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—U.S. Air Force Gen. Donald Kutyna

E-Business

As Graham did, let’s compare and contrast four stocks, using their reported numbers as of December 31, 1999—a time that will enable us to view some of the most drastic extremes of valuation ever recorded in the stock market.

Emerson Electric Co. (ticker symbol: EMR) was founded in 1890 and is the only surviving member of Graham’s original quartet; it makes a wide array of products, including power tools, air-conditioning equipment, and electrical motors.

EMC Corp. (ticker symbol: EMC) dates back to 1979 and enables companies to automate the storage of electronic information over computer networks.

Expeditors International of Washington, Inc. (ticker symbol: EXPD), founded in Seattle in 1979, helps shippers organize and track the movement of goods around the world.

Exodus Communications, Inc. (ticker symbol: EXDS) hosts and manages websites for corporate customers, along with other Internet services; it first sold shares to the public in March 1998.

This table summarizes the price, performance, and valuation of these companies as of year-end 1999:

Electric, Not Electrifying

The most expensive of Graham’s four stocks, Emerson Electric, ended up as the cheapest in our updated group. With its base in Old Economy industries, Emerson looked boring in the late 1990s. (In the Internet Age, who cared about Emerson’s heavy-duty wet-dry vacuums?) The company’s shares went into suspended animation. In 1998 and 1999, Emerson’s stock lagged the S & P 500 index by a cumulative 49.7 percentage points, a miserable underperformance.

But that was Emerson the stock. What about Emerson the company? In 1999, Emerson sold $14.4 billion worth of goods and services, up nearly $1 billion from the year before. On those revenues Emerson earned $1.3 billion in net income, or 6.9% more than in 1998. Over the previous five years, earnings per share had risen at a robust average rate of 8.3%. Emerson’s dividend had more than doubled to $1.30 per share; book value had gone from $6.69 to $14.27 per share. According to Value Line, throughout the 1990s, Emerson’s net profit margin and return on capital—key measures of its efficiency as a business—had stayed robustly high, around 9% and 18% respectively. What’s more, Emerson had increased its earnings for 42 years in a row and had raised its dividend for 43 straight years—one of the longest runs of steady growth in American business. At year-end, Emerson’s stock was priced at 17.7 times the company’s net income per share. Like its power tools, Emerson was never flashy, but it was reliable—and showed no sign of overheating.

Could EMC Grow PDQ?

EMC Corp. was one of the best-performing stocks of the 1990s, rising—or should we say levitating?—more than 81,000%. If you had invested $10,000 in EMC’s stock at the beginning of 1990, you would have ended 1999 with just over $8.1 million. EMC’s shares returned 157.1% in 1999 alone—more than Emerson’s stock had gained in the eight years from 1992 through 1999 combined. EMC had never paid a dividend, instead retaining all its earnings “to provide funds for the continued growth of the company.”1 At their December 31 price of $54.625, EMC’s shares were trading at 103 times the earnings the company would report for the full year—nearly six times the valuation level of Emerson’s stock.

What about EMC the business? Revenues grew 24% in 1999, rising to $6.7 billion. Its earnings per share soared to 92 cents from 61 cents the year before, a 51% increase. Over the five years ending in 1999, EMC’s earnings had risen at a sizzling annual rate of 28.8%. And, with everyone expecting the tidal wave of Internet commerce to keep rolling, the future looked even brighter. Throughout 1999, EMC’s chief executive repeatedly predicted that revenues would hit $10 billion by 2001—up from $5.4 billion in 1998.2 That would require average annual growth of 23%, a monstrous rate of expansion for so big a company. But Wall Street’s analysts, and most investors, were sure EMC could do it. After all, over the previous five years,