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3. The bonds of the Penn Central system could have been exchanged in 1968 and 1969, at no sacrifice of price or income, for far better secured issues. For example, in 1969, Pennsylvania RR 4½s, due 1994 (part of Penn Central) had a range of 61 to 74½, while Pennsylvania Electric Co. 4 3/8s, due 1994, had a range of 64¼ to 72¼. The public utility had earned its interest 4.20 times before taxes in 1968 against only 1.98 times for the Penn Central system; during 1969 the latter’s comparative showing grew steadily worse. An exchange of this sort was clearly called for, and it would have been a lifesaver for a Penn Central bondholder. (At the end of 1970 the railroad 4¼s were in default, and selling at only 18½, while the utility’s 4 3/8s closed at 66½.)

4. Penn Central reported earnings of $3.80 per share in 1968; its high price of 86½ in that year was 24 times such earnings. But any analyst worth his salt would have wondered how “real” were earnings of this sort reported without the necessity of paying any income taxes thereon.

5. For 1966 the newly merged company* had reported “earnings” of $6.80 a share—in reflection of which the common stock later rose to its peak of 86½. This was a valuation of over $2 billion for the equity. How many of these buyers knew at the time that the so lovely earnings were before a special charge of $275 million or $12 per share to be taken in 1971 for “costs and losses” incurred on the merger. O wondrous fairyland of Wall Street where a company can announce “profits” of $6.80 per share in one place and special “costs and losses” of $12 in another, and shareholders and speculators rub their hands with glee!†

6. A railroad analyst would have long since known that the operating picture of the Penn Central was very bad in comparison with the more profitable roads. For example, its transportation ratio was 47.5% in 1968 against 35.2% for its neighbor, Norfolk & Western.*

7. Along the way there were some strange transactions with peculiar accounting results.1 Details are too complicated to go into here.

CONCLUSION: Whether better management could have saved the Penn Central bankruptcy may be arguable. But there is no doubt whatever that no bonds and no shares of the Penn Central system should have remained after 1968 at the latest in any securities account watched over by competent security analysts, fund managers, trust officers, or investment counsel. Moral: Security analysts should do their elementary jobs before they study stock-market movements, gaze into crystal balls, make elaborate mathematical calculations, or go on all-expense-paid field trips.†

Ling-Temco-Vought Inc.

This is a story of head-over-heels expansion and head-overheels debt, ending up in terrific losses and a host of financial problems. As usually happens in such cases, a fair-haired boy, or “young genius,” was chiefly responsible for both the creation of the great empire and its ignominious downfall; but there is plenty of blame to be accorded others as well. †

The rise and fall of Ling-Temco-Vought can be summarized by setting forth condensed income accounts and balance-sheet items for five years between 1958 and 1970. This is done in Table 17-1. The first column shows the company’s modest beginnings in 1958, when its sales were only $7 million. The next gives figures for 1960; the enterprise had grown twentyfold in only two years, but it was still comparatively small. Then came the heyday years to 1967 and 1968, in which sales again grew twentyfold to $2.8 billion with the debt figure expanding from $44 million to an awesome $1,653 million. In 1969 came new acquisitions, a further huge increase in debt (to a total of $1,865 million!), and the beginning of serious trouble. A large loss, after extraordinary items, was reported for the year; the stock price declined from its 1967 high of 169½ to a low of 24; the young genius was superseded as the head of the company. The 1970 results were even more dreadful. The enterprise reported a final net loss of