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2 Excerpts from ben graham’s security analysis:
Chapter 37 – Significance of the Earnings Record
Large Profits Frequently Transitory.
More frequently we have the
opposite type of situation from that just discussed. Here the analyst finds
reason to question the indefinite continuance of past prosperity.
Examples: Consider a company like J. W. Watson (“Stabilator”) Company, engaged chiefly in the manufacture of a single type of automotive
accessory. The success of such a “gadget” is normally short-lived; competition and changes in the art are an ever present threat to the stability of
earning power.
Chapter 38 – Specific Reasons for Questioning or rejecting the past record
The Future Price of the Product.
The three preceding examples
related to the future continuance of the rate of output and the operating
costs upon which the past record of earnings was predicted. We must also
consider such indications as may be available in regard to the future selling price of the product. Here we must ordinarily enter into the field of
surmise or of prophecy. The analyst can truthfully say very little about
future prices, except that they fall outside the realm of sound prediction.
Now and then a more illuminating statement may be justified by the facts.
Adhering to the mining field for our examples, we may mention the enormous profits made by zinc producers during the Great War, because of
the high price of spelter. Butte and Superior Mining Company earned no
less than $64 per share before depreciation and depletion in the two years
1915–1916, as the result of obtaining about 13 cents per pound for its output of zinc, against a prewar average of about 5
1/4 cents. Obviously the
future earning power of this company was almost certain to shrink far
below the war-time figures, nor could these properly be taken together
with the results of any other years in order to arrive at the average or
supposedly “normal” earnings.