The Aggressive Conservative Investor by Martin J. Whitman & Shubik Martin & Isenberg Gene

Author:Martin J. Whitman & Shubik, Martin & Isenberg, Gene
Language: eng
Format: epub
Publisher: Wiley
Published: 2011-02-14T05:00:00+00:00

Polaroid Corporation CIT Financial Corporation

1969 $2.20 $3.15

1970 2.01 3.27

1971 1.86 3.77

1972 1.30 4.15

1973 1.58 4.28

Polaroid sold at over 40 times earnings because of its industry identification with instant photography. CIT Financial, on the other hand, was a diversified financial-services company.

THE LONG - TERM EARNINGS RECORD

In fundamental analysis, special attention should be given to the importance of a favorable long-term earnings record—that is, a company’s ability to have enjoyed, at least for accounting purposes, annual profits from operations over a period of three years, five years and longer. Such a record or lack of it can be extremely important in many types of analysis, even though it lacks the universal significance attributed to it by some analysts for all corporate evaluations.

As we have commented in the previous chapter, there is an integral relationship between earnings records and asset values. The major component of net asset value for most publicly owned businesses is retained earnings—past profits that have not been paid out. There is a general tendency, therefore, for past records of profitability to be reflected in the book value reported in a company’s relatively recent balance sheets.

Over and above this, there are two types of analysis in which a company’s long-term earnings record becomes especially significant. In the first, the business to be analyzed is to be viewed as a strict going concern, likely to conduct its operations in the future as it has in the past, and financed about the same as in the past, with management and control groups essentially unchanged.

The second area of analysis where a long-term earnings record becomes especially significant is in gauging the quality of an issuer. Where an operating business lacks consistent profits—indeed, where an issuer lacks long-term profits that have been on a rising trend—it lacks a crucial attribute necessary to rank as high quality. Securities of an issuer lacking a good earnings record frequently are highly attractive—as are, for example, asset-conversion issues selling at depressed prices—but they are not high quality.

It should be reemphasized, furthermore, that many portfolios should be restricted in whole or in great part to high-quality issues (especially when the portfolio managers have neither know-how nor know-who) where a principal objective has to be the generation of regular cash income and where there are fiduciary obligations to the portfolio beneficiaries. In these instances, we suggest that suitable securities consist, at the minimum, of the issues of companies whose financial statements combine both favorable long-term profits records and strong present financial positions. We would not emphasize the long-term earnings record at the expense of the present financial position, or vice versa.

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