Chapter 49: Comparative Analysis of Companies in the Same
Field
Statistical
comparisons of groups
of concerns operating in a given industry permit each company’s
showing to be
studied against a background of the industry as a whole. They
frequently bring
to light instances of undervaluation or overvaluation or lead to the
conclusion
that the securities of one enterprise should be replaced by those of
another in
the same field.
- It is more logical
and effective to ignore calendar year division and to use instead the
result for the twelve months to the latest date available for studying
the latest one year results.
- In addition to the
results for the latest one year, average results over the past 5 or 7
calendar years should be studied. It should be long enough to cover a
full cyclical fluctuation but not so long as to include factors or
results that are totally out of date.
- Caution is needed
in trying to compare the relative attractiveness of two stocks where
one is speculatively capitalized and the other conservatively
capitalized. The two stocks will respond quite differently to changes
for the better or the worse, so that an advantage possessed by one of
them under current conditions may readily be lost if conditions should
change. Ex. Union Pacific had a 9.1% earnings yield and Chicago Rock
Island had a 2.4% earnings yield in 1922, yet a conclusion that Union
Pacific was cheaper based on these figures would have been fallacious
because the capitalization structures were so different. By 1927, Union
Pacific had a 9.0% earnings yield and Chicago Rock Island had a 13.1%
earnings yield as a result of gain from its speculative capitalization
and general business expansion during this period. It would be equally
fallacious to conclude Chicago Rock Island is attractive at this time.
- The division of
importance as between the current year results, the seven year average
and the trend is something entirely for the analyst’s judgment to
decide. Naturally, he will have the more confidence in any suggested
conclusion if it is confirmed on each of these counts.
- Conclusions
suggested by comparative tabulations of this sort should not be
accepted until careful thought has been given to the qualitative
factors. When one issue seems to be selling much too low on the basis
of the exhibit in relation to that of another in the same field, there
may be adequate reasons for this disparity that the statistics do not
disclose. Among such valid reasons may be a definitely poorer outlook
or a questionable management.
- Relative
popularity and relative market activity are two elements not connected
with intrinsic value that nevertheless exert a powerful and often a
continuing effect upon the market quotation. The analyst must give
these factors respectful heed, but his work would be stultified if he
always favored the more active and the more popular issue.
- The dependability
of industrial comparisons will vary with the nature of the industry
considered. The basic question, of course, is whether future
developments are likely to affect all the companies in the group
similarly or dissimilarly. If similarly, then substantial weight may be
accorded to the relative performance in the past, as shown by the
statistical exhibit. An industrial group of this kind may be called
“homogeneous”. But, if individual companies in this field
are likely to respond quite variously to new conditions, then the
relative showing must be regarded as a much less reliable guide. A
group of this kind may be called “heterogeneous”.
- Homogeneous:
Railroads; power utilities; producers of raw materials and of other
standardized products in which the trade name is a minor factor –
producers of sugar, coal, metals, steel products, cement, cotton print
cloths, etc; Larger oil companies; Larger chain store enterprises;
- Heterogeneous:
Makers of manufactured goods sold under advertised trade-marks –
in this field one concern frequently prospers at the expense of its
competitors, so that the units in the industry do not improve or
decline together; Automobile manufacturers; Producers of various
classes of machinery and equipment; Drug manufacturers;
The
analyst
must be cautious about drawing conclusions from the statistical data
when
dealing with companies in the heterogeneous group – the analyst
may give
preference to companies making the best quantitative showing but the
analyst
should be aware that such superiority may prove evanescent. The less
homogeneous
the group the more attention must be paid to the qualitative factors in
making
comparisons.
- The analyst must
be careful not to be deluded by the mathematical exactitude of his
comparative tables into believing that their indicated conclusions are
equally exact. The technique of comparative analysis may lessen some of
the hazards of his work, but it can never exempt him from the
vicissitudes of the future or the stubbornness of the stock market
itself or the consequences of his own failure – often unavoidable
– to learn all the important facts. He must expect to appear
wrong often and to be wrong on occasion.
Items for Comparison for Industrial
Companies in the Same Field
A.
Capitalization
1.
Bonds
at par
2.
Preferred
stock at market value (number of shares x market price)
3.
Common
stock at market value (number of shares x market price)
4.
Total
Capitalization (1 + 2 + 3)
5.
Ratio
of Bonds to Capitalization (#1/#4)
6.
Ratio
of aggregate market value of common to capitalization (#3/#4)
B.
Income
Account (most recent year)
1.
2.
3.
4.
5.
6.
7.
Gross
Sales
8.
Depreciation
9.
Net
available for bond interest
10.
Bond
Interest
11.
Preferred
dividend requirements
12.
Balance
for common
13.
Margin of
profit (#9/#7)
14.
% earned
on total capitalization (#9/#4)
C.
Calculations
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Number of
times interest charges earned
16.
Earned on
common, per share
17.
Earned on
common, % of market price
18.
Ratio of
gross to aggregate market value of common
D.
Seven
Year Average
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Number of
times interest charges earned
20.
Earned on
common stock per share
21.
Earned on
common stock, % of current market price
E.
Trend
Figure
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
Earned per
share of common stock each year for the past seven years
F.
Dividends
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
Dividend
rate on common
24.
Dividend
yield on common
G.
Balance
Sheet
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
Cash assets
26.
Receivables
27.
Inventories
28.
Total
current assets
29.
Total
current liabilities
30.
Notes
payable
31.
Net
current assets
32.
Ratio of
current assets to current liabilities
33.
Ratio of
receivables to sales
34.
Ratio of
inventory to sales
35.
Net
tangible assets available for total capitalization
36.
Net
tangible asset value of common per share (deducting all prior
obligations)
H.
Supplementary
Data
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
Physical
output: Number of units; receipts per unit; cost per unit; profit per
unit;
total capitalization per unit; common stock valuation per unit.
38.
Miscellaneous:
Number of stores opened; sales per store; profit per store; ore
reserves; life
of mine at current rate of production.