE 30, 1919 pany were at the annual rate of $6,500,
Assets Liabilities 000, compared with $14,840,000 in 1918.
Plant . . . . . . . . . . . . . . . . . . . . . . . $8,141,000 Preferred stock . . . . . . . . . . . . . . $7,900,000 Net before taxes and special amortization
Good will . . . . . . . . . . . . . . . . . . . 5,492,000 Common stock .. . . . . . . . . . . . . . 7,600,000 shows a relatively larger shrinkage, the
Cash and Liberty Bonds . . . . . . 23,638,000 Current liabilities . . . . . . . . . . . . 2,772,000 1919 figures being at the rate of $3,672,
Other current assets . . . . . . . . .. 5,547,000 Advanced by Government.. . . . 107,337,000 000, for the year, against $l0,079,000, a
Govt. contracts in process... . 100,431,000 Reserve for taxes. . . . . . . . . . . . . 9,618,000 Assuming
decrease of nearly two-thirds.
War plants . . . . . . . . . . . . . . . . . . 8,641,000 Reserve for amortization. . . . . 4,500,000
a deduction of say $1,000,000 for war
(To be amortized) . . . . . . . . . . Miscellaneous reserves . . . . . . . . 1,000,000
.. . . . . . . . . . . . . . 694,000 Surplus . . . . . . . . . . . . . . . . . . . . . 11,857,000 taxes, the interest of American Ship &
Miscellaneous
Commerce in these profits would amount
$152,584,000 $152,584,000 to about $1,600,000, or $5.25 per share for
the stock issued to acquire this subsid
iary. These earnings are satisfactory
William Cramp during the war period.
enough on the present market price of
So much for the relative merits of
American Ship, especially since the Kerr
these two shipbuilding companies. All
Navigation Co. has a large cash balance
the facts given above go to show that
available for new investments. The real
while the outbreak of the war found both
question, however, is whether this rate of
concerns with very medioere earning
earnings can be maintained in the future.
power (Cramp being in somewhat better
and of this there is at least room for
shape), American Shipbuilding has since
doubt.
forged ahead at a rate beside which
Cramp appears to have practically stood To sum up, American Ship 8: Com
still. After the war was over and the merce is about 40% William Cramp and
cream had been skimmed from the ship 60% Kerr Navigation. Whether the prof
building industry, large financial interests its of the latter interest will fully justify
succeeded in doubling the price of the its cost it is hard to say; but it is cer
less prosperous enterprise, while the tain that the price paid for the William
really extraordinary record of the Great Cramp shares was far too high as com
Lakes company has been virtually neg pared with the market quotations at that
time for American Shipbuilding Co. The
lected.
latter company would seem to have
It is time now to turn to the other
reaped such enormous profits in the re
asset of the American Ship & Commerce CUTTING AWAY METAL
Corp, namely the 76,000 shares of the cent past as to be worth substantially
An acetylene torch is used in cutting
Kerr Navigation Co. “B” stock, in order used in ship construction. more than its current price, without re
the plates
to determine whether by acquiring these This illustrates the process _ gard to future developments.
322
THE MAGAZINE OF WALL STREET
value of collateral shall be maintained at Quality of Security closed at 49%, a difference of % of a
125% of the par value of these notes. The point. The holder of a divisional four
present market value of the Reading col— Of the eight bonds described in the has a reasonable degree of assurance that
lateral is about $29.000.000. Omitting con foregoing paragraphs, I believe the his bond will be worth 100 in 39 years,
sideration of the Baltimore & Ohio bond security is ample for five of_ them. In and gradually approach par in the inter
Reading collateral at the case of a reorganization, it might be de val. A holder of the preferred stock has
collateral.
cided to detach and surrender the old no such assurance, and could count on a
market secures these notes up to 83 and
they have sold as low as 81%.
Cincinnati, Hamilton & Dayton. In that profit only by assuming that money rates
event, the holders of the Toledo & Cin will fall materially and Baltimore 8: Ohio
The convertible 4%5 of 1933, originally cinnati divisional fours might have to credit improve likewise. I should cer
debentures, are secured equally with the take the property, but such a course seems tainly not continue to hold the preferred
refunding and general mortgage bonds. unlikely. Unless the improvement in stock if I could make the switch at a cost
They have sold this year as low as 59, at operating conditions is prompt and pro of a point.
which they yield about 10% per cent. nounced, the position of the refunding A few years ago several large railroad
The southwestern division 3%5 of 1925, and general fives and the convertible 4725 systems were confronted with the prob
of which about $45,000,000 is authorized may well be questioned. At the prices lems that now face Baltimore 8: Ohio.
and issued, are secured by a first col— of some of the better secured issues, they Most of them went through reorganiza
lateral lien on 921 miles of road, and are are not the most attractive among Balti tions, with the result that their stocks
outstanding at the rate of $48,859 a mile. more & Ohio’s bonds. The recent advance rest nearer the rails than they used to
The company reserves the right in the re— in Reading common has made the security and nearer than Baltimore8zOhio's stocks
funding and general mortgage to extend for the ten-year notes ample, especially if rest at present. I believe some of them
this issue to July 1, 1950, but such an ex— it be considered that they are selling at a are nearer dividends than Baltimore &
tension, of course, would depend on the big discount for a short-term issue. Ohio common, and among them may be
consent of the holders. The bonds are At the close of the market on March mentioned Pere Marquette, Western
senior to the refunding and general bonds 13, Baltimore & Ohio preferred sold at Pacific and St. Louis-San Francisco. In
and to the convertible 4%5. With only 48%. The stock is paying 4%, and is each instance the switch can be made at
five years to run. they have sold in 1920 limited to 4%. On the same day the a profit of seven to .thirteen points. Vol.
as low as 69%., Toledo 8: Cincinnati divisional fours 25, P. 506.
T
HE sugar issues as a class enjoyed These five concerns are Cuba Cane, panies—all covering the crop year 1918-9
considerably more than the average Cuban-American, Punta Alegre and Man —to determine therefrom the amounts
advance in the bull movement of ati, located in Cuba; and South Porto earned on the respective common shares.
1919, and in the February decline they Rico,‘ operating in that island and in These preliminary results are given in
suffered less than most other industrials. San Domingo. Table I. Since what we are seeking is
This favorable showing has been due pri Of the other three companies the most not merely the amount earned per share,
marily to the continued advance in the important is probably American Sugar but chiefly the relation of the earnings
price of the commodity. During the war Refining, which is primarily a refining en to the price, the figures are stated both in
the price of sugar was fixed by the In terprise, and is interested in raw sugar dollars per share and in percentage of
ternational Sugar Committee and the production only indirectly, through its market value (market price as of March
Sugar Equalization Board, which in the stock holdings in six western companies. 23, 1920, being used). These profits are
crop years 1917-8 and 1918-9 purchased United Fruit Co. is the fourth largest fac stated, moreover, both before and after
the entire Cuban output at 4.60c. and tor in the Cuban sugar output, but its deduction of depreciation and taxes. The
5.50c. respectively. For the current year other interests are so numerous—com amount charged to expense for deprecia
the regulatory policy has been abandoned. prising shipping, fruit growing, livestock, tion is more or less arbitrary with each
and the price of the staple has advanced etc.-- that it cannot well be compared with cotnpany, so that the net income can be
sharply in response to purely natural con‘ sugar producers, pure and simple. Finally made unduly large or small by curtailing
ditions. The scarcity of sugar—with there is the Am. Beet Sugar Co., the only or inflating this item. While there is
which most of our readers are ruefully direct representative of this industry on nothing voluntary about taxes, the pos
familiar—has been due, first, to the sharp the New York Stock Exchange. Since sibility of modification of at least the ex
falling off in European beet sugar pro beet sugar leaves the factory in the re cess profits levy gives a comparison of
duction, secondly, to the shortage of ton fined state, neither the selling price nor profits before the tax deduction consid
nage for the transportation of the Javan the operating costs of this enterprise is erable potential value.
crop, and thirdly, to a recent substantial comparable with those of the cane sugar The table would indicate that, both be
increase in the per capita consumption of companies. Moreover the weather con' fore and after these two deductions, Cuba
this country. ditions affecting the size of the crop may Cane Sugar earned last year the largest
Cuba—far from the firing line—has been be entirely different for the two indus percentage of its present market value.
able to take advantage of this situation tries—as indeed they were last year. On the second basis its figure of 16.2%
by raising record crops and selling them For the reason stated above, therefore, earned on the price of its common com
at record prices. Producers in Porto it seems advisable to confine this article pares with 16.1% for South Porto Rico
Rico and other islands have enjoyed sim to an intensive comparison of the five cane Sugar, 1.5% for Cuban-American, 14.5%
ilar prosperity. The sugar industry in sugar producers, leaving the remaining for Punta Alegre and 8.6% for Manati.
the United States, which relies chiefly companies—important as they are—out of Cuba Cane leads therefore from the
on beets, was severely handicapped during the picture. standpoint of 1919 earnings per dollar of
the last crop year by adverse weather. market price of the common stock. Does
The 1919 Reports
The securities of eight companies en this fact make Cuba Cane intrinsically the
gaged in the production of sugar are now In the last analysis that stock is cheap most attractive of the five issues? This
listed on the New York Stock Exchange. est which will ultimately yield the largest question suggests a new consideration—
Of these, five operate under substantially return on its purchase price. With this one much too little regarded in view of
similar conditions and are therefore sus criterion in mind, we begin by examining its vital importance—namely the capital
ceptible of fairly accurate comparison. the last annual reports of the'five com ization structure of the various companies.
a
South Porto Rico Sugar yields the dend rate will no doubt be increased. pany, certainly seems to be selling too high
highest dividend return (see Table IV). And besides its reputation as the oldest compared with the other issues.
As compared with the Cuban producers and most successful Cuban producer To sum up, we would group Cuban
it enjoys the advantage of exemption from should not be ignored'in any'comparison. American, South Porto Rico and Punta
the one cent import duty levied on the Punta Alegre made intrinsically the best Alegre rather closely together in the class
latter. We would point out further that showing of all the companies in 1919, but of conservative common stocks. Manati
the depreciation charges of South Porto that was on the basis of its capitalization too high, and Cuba Cane must be re—
is
Sugar on paper bag basis were unusually before the recent expansion. Since then garded as essentially speculative. If the
large last year (Table III),
a fact which it has increased its stock issue by 56% writer must select one issue as “the best,”
made the final profits appear somewhat for the purpose of adding about 40% he would name Cuban-American Sugar—
lower than was really the case. The com to its mill capacity. This dispro but by slender margin—Cuba Cane, Vol.
a
pany is planning to increase the output of portion would tend to diminish the at 25, p. 750; Cuba Amer. Vol. 25, p. 338;
its San Domingo central, and is said to tractiveness of the issue somewhat, espe Punta Alegre, Vol. 25, p. 676.
'
American Linseed the Sphinx of Wall Street
Management’s Policy of Silence Has Resulted in Confusion of Rumors About the Company’s
Abilities.
By PERRY A. EMERSON
INCE that period some ten or twelve companies have the various facilities subsidiaries, the following comment pub
years ago, when Theodore Roose necessary to handling fiaxsecd products, lished by leading brokerage house last
a
velt was attacking “bad trusts," and their manufactures including linseed oil, fall to the point:
is
a long-suffering public was supporting varnishes, oil cakes, etc. Their separate “In the fiscal year to September 30,
him, American corporations have, as a and individual earning powers are not 1918, American Linseed stated its profits
rule, gone far. Painted black—whether as equal to 12.75% on the preferred, or
rightly or wrongly does not matter now— StockOutlllnqu, Plasma. n tnnut:and dividends.
7"Inon-cumulnm 1wSIN!USmm. Commrev 5.75% on the common, after deduction of
it became their efi'ort to show themselves H00) $16,750,000
ynlended
NoIundel
September
M The'Ow"
I, tin m the19111
lo!IN
Inwhxh nu 7% preferred dividends. Because of the
to the public in a new light by the adop~ tomnlnypresented awalnut-emutant Ibo-m9 |oml fact that Linseed in part holding
is
a
nuts,habit-tin and "may atme“and atthwtn-m
tion of publicity methods. 95 mosTmumum own in.tumplny'l company there has been strong sus
a
Today, the largest corporations
United States are not only answering any
in the mtheNews
rmrel-able
W 01mm have
Way I! $1,132,000.
Buttev
wow-t,that
been
mm,50",01the
Mung(mm \NI
MI
It>1lhled picion that neither in 1917 or 1918 did the
corporation take up in its own income the
Pun-aunt Adams in “noney u uymg l! theannual
and all questions (with the reasonable meetingvaumtm to,tsp,that "any an annually full earnings of its subsidiaries.
as adding toIMplant attheNucoa Covmny A
reservations) put to them by the public’s “Monty InNmmbu. tsts,munthat theNuenl Com “American Linseed has for so many
panyOllnfld I" pumapm In theAutumn Lmued
most powerful representatives—its press metI you Yr»tmhal
A"alittle nu noel-led years pursued policy of comparative
a
dnndond
—but they are actually encouraging such 80 on the
common mu onNovember 11,ms.atthe rule secrecy and the facts of its business de
ol$3pmannum payableintowuulrtlriytutahmnu d
questions. Perhaps the most illustrious ' 7:nullcanbqlmllhfi Daemon 15.1919. Thenbu velopment have been so carefully screened
75 been mutual-nu “maytothe nutmu M"!m
yea!
example of this changed attitude would shun-mumm"I "W 01 2090ml: abovesomonths' with that the company's shares have many of
thepubllcatlon
d more 0!la:“vorablenew;
be that of the Standard Oil Company of
El
the elements of “mystery stocks." At least,
New Jersey, which has now one of the the financial community chooses to re
if
largest publicity departments in the city. gard them as such, there will be sound
Managed by a former newspaper man, it American LinkedCn arguments to support such course."
a
is through the single agency of this de l In explanation of its policy of silence,
partment that Standard Oil has built up l an ofiicial of the American Linseed Com
a degree of cordiality between its organi~ a:
a; pany has been quoted as saying that, be
zation and the public never dreamed of cause the subsidiary companies were
before. going through formative period,
a
it
There are a few corporations left, how would not be to the stockholders’ best
ever, who still adhere to the policies of advantage to publish their earnings. True
a generation ago. Their annual reports as this suggestion may be, seems be
it
are incomplete; at their annual meetings yond question that ignorance of the earn
Muttth ing power of such important subsidiaries,
they appear to discourage a healthy in
terest in their affairs; and to members of Common Stock for example, as the Nucoa Butter Com
the press, who come in spirit of co-opera pany, would be even more disadvantage
'8
._.__ 1...
tion to learn the facts, they accord a curt ous to these same holders than would
dismissal. It publicity about their earnings be to the
That the affairs of the American Lin companies themselves.
seed Co. should still be so conducted as 8 What is, apparently, the strongest unit
to give the impression, whether true or in the American Linseed organization
is
'controlled. Most of the other concerns Copyrighted by Graphic Record: Corp. borhood of $1,500,000 and within two
under the control of this illustrious years from the time of its acquisition was
family long since discarded "silence" as made public, however; and except for reported to have more than earned its
a corporate motto; and it is a mystery current rumors about them and some in purchase price.
why American Linseed has not followed flation of the holding company's earnings The Nucoa Butter Company’s product,
in their lead. resulting from the addition, in 1919, of substitute for real butter, manufac
is
a
The American Linseed Company, being their combined profits, quite impos— tured largely from cocoanut oil. As com
is
it
in part a holding company, has a string sible to analyze them or gauge their pos pared with another vegetable product,
of subsidiary companies upon whose re sibilities. put on the market some time before, this
sults its earnings largely depend. These With regard to past results from these cocoanut preparation said to have
is
APRIL 1920
3.
for 801
American International Corporation
By BENJAMIN GRAHAM
corporate events in recent years holders might have doubled or tripled suspicion of inexperience, or poor judg
FEW
have made as deep and painful an their stake. Instead, ill fortune was en ment, or mismanagement, might well
impression upon the financial world countered, and so half the investment was arise.
as the spectacular decline of American wiped out — unpleasant, but inevitable. However, if we accept the more opti
International from its high price of 132J4 On the other hand the directors may mistic view and consider that the break
in 1919, culminating in the passing of the say that the corporation is not responsible in the market price was greatly overdone
dividend and the resultant break to a low for the market action of its stock. The — the intrinsic value having suffered to
of 3&'A. Not, indeed, that the 94 point mere fact that dividends are suspended no such degree — even the responsibility
slump or the omission of the dividend does not cut the intrinsic value in two. for this collapse cannot be entirely
were in themselves such striking oc- This action was taken in the interest of avoided by the management. For months
cniTences. The Street unfortunately is conservatism, and because adverse condi there had been persistent and mysterious
fairly well inured to the bursting of bub tions involved a heavy strain ( io doubt selling of the stock which carried it
steadih to lower levels. All this time tl e
corpor ition gave no intimation that an. -
TABLE I.— COMPARATIVE INCOME ACCOUNT 1916-1919
thing was wrong and countless investo s
(In Thousands).
1916 1917 1918 1919 bought the issue on the basis of the latest
Interest and $602 $8,026 12,468 84,175 reports available, believing the stock to
Dividends 8,888 8,804 5,888 8,168
be a great bargain. In the light of what
Operations $8,840 86,880 $7,846 812,828 subsequently happened, Wall Street is
Taxes and Expenses 1,866 8,084 4,180 7,608
now asking, "Who did all the selling be-;
Net Income $2,484 88,746 $3,716 $4,719 fore the dividend was passed?" Certainly
Dividends 875 1,574 1,817 8,888
Adjustments 165 588 886 495 not the general public, who were rather
1,584 2,235 1,826
it,
Surplusfor Tear 1.844 buying with misplaced confidence.
Earnedon Average Capital 15.68% 14.81% 12.40% 12.48% Hence the men in the brokerage offices are
saying that the selling must have been
done by insiders, who knew the dividend
bles. But American International from temporary) upon the cash resources. The
was to be passed and who took advantage
the very first was regarded as an entirely company's assets are intact and its posi
of the public's ignorance to sell out their
different and sounder proposition than the tion fundamentally sound. So runs the of
holdings well in advance.
ordinary common stock. To begin with, ficial statement.
it was supposed to have the finest Board But by neither of these arguments can In view of the high character of the
of Directors in the country, comprising the management entirely escape blame for men identified with American Inter
twenty-four of the leaders of American what has happened. If the decline in the national these charges no doubt are en
tirely unfounded, but not their own
is
it
banking and business. Secondly, every market price really reflects an equal in
dollar of its $50,000,000 capitalization was intrinsic value, the disaster cannot be fault that their secretive policy has per
And, thirdly, its ascribed solely to bad luck. mitted such rumors to gain credence?
issued for cash at par. Exchange, it
field of activities— foreign trade and for is true, has suffered extreme weakness From this point of view there was much
eign investment — was considered to hold this year, notably in the South American warrant for the phrase used recently by
for profitable centers, where the corporation's prominent factor in Stock Exchange
a
they are certainly not without provoca change fluctuations so far as possible. still dear at 42, or whether its tremen
is
tion. For when the public is not told the Nor should the decline in commodity dous decline has not placed on the bar
it
"inside truth," it must necessarily decide prices have ordinarily involved an enor gain counter. The difficulty of answering
by the outside appearances. mous loss to the company, for the total these questions with 'any degree of ac
Now, the whole matter might be dis inventories carried at the end of last curacy must' be obvious. Not only
is
it
missed with the easy observation that year amounted to only $15,000,000, or $30 impossible even to surmise what has hap
where there are large possibilities of per share. If, therefore, the actual worth pened to the corporation in the past year;
profit there must also be great risks of uf the enterprise has really shrunk 65% but even in the years for which rep rts
loss. Had things gone well the stock- or $35,000,000 since last January, some are available the lack of definite litres
fff
an export business with the Orient. the progress
600 owned by American Interna-
7. American International Steel Corp. tbe '"ves ment account, as far as can
tional. Manufactures life-saving appara-
Incorporated 1917. Paid in capital be from the rePorts mi r'stlnS
tus. In the last 4 months of 1918 its ,?,caned .
$100,000, all owned by American Interna applications
gross was $372,000 and net $225,000.
tional. Does a general export business 13. China Co. Incorporated 1916. Year Securities Bo^°St>
in steel, with numerous foreign connec Capital $1,000,000, of which American In- 1916—Pacific Mailt Int. Merc. Marine,
tions.
.N;
.Y;
8. American International Steel Corp., intends to obtain concessions in China. Of 1917 S. Rubber, Int. Products,
Ltd. Incorporated 1917. Paid in capital the $1,000,000 capital, $950,000 represented lYierj. In.dustd. .A.'??h°! .(s°!d 2,500,000
£3, of which £1 owned by American In "contracts and concessions." In 1918 its 1918—Unspecified 5!boo]ooo
.. — Unspecified
1919 w
Is English agency of Amer 8.000000
•
ternational.
_
1
tional. Constructed and operated by Hog China In 1918 operations were nominal, no important changes were made in the
Island shipyard which built 122 ships for and showed loss of $40,000.
a
tion's recent troubles seem to have cen rated 1916, American International, to- an«.
bf
with South America. In 1918 it reported 16. International Mercantile Marine. ot' the utmost importance, not only be-
gross income of $1,363,000, but a net loss This interest was acquired in 1916, but the (Continued on page 217)
WOLLENBERGER a CO
enableemployees, with the assistance of
the company, to acquire an investment
interest therein. The plan includes all
employees who have been for one year
actively engaged in the conduct of the
company's business.
W Investment BanKers
JOS So. La Salle Stre<
CHICAGO
THE "COLLAPSE" OF AMERI
CAN INTERNATIONAL
{Continued from page 176)
N A few figures paint the suddenness of common, which had been offered
of
the midst of general commercial one
gloom, optimists have found much en the débâcle. In March, 1920, Goodyear last summer for $300, were worth only
couragement in the relatively few im In the following
of
common sold at 415. $61—about one-fifth cost.
portant To July a stock dividend of 150% was paid, General Significance the Catastrophe
of
failures recorded. a great
extent, however, and the new shares sold at 136. At the affair,
In
this condition reflects considering the Goodyear
not so much underlying financial strength, same time the company offered for sale at three questions arise:
Just what the present situation?
3. 2. 1.
is
How was brought about?
it
TABLE I.–GROWTH OF GOODYEAR'S BALANCE SHEET
the prospects under the
What are
oct. 31, 1915-1920(,000 omitted) proposed readjustment?
Assets—
in
be
to
1915 1916 1917 1918 1919 1920 may objected that idle
It
is
it
Fixed . . . . . . . . . . . . . . . . . 11,442 17,908 30,704 89,155 43,464 *98,041
quire into the cause Goodyear's trouble.
of
Current . . . . . . . . . . . . . . . . 14,888 31,309 51,858 54,464 76,813 55,036
can do nothing re
to
Liabilities— The stockholders
Stock . . . . . . . . . . . . . . . . . . 15,028 35,000 44,672 59,250 57,429 126,028
Surplus and Reserves 9,807 5,050 16,764 26,053 40,831 –13,931 trieve the past; their hopes and fears are
. ...
Current ,945 9,167 21,126 8,314 22,017 40,980 with the future. Yet for every investor,
..
..
.
.
.
.
..
..
.
.
.
Goodyear stockholder
or
not, the sudden
Total 26,280 49,217 82,562 93,619 120,277 153,077
collapse enterprise dis
of
..
.
.
..
.
.
.
.
..
.
.
•Includes $3,568,445due from Pres. Seiberling, later settled by transfer this raised
of
a
fixed assets.
quieting question. Goodyear's
If
reverses
result entirely ill-luck, and
of
were the
par $30,000,000 additional preferred and
as
technique
in
troubles. For when occur, in common. Less than three months later, powerless prevent them, then this in
to
difficulties
its balance sheet dated Oct. 31, 1920, shows very disturbing side
of
a
a
tors now usually establish profit and loss deficit $15,670,000, light on the hidden risks underlying even
of
to
committee
a
a
company
of
another three to
is
cerns have thus been passing through the months (Dec. 31, 1920) the deficit had in was purely an accident that this company
it
to
insolvency, reorganization,
of
throes creased
a
liquidation, without Dun's loss on materials contracted for was placed its rivals were able to withstand.
or
Bradstreet's
quarter
In
officially being any the wiser. $18,247,000. year and we study the summary Goodyear's
of
at
If
a
striking example the current liabilities rose from 22 mil history, given
of
Table
in
these new finan financial we
A
I
cial methods furnished by Goodyear Tire
is
CAPITAL SURPLUS
B
c.
Remarkable Incident
-
‘s
Goodyear
of
r:
.9
of
business disasters.
3.
an
the country lions 66 millions, and the merchandise quickly perceive the weak point
to
the
in
the leader among tire producers, with the commitments to another 55 millions. company's armor. Two figures alone
highest reputation both the commercial
As this state of affairs became known practically tell the story.
in
the public, the stock quotations fell pre Fixed assets Oct. 31, 1920. .398,041,000
to
prosperity the cipitately. At the recent low prices Fixed assets Oct. 31, 1919. 43,464,000
of
to
bewilderingly
25
of
time.
-
-
-
-
-
-
-
-
-
-
-
the shrinkage inventory values, justment,
of
Just as the industrial boom was reaching which will involve the issuance
to
fined
its climax, Goodyear invested $54,000,000 Goodyear the following securities:
of
no doubt could pulled
have
Twenty-Year
A.
in new plant facilities and subsidiary en through, Leather, despite $35,000,000 First
as
did Central
Mortgage 8% Bonds, presumably
be
its
terprises. In one year it increased its colossal losses.
to
fixed
by130%; five years by 750%. sold the general public.
in
assets
Details the Company's Position
of
Present
of
That
B.
theinvestment these enormous $25,000,000 Ten-Year 8% Deben
permanent assets 250,000
at
sums such time used together, with
in
be
The recently published
Readjustment
ofto
tures,
a
grave error judgment can pay off
of
Plan contains of the various
to
constituted statement shares new common similar
of a
a
a
hardly Huge inventory losses amount of bank debt. These debentures
be
obligations
31
an
out
as
denied. Dec. last, and
-
the ground
be
be
on
may excused, perhaps, present stockholders
to
to
the proposed method financing
of
of
line are offered
par with
of
same through the issuance
so
stagnation
of
ten shares com
of
at
that the business came new securi bonus
a
swiftly and suddenly that escape was im No complete picture the com mon with each $1,000 bond.
or of
ties.
after re Prior Preference
C.
possible—the only possible preparation pany's finances either before $35,000,000 8%
being the voluntary curtailment opera organization To be used pay merchandise
its of
This can
to
given, however. Stock.
is
to
height. only by and contingent creditors and
be
tions while the demand was fund one
at
constructed careful piecing
-
a
policy
its
of
But
in
together
of
the available material. the merchandise commitments.
Goodyear went the opposite extreme, For this purpose the Prior Preference
to
at
as
will
to
feverish activity stockholders
at
1919 was merely the TABLE II.-Approximate
of
era
a
D.
industrial prosperity.
to
Fixed $98,041,000
..
..
.
..
.
.
..
.
.
..
.
.
.
the lavishness and variety
be
71,267,000 exchanged share for share for present
of
..
..
.
..
.
..
..
.
.
..
.
Liabilities—
be
of
from the following partial chronology: 900,000 shares no par
of
E.
Deficit - 24,400,000 common
pre Current 65,964,000
be
Feb., 1920. $2,000,000 guaranteed value, exchanged share for share
to
.
.
.
.
Reserves
--
1,716,000 shares);
to
Goodyear Textile Mills
to of
of
º
Total $169,308,000
be
Cal. offered public.
as
given bonus with the debentures
.
.
.
.
.
..
.
..
.
..
.
.
a
March, 1920. Naval Air Station at (250,000
- shares); and for “other pur
Akron, Ohio, pur pose s” (40,000
chased for manu shares).
- Further
*
- more,
facture of commer-
cial dirigibles. TABLE III.-APPROXIMATEBALANCE SHEET AFTER REORGANZATION theremay be cre
March, 1920. Re- (Allowing for $18,247,000loss on Merchandise Commitments) ated an unstated
|
ported
- Assets— Liabilities— amount of manage
that com Fixed $98,041,000 1st Mtge Bonds $25,000,000
ment stock to be
..
.
.
.
..
.
.
.
.
..
.
..
.
.
.
.
.
.
.
.
..
.
..
.
85,000,000 -
lishing plant
#.
in
to
*
65,000,000 entitled aggre.
a
rel erreol
-
of
Reserves
March, 1920. of 900,000
.."; not more than
--
ares Common 11,381,000
Company leases $30,000 per annum,
Total $163,097,000 Total $163,097,000 priority to the
in
5,200 acres
of
coal
-
-
--
-
-
-
--
-
--
-
--
-
--
-
-
.
.
.
.
..
..
.
..
..
.
..
.
.
di
an approximate power for the election majority
of
Long lsland City for $2,000,000. give
of
In
Table
II
plant we
in
May, 1920. Company Dec. 31, 1920, prior This means that control of the
as
of
Cal. for $1,000,000. to the creation of the new securities. The company will be vested the Creditors'
in
ranch
in
as
as
$24,400,000, and we long
to
reduced since
31
in
rubber lands
only $5,200,000. Since current liabilities Working Capital and Fixed Charges After
Sumatra and had organized the Goodyear
Tire and Rubber Co. of Cal. with $66,000,000 we put the cur Reorganization
at
are stated
a
at
reflects
in
thus $85,000,000.
is
is
good part these heavy out merchandise, upon
of
be
of
at
issued
a
of
about $30,000,000 new preferred and will be sustained. this loss were
of
If
$13,000,000
of
of
of
resources
a
disaster. For had the difficulty been con sition after consummation of the read 000. This will cover the two bond issues
|
#Nº
A
a
*
*
r*
r
--
-
-
fully $43 per share, for available. Hence we do not know how its lative, resumption
to is
and leave about since dividend not
Prior Preference Valuing the working capital has fared the price re yet sight. as
in
the seems reasonable
It
in
stock.
fixed assets at their book figure of $98, adjustment. Last June $70,000, sume that the re-establishment of normal
at
stood
it
000,000, the total assets behind the pre 000—a comfortable figure—but has conditions the motor industry should
in
if
it
ferred works out at $117 per share; but since shrunk considerably this factor may enable the company pay something
to
on
for the new common, at only $12% per offset the apparent superiority over Good 30 the preferred stock
at
this issue. Hence
fairly attractive long-pull specu
its
share—or just about present price. year. appears
a
Interest and dividends on the two bond lation. In this connection must be re
it
The Common Fundamentally Speculative
issues and prior preference stock will ag membered that Goodyear's troubles are
gregate $4,800,000. But
be
$13,000,000 net for mainly financial.
to
of
this must Our estimate Its products have not
sinking fund lost their prestige, and the valuable good
on
added $1,250,000 the of Goodyear leaves nothing for the common.
a
First Mortgage bonds, and another for the Its dilution through the issuance will built up by years
of
of
the national advertis
debentures, the amount bonus stock makes the establishment of
of
which not ing and honest merchandise should be
is
fu
be
in
stated but may $500,000.
a at
estimated the near
In valuing
of
These two items would make total ture rather improbable. At the present the Goodyear issues we have
$8,550,000 charges ahead the 7% pre moment the salient point about the com assumed that the reorganization plan
of
of
is
Hence total annual payments mon that the total market value of the successfully completed. As this written
of
ferred.
is
is
only $11,000,000,
be
as
$13,100,000 would have met, before against the company announces that while over
to
new issue
is
anything par value prior se
of
for the common. $150,000,000 the creditors have consented
of
of
to
available 75%
is
of
This relationship
be
duce these charges gradually, since what
of
the earmark the plan
If
an mainder must obtained.
is
ever amount
in
essentially speculative
of
adoption, receivership
of
thus saved interest must valueissue—the fails will then
is
a
go to redeem the Prior Preference stock. which will fluctuate widely with each appear inevitable, with more drastic treat
relatively small change the company's ment ultimately accorded the stockholders.
in
the Outlook?
Is
What
This possibility has served
to
earnings. Goodyear common must, there depress the
typical speculation; current market price
as
The great obstacle fore, be regarded lower level than
to
determining
to
what
a
are the reorganized company's prospects its market price will rise and fall with the warranted by the long-range prospects
of is
the impossibility general outlook the tire industry. the preferred
of
an
of
selecting
of
lies
in
p.
normal year's operations on stock.-vol. 26, 166.
earning is
an
of
which
to
base estimate
power. As the graph shows,
in
twelve
years the company's sales grew from WHAT AMERICAN BUSINESS NEEDS
$2,000,000 $200,000,000, and
to
the assets
(Continued from page 666)
and capitalization were similarly expand
ing hundredfold. Hence the company's
a
or
exhibit five even two years ago may France's insistence upon large indemnity too long neglected. The time has come
a
and her impatience with attempts miti when we must turn our attention to them
at
sults.
or
in
evasion wise and
a
One thing
of
the time being sales cannot expected tled, Germany's creditors will know where The United States the most fortunate
is
to
be
last they stand and will plan for the among the earth today. We
of
to
of
are
in
operations Furthermore the settlement curity, ample resources and abundant capi
60,000 tires per week; but
to
of
in
this schedule probably means gross busi international situation and promoting the these advantages not only
to
rebuild our
less than $60,000,000 per annum.
of
to
aid the
a
2322.2%.
foreign trade cannot be expected, and upon
taxes at, say, 10%, this would give net depends
of
activity
at
home.
enough cover the preferred dividend.
to
the resumption
of
comparative figures
of
31, 1920,
of
of
year preferred quoted only 30, tenance approximately 25,000 more the next
at
can than
is
it
be set off against Goodrich common, which largest institution reporting. These figures
dustry until the deficit has been supplied.
six points higher.
In
the
in
a
Necessity Co-operation
of
reduced
if
is
000,000, the other company's might drop heavily upon business. trust that the new building on Market street, San Fran
I
largest build
in
$105,000,000. On
a
may be re
as
000. Deducting note interest $2,100,000 quired from the incoming Congress and bank.
of
a
as
and preferred dividend $2,660,000, the such encouragement may be needed Among the be incor
of
to
new features
balance left for the 600,000 shares of com irom the new Administration will not porated
of
in of
the Bank
in
mon
I
ferred. school
It
savings; ca
be
paying proper request; but business must en safe deposit vault with
$6
a
a
diffi couraged rather than discouraged, pacity 26,000 boxes; large international
of
least—and financial
in
• culties.
in
Z The 1920 Goodrich report not yet laws affecting our foreign trade, have been people.
is
United Drug C o.
a
facturing and distributing goods to re— Taken in conjunction with the fact that forget that corporations, like individuals,
tailers, the company also operates retail the tangible asset value of the stock was rarely acquire something for nothing.
stores of its own, known as Liggett Drug but $40 per share, clear that the The price paid for the Boot’s enterprise
is
it
Stores. In 1916, United Drug merged profits of $9 were far from justifying the was apparently $22,000,000 of which $12,
with the Riker-Hegeman-Iaynes inter high price of $175 touched by the issue 750.000 in preferred stock (apparently
is
ests, increasing the number of its retail in 1919. 6%) of the English company. The capi
stores to 145. At the end of 1920, 226 talization of the new enterprise cer—
is
Balance Sheet Items
stores were in operation. tainly topheavy, since the preferred stock
Our graphs present a picture of the Table traces the development of the aggregates $20,500,(X)0, against only $7,
I
growth of the number of stores, total chief balance sheet accounts from 1916 000,000 of common stock. Of the latter,
sales, net profits (before and after taxes) through 1920. In the first three years we $2,000,000 called class B, has sole vot
is
for the six years 1915-1920 inclusive. We note that fixed assets were increased but ing power, and all owned by United
is
also separate the sales of the retail and moderately, financed through corre Drug. The $5,000,000 of class non
A
sponding small expansion in capitalization. voting stock was offered to the public.
Inventories, however, grew from $8,000,
in
The net earnings, after preferred divi
000 to $14,000,000 or 75% against_a 40% dends but before British income tax, were
'17
'18
“16* increase in sales. Practically all this estimated at $1,000,000, of which 9%,“
$6,000,CK)0 addition to inventory was would accrue to United Drug. But to
UN! ED DRUG
financed by the expansion of current lia obtain this moderate income, United Drug
SALES éPROFlTS bilities. In 1919, the company sold $7, guaranteed the 8% dividend on $7,5(XMXII
500,000 of preferred stock, increased its of Liggett’s International preferred—thus
surplus by $1,600,000, and realized $700, assuming contingent liability of $6“),
a
000 on the sale of the intangible assets of 000 per annum. Even more, in order to
O
\n
Vivaudou. 1t
also reduced its invento persuade United Drug preferred stock
OIDOii¢r$‘
ries slightly, despite 14% addition to holders to invest in the new International
a
sales. These operations gave cash
3
it
a
issue, those who subscribed were offered
fund of $10,000,000 of which $3,000,000
was expended on new plants, and the bal
ance of current assets—excluding inven
‘VNITF. DRUG»
o
I
position. ended 1919, therefore, in ex
It
\N
0
OF RETHL DUSIIUI
Millions
2.
5OCLROWIH
In 1920, however, we witness com~
H llll
(LFOS Sales
a
5
I
plete reversal of the tendency toward
ill]
Net before Taxes NO OF STORU
N
Oirfllltd
You IVBiUdOU
W beforededudm br Inventors
Shrinkage indebtedness, and the balance sheet shows
t
pointed out here that the annual reports ance of current assets—excluding inven
all state earnings before allowance for tories—over current liabilities of $3,100, Sale: per Share ooo
taxes, which are deducted from surplus 000, 1920 this figure was transformed
a in
\II
of Dollars
0
were actually realized. We have revised company's position has been taught the
the income accounts to allow for war investor by many hard experiences in re
taxes, and have estimated the deduction cent months. In fact the basic difficulty
for 1920. with industrials as whole_ may be
O
N
a
In order further to picture the progress summed up in the statement that their
ions
share basis, we have treated all the sec liquid asset position.
ond preferred as the equivalent of com the right to exchange their present hold
Liggett’s International ings, par for par, for additional guaran
mon stock from the very beginning, as in
has practically all been converted An event of first importance during teed 8% stock. Hence, all the pre
if
fact
it
into common. When the figures are thus 1920, was the acquisition of Boot's Pure ferred stock had been so exchanged,
recast so as to give an insight into the Drug Co. stock of England and the mer United Drug would now have substituted
real performance of the company, we are ger of this enterprise with the British yearly fixed charge of $1,Z)0,000 for an
a
struck by the exceedingly moderate earn and Canadian subsidiaries of United optional preferred dividend payment of
ings shown by the common stock. The Drug. The new combination started $1,050,000.
1920 profits, before inventory shrinkage, with annual gross sales of $37,000,000 of No figures have been published as to
were the largest on record, and yet were which $32,000,000 was contributed by the the amount of United Drug first pre
only slightly above the 8% dividend rate Boot‘s stores. ferred exchanged for the Intematioml
established early in the year. The earn By thus adding over 50% to the busi preferred, so we do not know what the
is
ings for 1920 are referred to by Mr. Lig ness under its control, United Drug ex company‘s liability on account of the
gett as about $14.28 per share, but re pects to and undoubtedly will efiect im guaranteed dividends. clear that the
in
It
is
ality were only $9 per share, after allow portant savings in overhead and opera control of the Boot's Company must have
The Difference
Between the Investment Qualities of Two Equipment Stocks
By B. A. BERNSTORFF
HE Pressed Steel Car 1C0. manufac more than 50% because this concern did steel springs. In later years one or two
tures the bodies and trucks of rail not share in the repair work. of the plants were sold and other plants
were acquired. Among the properties ac
way ears, passenger, freight and street Railway Steel-Spring quired were the plants of the Steel Tired
cars. The Railway Steel-Spring Co., as Wheel Co. and the Latrobe Steel Company.
The Railway Steel-Spring Company is
its name signifies, produces the steel one of the largest, if not the largest, At the present time the company owns
springs, wheels and tires. Since both are manufacturer in the world of steel springs in fee, five plants for the manufacture of
engaged in the same general field—railroad for cars and locomotives, steel tired car steel springs, covering approximately 15
wheels, locomotive and car wheel tires, acres and having a combined annual ca
equipment—it would seem that in order for
etc. It is only logical to expect that pacity of 155,000 tons; two plants (one of
one of these companies to get much new
when the railroads begin placing their or which also manufactures steel springs) for
business the other must benefit also, ders for cars and locomotives the Rail the manufacture of tires, which have a
Such was the case until the government way Steel-Spring Company, being the larg combined annual capacity of 150,000 tons;
took over the control of the railroads. est manufacturer of its kind, will receive and four plants for the manufacture of
But during the period of government con a large part of the orders for the steel steel-tired wheels, the combined annual
trol, which lasted more than two years, springs, tires, etc. If railroad buying does capacity of these four plants being 62,000
very little new equipment was purchased not commence at once, however, it is not tons.
for the roads, expenditures being confined to be presumed that Railway Steel—Spring In January, 1920, operations were be
very largely to repair work; and the for will necessarily be idle. On the contrary, gun at the company's new plant at Mont
tunes of the two companies mentioned dur as instanced above, the company can be real, Canada. This plant is owned by the
ing the period were very divergent. The counted on during a period of restricted Canadian Steel-Tire 8: Wheel Co., Ltd,
Railway Steel-Spring Co. (which company new buying to do a large business in re- . a company with a capital of $1,000,000, all
did a flourishing business in repair work) pair work which, at least, is inevitable. of the stock being owned by the Railway
scored an increase in the amount earned on The company was incorporated under Steel-Spring Company, While the figures
the common stock in 1920 over 1919 of the laws of New Jersey in 1902, at which covering the operations of the plant for
about 2%; while earnings on the common time it acquired the properties of five the year 1920 are not reported separately
stock of the Pressed Steel Car Co. fell off companies engaged in the manufacture of (the company showing only a consolidated
Holders of page 199.) that Frisco actually fails to cover its full
(Continued front Income Bond interest. In other words,
taking the twelve months ended Sept. 30
as a criterion, St. Louis ft San Francisco
Low Priced production will be further curtailed until has been able to maintain full contingent
interest payments only at the expense of
there is greater stability in demand. the property.
Export trade in textiles is not particu 3. The M. K. & T. Adjustments 5s will be
Stocks larly good. This situation will probably cumulative from Jan. 1, 1925, while the
Frisco Incomes are permanently non-cumu
continue for some time yet. Small buying lative. During the next three years at least
in a number of foreign countries has led 50% of the earnings available for interest on
the Katy Adjustments must be paid to the
have pre
WE
to curtailment of stocks and the demand bondholders. On the basis of the current
would now be greater were it not for the returns, this would mean that the Adjust
pared a special difficulty encountered in securing credit
ments must receive at least 4% the first
year. It is eminently proper to give the
memorandum
- directors considerable discretion as regards
facilities. Improvement in this branch of
the portion of the earnings to be paid in
our foreign trade as well as in others is adjustment interest; in fact one of the criti
which should prove dependent to a large degree on improve cisms leveled against the Frisco reorganiza
tion has been that the contingent interest
of interest to hol ment in credit conditions. Should this
situation be rectified there is no doubt that
has been absorbing practically all the in
come, leaving very little to be ploughed into
ders of low-priced
the property.
a considerable volume of business would
At the present price of 42, these Katy
stocks with no spring up as the underlying demand abroad
is very large.
Adjustment 5s would yield just 12%
6c LOEB
dence of the trade in this market. This security invites comparison, not
Conditions in woolen manufacturing are with Frisco preferred (of which only
Member, tf New York and Pkiladeipkia not so favorable as several months ago. $7,500,000 is issued), but with Frisco com
Stock Exchange! This is accounted for by high-priced cloth mon, since both are selling about 23.
100 Broadway, New York ing and ladies' garments. The still high While Katy new preferred is limited to
Phone, Rector 7M* prices have affected demand and a num 7% (cumulative after Jan., 1928), at its
ber of manufacturers are forced into rela present price it may be regarded virtually
tive idleness. The outlook is that woolen as a common issue, because for years to
production will be further curtailed in come it will doubtless absorb whatever
succeeding weeks. dividends are paid. Katy preferred makes
Silk prices have advanced. Conditions in an incalculably better showing than Frisco
this industry are irregular. Where pro common. The former earns a full $7 per
duction of silk fabric is very small, fac
Trustworthy tories engaged in silk hosiery manufacture
share, against less than $1 for the latter.
Turning to the corrected maintenance fig
is still very good with a number of mills ures, we find that Katy's earnings have
Investment Service operating at capacity. risen to 12.89% on the preferred, while
Frisco would report nothing available for
Ifyou desire to purchase cither class of stock. When this signifi
securities, you will do well cant exhibit is studied with reference also
WASHINGTON
August, we get the summary shown in D. C. Corporation Maintenance
Table II. Union Trust Bldg.
The Bank Rate and Service Company
The National Bank rate which at the
beginning of the fiscal year was 7 per JERSEY CITY
cent., was reduced to 6Yi per cent, on May N. J.
5, 1921, and further reduced on July 6 to
586 Newark Ave.
6 per cent. These reductions took place
at the same time, or nearly at the same
time, as the reductions in the English.
Swedish and Norwegian rates. The rates
of these countries are now respectively
5yi per cent., 6 per cent., and 6]/2 per cent.
It is maintained now, just as it was
during the war, that the influence of the
Bank rate on industry is not as great now'
as it was formerly, the fluctuations in the
rates of exchange and in prices being so
great that the Bank rate became of sub
ordinate importance. When, on the other Investment Securities
hand, industry was in a state of stagna
tion and the note circulation was declin
ing', there were no reasons for maintain
ing an abnormal Bank rate, and it was
only necessary to maintain such a rate
as would indicate that the Bank still in
tended to put a brake on too much free
dom in the granting of credits, while at
the same time making the indispensable
WHITEHOUSE & CO.
credit less burdensome than before.
Established
WHAT TO DO WITH PROFITS ON 1828
SHORT TERM BONDS
(Continued from page 167.)
THE
cuss a number of railroad
which have good speculative
issues
possi
charges. In character of traffic, rates, and
operating costs the two groups of carriers
to say nothing of dividends. In 1921, how
ever, another wide swing was registered in
bilities, i. e., which under favorable condi showed very similar results. By taking the opposite direction, the operating ratio
tions may increase substantially in market the so-called Test Period as a basis (July having been reduced probably to about
price. Our attention must therefore be I, 1914, to June 30, 1917), it appeared that 84%.
confined to the low-priced issues, because while in the case of the strong roads only The effect of such fluctuations upon the
—as is well known — they are subject to II. 5% of gross receipts were required for exhibit of any individual road is nothing
much wider fluctuations proportionately interest and other charges, the correspond short of magical. Take Rock Island as
than the standard shares. To use a ready ing figure for the weak roads was almost an example. A reduction of 10% in its
example, it would be by no means impos double, or 222%. This latter amount rep operating ratio would mean an annua!
sible for M. K. & T. new common to ad resented nearly four-fifths of the net earn saving of about $14,000,000 (based on 1920
vance from 8 to 16 in a good rail market ; ings of these systems, so that the small gross), equivalent to over $18 per share
but a corresponding doubling in the price margin remaining was not sufficient to per of common stock. Hence with revenues
of Union Pacific (from 120 to 240) is mit dividends on the stocks, or even to on their present scale, even a moderate
practically out of the question. In con assure the safety of the bonds. change in the rate of expenses will pro
nection with the issues treated, we must Hence the poor credit of second-grade foundly affect the position of railroad
inquire, first, "What are the factors which roads was found to arise primarily from stocks.
will contribute most directly to an in over-capitalization, in particular, from too Given this kaleidoscopic background of
crease in value?," and second, "What are large a proportion of bonded debt to gross the railroad situation, how shall we go
the prospects of these factors being real revenues. But the enormous expansion of about judging the position of the various
ized in the near future?" both receipts and expenses in recent years low-priced shares? The difficulty lies evi
But in order to judge intelligently of has greatly reduced the relative impor dently in finding some definite basis for an
the position of the individual companies, tance of the fixed charges. For, in 1920 estimate of future earning power. The
it is essential that the reader have some interest requirements consumed only 7.7% results of the pre-control days are cer
idea of the very extraordinary present of revenues, as against 11.7% four years tainly too remote to be of much help un
status of the railroads as a whole. The previously. Given a normal operating der the present greatly changed conditions
developments of the past few years have ratio, any read would now have no dif On the other hand, the exhibit of the las-
injected into the country's transportation ficulty in meeting its interest charges, and four years have been so dominated by the
system a new speculative feature of the almost all would be earning substantial distorting effects of Government operation
greatest importance. For, in determining amounts on their stocks. as to make it a very questionable guide to
the prosperity of any one road the empha future performance. The 1921 figures, of
from capitaliza
Operating Cost* Now the Ruling Factor course, deserve careful attention;
sis has been transferred but in
tion (a fixed element) to operating costs The primary requisite of a prosperous the present state of flux they can hanlK
(a distinctly variable element). The test railroad is therefore no longer conserva be accepted as conclusive.
of strength has come to lie in a highly un tive capitalisation, but rather operating The facts at hand being thus insufficient
certain factor, and hence the status of the economy. The extraordinary variations in for our needs, we are driven to supple
carriers as a class has grown essentially the operating ratio since 1917 stand out ment them with an admixture of theory
speculative. most prominently when contrasted with its The future earning power of the carrier?
Theoretical as all this may sound, it has stability in previous years. (By operating must be estimated — "guessed at" is proba
so vital a bearing upon the future of the ratio is meant the percentage of gross bly the more accurate term — in accordance
low-priced rails that some elaboration of revenues consumed by all working ex with some arbitrary principles. The two
the idea is necessary. Some two years penses other than taxes). From 1908 to uncertain elements involved are the gross
ago, John E. Oldham, once vice-president 1917 this ratio was never more than 73% receipts and the operating costs — the for
of the Investment Bankers Association, or less than 6Sy2% ; in five years the fig mer depending on both volume and rate*,
published a treatise entitled "A Compre ure stood between 70% and 71%. But in the latter on wages and material prices.
hensive Plan for Railroad Consolidations," 1918 it jumped to 81.4%, in 1919 to 85.1%, Tn preparing the appended tabulation of
which included a study of the position of and in 1920 it reached the incredible figure expected normal earning power, the tota'
railway credit before Federal control. It of 94.5%. In that year, after making fur revenues have been taken at 80% of the
was here pointed out that the distinction ther deductions for taxes and equipment 1920 figures, while the net earnings, after
between the strong and the weak systems rentals, only 1% of the total receipts re taxes, are assumed to equal 20% of the
TABLE I.
SIX SELECTED LOW-PRICED RAILROAD ISSUES
ESTIMATED FUTURE EARNING POWER
Interest and
Other Balance
*
Earned on
Estimated Balance Equipment Deductions Preferred for Per Present Present
Road Gross After Taxes Rentals, eto. (Net) Dividends Common Share Price Price
Revenues (20% of Gross) (Net) (Est.) (1920figures)
St. Louis Southwestern... $24,800,000 $4,860,000 $2,140,000 $1,000,000 $1,820,000 $11.03 21 82.4~r
Pere Marquette 82.S00.0O0 6,460,000
22,600,000
$1,500,000
8,500,000
2,097.000
10,502.000
1.072,000
3,640.000
1,791000 S.98 20 lO^
Rock Island 118.000.000 4.948000 6.G5 SI 21.4%
Chic. * East 111 24.720.000 4,944.000 6.800,000 2,327,000 1,828,000 1,594,000 6.CO 14V, 45.t"-c
Balanoefor
Preferred
M. X. * T 58.40O.0O0 11,6(0,000 1,400,000 7.793,000 $2,498,000 •10.17 •40.0
Pfd.24 1
1,880,000 500.000 463.000 917,000 t9.17 Com 14f t24.2«l
Toledo. St. Louis ft West'n 9.400.000
•Per share of Preferred. tPer unit of one share Preferred and one share Common.
By BENJAMIN GRAHAM
NOTE:-The influence of capitalization
structure upon the carning power of cont
mon stocks is cartremely important,
little understood.
but
This article show's 2–Old
JULIUS KAY SER
No. Shares *Price
Capitalization—
& CO.
,
—-New Capitalization——
Total Value No. Shares *Price Total Value
through actual cramples how changes in
the proportion of common stock to pre
Preferred . . . . . . . . . . . 16,400
Com.mon . . . . . . . . . . . . 60.100
120
100
$2,000,000
6,600,000
66,100
115,000
95
20
$6,300,000
2,300,000
ferred will vitally affect the carnings for
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,600,000 $8,600,000
share. The application of this principle
to certain issues has had a striking effect Net Earnings (Average) . . . $1,500,000... . . . . . . . . . . . . . . . . . . . . . $1,500,000
Per Cent of Total Capital. - .4% 17.4%
upon their market price. Balance for Common. . . . . . $1,370,000 $971,000
Per Cent of Market Price. . . . . . . . . . . . . . . 42.2%
N a recent issue of THE MAGAZINE * Price at Date of Recapitalization.
of WALL STREET, one of the leading
articles was devoted to a comparison NORTH AMERICAN CO. |
of a number of listed common stocks
from the standpoint
–old
No. Shares *Price
capitalization—,
Total Value
2 —New
No. Shares
Capitalization——
*Price Total Value
of the percentage
Preferred . . . . . . . . . . ... - - - - - -- -- - - - - - - - --- 300,000 32% $9,750,000
of current earnings upon their market Common . . 300,000 65 $19,500,000 300,000 32% 9.750,000
price. It was pointed out very properly
that in the last analysis earning power Total. . . . . . . . . . ... . - - - - - - - - - - - - - - - - $19,500,000 $19,500,000
must always be the chief criterion of Net Earnings After Depreciation (Year
Endºd July 31, 1921). . . . . . . . . . . . . . . . $3,000,000... . . . . . . . . . . . . . . . . . . . . . $3,000.000
stock values—exceeding in importance Per Cent of Total Capital. . . . . . . . . . . . . . . .
Balance for Common. . . . . . . . . . . . . . . . . . . . . $3,000,000... . . . . . . . . . . . . . . . .
.
15.2% . . . . . . . . . . . . . . . . . . . . . 15.2°,
$2,100,000
. ...
asset backing, financial condition, and
Per Cent of Market Price. 15.2% 21.5°s
dividend return. For it is the
..
.
.
.
.
..
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
..
even
.
.
.
.
..
average rate of earnings which deter * Price at Date of Recapitalization.
mines the real value of the physical
assets, which weakens or strengthens the
cash position, and which finally must con
trol the dividend policy. pre
of
the smaller the ratio company with the larger earning power
to
common
The study of corporation earnings as ferred stock and bonds, the more “specu on its common stock has decided:
its a
on
related to security values involves certain latively" the company capitalized. smaller earning power total capi.
is
elements which usually receive slight con We are now ready for concrete ex tal.
the
be
on
sideration, yet which are not only inter amples. appears selling 10% too low,
to
tical importance.
preted, a comparative table of earnings and are fairly similar size and market This paradox has simple explanation
in
per share of common stock may result at quotation. Taking the most recent esti White Motors has only one kind stock of
1922 profits, the two common
of
times in quite misleading conclusions. mates but Mack Truck's capital divided abºut
is
Ratio of this
the same time be earning a relatively Current Current Earnings arrangement detail."
is
worked out
in
Price Earnings
to
15%
a
º
Pº
go
swell the
..
selling
as
*
does on its total capital, because
it
are just as irrelevant here as the Prohi intrinsic merit present prices. But
at
to
White were
bition Amendment. let us consider these companies from an
the
its
on
capitalization same
of the par value is growing as customary other and more fundamental standpoint.
Mack, then—as our table shows
".
among stocks as that of the appendix How do their earnings compare with this
on
of
its
figure would
be
a
figures:
of
is usually commo"
(
structure wherein
.
3,500,000 14.00%
"
£ºr.
Total . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . $31,500,000 $25,000,000 $25,000,000
-
1922 (Estimated). . . . . . . . . . . . . . . . . . . . $3,700,000.. . . . . . . . . . . . . . . . . . . . . . . . .. $3,500,000. . . . . . . . . . . . . . . . . . . . . . . . . . . $3,500,000
N: Capital. . . . . . . . . . . . . . . . . . . . . . . . . . 11.7%.. . . . . . . . . . . . . . . . . . . . . . . . . . 14.0%.. . . . . . . . . . . . . . . . . . . . . . . . . . 14.0%
Balance for Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,562,000.. . . . . . . . . . . . . . . . . . . . . . . . . . $3,500,000.. . . . . . . . . . . . . . . . . . . . . . . . . . $2,500,000
Per Cent on Market Price. . . . . . . . . . . . . . . . . . . . . . . . . . . 15.5%.. . . . . . . . . . . . . . . . . . . . . . . . . . .0%. . . . . . . . . . . . . . . . . . . . . . . . . . . 20.0%
£º
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,900,000 $26,000,000 $26,000,000
ings, 1921. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,769,000.. . . . . . . . . . . . . . . . . . . . . . . . . . $3,256,000.. . . . . . . . . . . . . . . . . . . . . . . . . . $3,256,000
N: Total Capital. . . . . . . . . . . . . . . . . . . . . . . . . . 10.8%.. . . . . . . . . . . . . . . . . . . . . . . . . . 12.5%.. . . . . . . . . . . . . . . . . . . . . . . . . .
$1,453,000.. . . . . . . . . . . . . . . . . . . . . . . . . . $3,256,000.. . . . . . . . . . . . . . . . . . . . . . . . . . $2,000,000
12.5%
Balance for Common; : . . . . . . . . . . . . . . . . ... . . . . . . . . .
Per Cent on Market Price. . . . . . . . . . . . . . . . . . . . . . . . . . 18.1%.. . . . . . . . . . . . . . . . . . . . . . . . . . 2.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . 25%
ãº
2–Recapitalized on Basis of Assoc.—
No. Total 2–Present Capitalization—, Dry Goods
Capitalization : Shares Price Value No. Shares Price Total Value No. Shares Price Total Value
First Preferred . . . . . . . . . . . .” 67.
rred. . . . . . . . . ... #:
. . . . . . . . . . . . ... 149,850
%
62
*:::::::
**** *
9,290,000
55,690
- - - -- - -
200,000
115
--
137
$6,400,000
-- - - - - - - - -
27,400,000
225,000
- - - -- - -
82,500
100
--
137
$22,500,000
-- - - - - - - - -
11,300,000
Jºe:
$27,365,000 $33,800,000 $33,800,000
Total. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .
- 1921. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,836,900.... . . . . . . . . . . . . . . . . . . . . . . . $4,053,000.. . . . . . . . . . . . . . . . . . . . . . . . . . $4,053,000
N: dº
£º.º.º.º.º
Capital........................... $1,538,000.
non . .
..... .... ...............
10.4%.. . . . . . . . . . . . . . . . . . . . . . . . . . 12%. . . . . . . . . . . . . . . . . . . . . . . . . . . 12%
. . . . . . . . . .. . . . . . . . . . . . . . . . $8,663,000.. . . . . . . . . . . . . . . . . . . . . . . . . . $2,478,000
Balance
Per Cent on Market Price. . . . . . . . . . . . . . . . . . . . . . . . . . 16.6%. . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4%.. . . . . . . . . . . . . . . . . . . . . . . . . . 21.9%
28,
r OCTOBER 1922
Nevertheless, Freeport Texas stock is
not to be measured by the estimated value
of sulphur reserves—the main problem is
to mine and sell this sulphur at profitable
figures. It now seems likely that the
company is recovering slightly from the
unsettled conditions of the past two years
which were precipitated by the large
amount of sulphur left on hand at the
end of the war—followed by the general
business depression. It is evident, how
ever, that the earning power back of
the shares is not yet at a substantial
-
ings statements are issued—the dividend in the World.” Insurance makes them this added protection.
record is not made public and yet it is so. This is the only positive protection
quite generally known that the company you can get for a check, just as the only
has made big profits for years as mea positive protection against any other
loss, such as fire, theft, hold-up, tornado
sured on capitalization. The shares have
or flood is insurance.
no open or general market, but once in
a while there may be private transactions Banks displaying the door and grill
in the stock which commands undoubt signs pictured in the circle are banks
edly a very large premium above par, that will gladly accommodate you with
which is $100. Outside of the company's this added protection. There are thou
importance to the industry in which it is sands of them in the United States.
engaged there is no public interest and Look for them in your city.
of course the shares are unattainable by
Ask your banker for these checks
the average investor. today and get your free $1000.00 certi
ficate of insurance protecting you
through loss from fraudulent alteration. On
ARITHMETIC AND If you cannot find a banker in your
STOCK VALUES locality who can supply you with these the “cage”
checks, write us for the name of one Alongside the teller’s
(Continued from page 999) window in banks that
who will gladly accommodate you. give this protection you -
will find this aluminum
hanger.
still being recommended as among the
most desirable of industrial common Bankers Supply Company
TheLargest
The Manufacturers
of Bank checksin the world
issues. NEw York CHICAGO E
DEnvert
Indirect Methods ATLANTA Des Moines san Francisco
as
as
did not show up spectacularly
as
those over-conservatism capitali
(#)
in
a
of Baldwin or American Locomotive,
as
and zation, well
as under-conservatism
its stock ranged considerably industry,
of
lower. The
in
Concerns stable field
a
was changed 1919 through normally exempt from wide fluctuations
in
situation
the acquisition another large enter earnings, are justified having
of
rea
Profitable
in
in
a
prise—Griffin Wheel Co.—by issuance sonable part their capital
of
of
the form
in
new preferred stock. of securities with fixed dividends in
or
of
Thrift
about millions
9
Since Griffin Wheel normally earned sub
so
terest, that the common stock may
stantially more than the 7% dividend re the profits which this
of
have the benefit
Just “saving” isn't any fun— quired by this preferred, its surplus prof capital regularly produces
its
of
excess
in
but saving that starts returning its now go increase the earning power has been considered quite
to
annual cost.
It
you profit right away of American Steel Foundries common. proper, for example, that public utility
is
a
by
mighty pleasant and interesting The success of this transaction from enterprises should have far the greater
a
now becoming evi portion their capitalization
of
market standpoint senior
in
is
way increasing your income.
is of
dent. Steel Foundries keeping pace securities—a financial policy which has
is
That why we developed the often been carried disastrous ex
to
the other equipment
of
with the advance
Herkins Partial Payment Plan companies, whereas the previous boom tremes. In the case of North American
in
—an agreeable way accumu period had lagged behind. Co., however, the old common stock un
of
it
lating high-grade, income pay These concrete examples have been doubtedly represented much larger per
a
centage of the total capital the sys
of
so
ing bonds. order dispel
in
to
made numerous
a
— namely that capi
or
natural impression tem than was usual, probably neces
We offer only the best bonds primarily sary. Hence the recent readjustment may
talization structure theo
is
a
listed on the New York Stock be characterized as stroke of sound
retical conception, with remote practical
a
Exchange equal quality,
of
or
in
significance. must not be imagined, substantially
It
it
paying good rate interest,
of
the earnings
of
however, the expedients
that described creased the common
a
reliable, and salable any time. above can be applied indiscriminately shares, did not expand the prior
at
to
to it
You make your own choice from all companies, with unvarying success charges an uncomfortable total. Simi
larly, American Steel Foundries was
its no
our list and your income starts and without compensating disadvantages.
doubt well justified rearranging
in
In prosperous years undeniably
is
it
from the day you make your first capitalization
the smaller the proportion of basis comparable with
to
true that
a
payment.
the other equipment companies.
of
total capital, the larger that
to
common stock
Send for our current list of per share. On the other hand,
of
the directors
if
the earnings The company
offerings and booklet ex with the most speculative capitalization White Motor were asked why they did
plaining this attractive plan.
makes the best showing. But when pe not follow suit and recapitalize on the
basis, say, Mack Truck, they might
of
ADDRESS DEPT. M.W. depression bring sharp shrink
of
riods
a
profits, then the situation re plausibly point out that the absence
of
age
is
in
in
on such common stocks decline with
115 BROADWAY, NEW YORK alarming rapidity, but frequently the pre trying times
of
1920-1921. Hence White
ferred dividend and even the bond in
to
was able continue its 8% ($4) common
its
not covered, resulting dividend, while Mack has yet
to
make
in
is
terest serious
embarrassment. But the conservatively first cash payment on its junior shares.
capitalized company has no problem Obviously there this subject
to
is
more
of
be
an
heavy fixed charges, and comes through presented
of
than can article
in
hard times with far less difficulty. this size. Scientific inquiry might deter
m () Z }> () X IT
capitalization
of
The situation here has its direct coun mine what basis best
is
adapted various types enterprises,
of
terpart the stock market itself—among
to
in
I
be
so
ulatively constituted
be
rise prices evidently brings larger might avoided
in
In
profit on the capital the marginal passing, the writer might express his
of
a
fades away just sufficient percentage preferred
of
so
ings justifies
of se
take care of, while the other man can higher proportion
of
to
sit tight and wait for the storm nior securities—which would mean
far blow
to
are very analogous fashion, the com course correspondingly larger profits per
In
over.
reaching service
to
of
mon stock
a
You can diversify your the major swings the market, such conventionally accepted financial prac
of
in
issues
a
wider range. They advance furthest the common stockholders. One would
in
gation
a
lead
2
found
to
is
is
mathematical,
entirely artificial. Yet ad does not soar into the
be
it
if
realms calculus—in
it
as
-
m 5 A.L.E.5
5 u R. P. Lu 5t
| N.W.E.N.To R.Y
75
Which Has the Greater Earning-Power?—
Unusual Position of Hide and Leather Pre- 50
T!
- © 50
third quarter of 1922 apparent product. Am. Hide & 2
ly marked the turning point in the Leather, however, finds it o
leather industry. After a period of
-
advisable to purchase its #40
depression almost unexampled in length tanning materials.
30
and intensity, the leading companies are Both companies were
again on a profitable basis. Hide prices formed during the trust
have scored substantial advances, fol era of twenty-odd years 20
lowed to a lesser degree by strength in ago as amalgamations of
the leather market. The report of Cen inunnerous competing 10
tral Leather for the three months ended units. Following the usual
September 30 shows the preferred divi practice, a liberal propor
dend covered with a slight margin, as tion of water was inject 1944 *2+ 20: 20+ 2
contrasted with a long series of previous ed in the property ac
* Not available.
count. While neither com + before reduction to eliminate good will.
deficits. The corresponding figures of
# Adjusted to reflect modified depreciation-charges
American Hide & Leather have not been pany made an especially way * Ye’ºrs ended June 30.4 Years ended Dec. *ſ.
published at this writing, but estimates brilliant exhibit prior to
considered reliable place the profits for the war, Central Leather
the period at the annual rate of about shone at least by comparison. It suc devised for a recapitalization involving
$10 per share of preferred stock. ceeded in maintaining uninterrupted the discharge of the back dividends
With the hectic chapter of war infla dividends on its preferred, and was through a distribution of bonds or
tion and deflation at last brought to a gradually building up a moderate earning stock. These schemes were not ac
close, it may be well to ascertain in what power for its common. But American cepted, nor can any logical reason be
condition and with what prospects these Hide and Leather seemed unable to adduced for the preferred stockholders
two leading companies are embarking realize an adequate profit on its sales. to commute their claims in order to
once more upon a normal basis of opera It was handicapped further by the un benefit the common shares.
tions. We shall try to form some esti usually onerous sinking fund provisions Am. Hide & Leather preferred, rep
mate of their average future earning of its bond issue, so that the balance resenting thus the entire capitalization
power, thereby to determine how their available for the preferred shares was of the company, has a current market
various securities compare in attractive made to appear even scantier than the value of only about half the average
ness at present prices. The elements to meagre reality. In seventeen years it pre-war sales. Central Leather's three
be considered are the following: was able to pay a total of just 3% in classes of securities aggregate $67,000,-
preferred dividends, the accumulations 000 in market price, or somewhat in ex
1. The actual and relative position of the
finally exceeding 100%. cess of its annual turnover. Otherwise
two companies before the war. stated, Central Leather is capitalized
2. The permanent effects of the war and Their Pre-War Record
twice as heavily in comparison with its
post-war periods.
Table entitled Average Pre-War volume of business. This should be an
3. The current financial condition and important advantage in favor of the
income account presents an income
earning power, as evidenced by recent
account based on the average results American company, for with the same
data.
for the five years preceding the war, but margin of profit on its sales it should
Central Leather is a very much larger with certain adjustments for bond in earn double as much on its capital. The
enterprise—as measured both by capitali terest and depreciation in order to re actual results, however, have been just
zation and turnover. Its product is chief flect current requirements. These fig the opposite, because its ratio of net to
ly sole leather while the American com ures must be considered in connection gross has always been abnormally low.
pany concentrates on the manufacture of with the present capitalization of the The average pre-war figures, given in
upper leathers. Thus the two companies companies, as detailed in Table show our table, show a profit margin of only
are not competitors, yet the prosperity ing present capitalization. We leave 454% on its total business, as against
of both is vitally affected by conditions Am. Hide & Leather common out of over 9% for Central Leather. After
in the shoe trade. Sole leather is tanned account entirely, because the 125% of allowing for depreciation, American
by oak and hemlock bark, while upper unpaid dividends on the 7% cumulative Hide & Leather's net works out as only
leather is tanned by chemicals. Hence preferred entitle the senior shares to all 5.40% on its capitalization, while Cen
Central Leather finds it necessary to hold conceivable future earnings of the en tral Leather has earned 6.85%. On the
extensive timber lands, equipped with terprise. The common stockholders latter's stock capitalization alone the
saw-mills, logging lines, etc. These op seem condemned to maintain a purely available balance averages over 8%.
erations in turn lead to heavy sales of academic interest in the affairs of their These figures of pre-war income in
hard-wood lumber, as an important by company. During the war, plans were dicate a great potential advantage for
2S T |H . \! \t , \/IN E () | \\,\LL STR ]: I.T
Am. H. & L. (in its simpler and smaller present $6,800,000 deficit in profit-and future. American Hide and Central
capitalization), but an equally great loss. Leather entered 1922 with very nearly
actual superiority of Central Leather in Said deficit is undeniably a serious the same resources and capacity as in
its final net profits. It may be thought matter for the preferred shareholders. 1912. In fact, their policy has consist
that the extraordinary changes wrought It implies the postponement of all divi ently aimed towards reducing their
by war influences would completely dends until it is made up out of earn over-numerous plants and concentrat
destroy the significance of such ancient ings—a two-year wait, or even longer, ing their interests on fewer products.
statistics. Yet the influence of the it would seem. It is true that the com For these reasons the earnings of 1910–
war on these enterprises was most pany may “doctor” its balance-sheet, 1914 were given such detailed attention
peculiar—exceptionally violent, and still either by restoring the good-will item above.
strangely transitory. To most indus (as Hendee Mfg. did recently), or by It is reasonable to hope, however, that
trials the great upheaval has left some changing the par value of its common Am. Hide & Leather will be able to
permanent legacy—increased plant ca (cf. Montgomery Ward). But any such report better average operating results
pacity, larger working capital—or, con procedure must be regarded as im from now on than in the unsatisfactory
versely, a heritage of debt. But the probable. years preceding the war. A determined
leather companies were borne high on There is presented in the table show effort has since been made to attain
the crest of war prosperity, then dashed ing Comparative Balance Sheets a skele greater efficiency. From 1915 to 1920
into the lowest abyss of deflation—to ton balance-sheet of Central Leather the company succeeded in reducing
land finally almost exactly where they at the end of 1921 and 1911. No one somewhat Central Leather's former
started a decade before.
could guess from these figures the great advantage with respect to mar
colossal vicissitudes of the intervening gin of profit on sales. Although this
Back Where They Started years. The inventory, the working progress may perhaps have been due
capital, the surplus, are all nearly iden solely to war conditions, there is no
The appended graph traces the rise tical in both exhibits. The only signifi reason why the company should not
and fall of gross sales, inventories, and cant change is a substantial reduction maintain the improvement.
surplus during the past ten years. The in fixed assets on one side, and in fund
lines show clearly the fictitious charac ed debt on the other. This represents The Current Situation
ter of their dazzling profits—their pros chiefly the steady depletion of the com
perity based entirely on price and not pany's timber holdings, with a corre This view is supported by more re
on volume; their enormous surplus rep sponding amortization of the bond issue. cent figures, which indicate that Am.
resenting merely the marking up of With American Hide & Leather, the Hide & Leather has weathered the
inventory values. For comparative pur case is very similar. But here the re storm of deflation somewhat more suc
poses we have omitted from our fig tirement of the funded debt, first effect cessfully than the larger concern. Its
ures the arbitrary reduction of $8,126,- ed out of surplus cash, seems now to inventory losses were proportionately
000 made in Central Leather's surplus have necessitated the reduction of in as heavy, but they were concentrated
in 1919, through writing off the good ventories to an abnormally low figure. within a shorter space of time—from
will item in the property account. This The absence of any considerable met July, 1920, to March, 1921. From that
conservative action seemed well justi change in the companies' position since date to the last quarter it operated at
fied by the huge surplus balance at the 1914 leads us back to the results of the a slight profit, while Central Leather
time, but it is directly responsible for earlier years for guidance in judging the was still reporting sizable deficits. Fur
cºlº
Dec. 31, 1913)
*****
June 30, 1914)
$17,470,000 Depreciation . . . . . . .
Central Leather
Gross sales . . . . .. . . . . . . . . . . . $70,000,000
Net profits . . . . . . . . . . . . . . . . . 7,000,000
750,000
Am. Hide & Leather
$20,000,000
1,600,000
250,000
Gross sales . . . . . . . . . . . . . . . $58,000,000
§§ sº
736,000 Bond interest . . . . . . . . . . . . . . 1,300,000 ......
Net income . . . . . . . . . . . . . . . . 5,349.999
- - -- - - - - - - - - -
#:
Balance for preferred. . . . . . . . 4,950,000 1,350,000
:::::::::::::...' 1.
3,290,000 486,000 Balance for common. . . . . . . . . 2,619,000 .. ....
for preferred. - .
Balance for common . . . . . . . . 959,000 . ..... Earned per share preferred. . . $14.90 $10.75
Earned per share preferred.. $3.88 Earned per share common....
per share common. . . *:::
--- -- --- - 6.60 .... ..
Earned Earned on total capital (present
• Adjusted to present requirements. market value). . . . . . . . . . . . 9.33% 15.37%
--
for NOVEMBER 11, 1922
thermore, if the estimates of the Sep
tember Quarter's results may be relied
-
º -º
*§
-
The table presents the writer's idea
§
*Hoo
& is
O
22
18
2ſ
T
2.
1 Hſ
ly
1911
ties should entitle the former issue to vºy To Nov.
*