The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [175]
The figures in our table speak so eloquently that few comments are called for. But here are some:
1. The company’s expansion period was not without an interruption. In 1961 it showed a small operating deficit, but—adopting a practice that was to be seen later in so many reports for 1970—evidently decided to throw all possible charges and reserves into the one bad year.* These amounted to a round $13 million, which was more than the combined net profits of the preceding three years. It was now ready to show “record earnings” in 1962, etc.
2. At the end of 1966 the net tangible assets are given as $7.66 per share of common (adjusted for a 3-for-2 split). Thus the market price in 1967 reached 22 times (!) its reported asset value at the time. At the end of 1968 the balance sheet showed $286 million available for 3,800,000 shares of common and Class AA stock, or about $77 per share. But if we deduct the preferred stock at full value and exclude the good-will items and the huge bond-discount “asset,”† there would remain $13 million for the common—a mere $3 per share. This tangible equity was wiped out by the losses of the following years.
3. Toward the end of 1967 two of our best-regarded banking firms offered 600,000 shares of Ling-Temco-Vought stock at $111 per share. It had been as high as 169½. In less than three years the price fell to 7 1/8.†
4. At the end of 1967 the bank loans had reached $161 million, and a year later they stood at $414 million—which should have been a frightening figure. In addition, the long-term debt amounted to $1,237 million. By 1969 combined debt reached a total of $1,869 million. This may have been the largest combined debt figure of any industrial company anywhere and at any time, with the single exception of the impregnable Standard Oil of N.J.
5. The losses in 1969 and 1970 far exceeded the total profits since the formation of the company.
MORAL: The primary question raised in our mind by the Ling-Temco-Vought story is how the commercial bankers could have been persuaded to lend the company such huge amounts of money during its expansion period. In 1966 and earlier the company’s coverage of interest charges did not meet conservative standards, and the same was true of the ratio of current assets to current liabilities and of stock equity to total debt. But in the next two years the banks advanced the enterprise nearly $400 million additional for further “diversification.” This was not good business for them, and it was worse in its implications for the company’s shareholders. If the Ling-Temco-Vought case will serve to keep commercial banks from aiding and abetting unsound expansions of this type in the future, some good may come of it at last.*
The NVF Takeover of Sharon Steel (A Collector’s Item)
At the end of 1968 NVF Company was a company with $4.6 million of long-term debt, $17.4 million of stock capital, $31 million of sales, and $502,000 of net income (before a special credit of $374,000). Its business was described as “vulcanized fiber and plastics.” The management decided to take over the Sharon Steel Corp., which had $43 million of long-term debt, $101 million of stock capital, $219 million of sales, and $2,929,000 of net earnings. The company it wished to acquire was thus seven times the size of NVF. In early 1969 it made an offer for all the shares of Sharon. The terms per share were $70 face amount of NVF junior 5% bonds, due 1994, plus warrants to buy 1½ shares of NVF stock at $22 per share of NVF. The management of Sharon strenuously resisted this takeover attempt, but in vain. NVF acquired 88% of the Sharon stock under the offer, issuing therefore $102 million of its 5% bonds and warrants for 2,197,000 of its shares. Had the offer been