2021-12-21 "Smart Investor" study notes - 17. Four very inspiring cases - failure cases

From The Intelligent Investor (4th Edition) by Benjamin Graham

The 4 cases represent a variety of extreme events that have been evident on Wall Street in recent years.

The Case of Penn Central – Unreasonable Profits, Poor Financial Strength

It is the largest railroad company in the United States in terms of assets and total operating income.

In the book "Securities Analysis", we set the minimum guarantee multiples for railway bonds, which are generally 5 times before tax and 2.9 times after tax.
In 1967, the company's interest coverage ratio was 1.91 times, and in 1968, it was 1.98 times, which completely fell short of our safe requirement of 5 times.

In the case of Penn Central, it has not paid income tax for the past 11 years. This should raise serious concerns about the reasonableness of its reported profits.

Railroad stock analysts should have noticed early on that Penn Central was doing poorly, after comparing it to other more profitable railroad companies.
For example, its shipping rate in 1968 was 47.5%, while the shipping rate of its neighbor Norfolk & Western was only 35.2%.

For competent securities analysts, fund managers, trust directors, and investment advisers, the securities accounts held by them should have sold all the bonds and stocks of the Penn Central Railroad system by 1968 at the latest.

Ling- Temco- Vought Company – Debt Expansion, Careless Bank Loans

This is a case of crazy expansion and crazy borrowing, the end result of which is huge losses and serious financial problems.

insert image description here
The company's expansion has not been without hiccups. In 1961 there was a modest operating deficit.

At the end of 1967, bank loans amounted to $161 million. A year later, that figure was $414 million -- a frightening figure. In addition, long-term debt was as high as $1.237 billion. By 1969, total debt had reached $1.869 billion.

The losses in 1969 and 1970 have greatly exceeded the combined profits of the company since its inception.

In 1960 and before, the company's interest coverage ratio did not meet a safe standard. And the ratio of current assets to current liabilities and the ratio of equity to total debt are also substandard. But over the next two years, banks lent the business nearly $400 million more.
This practice is not good for the bank, and it is also bad for the company's shareholders.

NVF acquires Sharon Steel (a good business) – Snake swallows elephant, takes on huge debt

At the end of 1968, NVF had long-term debt of $4.6 million, equity of $17.4 million, sales of $1 million, and net income of $502,000.

Sharon Steel has long-term debt of $43 million, equity of $101 million, sales revenue of $219 million, and net profit of $2.929 million. The scale is 7 times that of NVF.

NVF acquired an 88% stake in Sharon, thus issuing $102 million in bonds (5% interest rate) and 2.197 million warrants.

Mergers took on huge new debts, counting 1968 profits as losses for the benefit.
The damage this practice has caused to the company's financial position.

The newly issued 5% bond failed to sell for more than 42 cents (per dollar) in the year it was issued.
This suggests serious doubts about the safety of bonds and the future of the company.
However, the company's management was actually using the bond price to save the company about $1 million in annual income tax that it would have to pay.

AAA Company – Overvalued Financing

This is an extreme case of a small company using public equity for financing.
The company's value is largely based on the deceptive term "franchise", and stock issuance is done through major stockbrokers.
Within two years of the stock offering, the company collapsed after a careless stock market doubled its initial overvalued price.

Guess you like

Origin blog.csdn.net/weixin_42555985/article/details/122071538