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.. 6 Walston &Co. MEMBERS NEW YORK STOCK EXCHANGE AND OTHER LEADING STOCK AND COMMODITY EXCHANGES NEW YORK PHILADELPHIA LOS ANGELES SAN FRANCISCO LUGANO (Sw,'wld I OFFICES COAST TO COAST CONNECTfC BY DIRECT PRIVATE WIRE SYSTEM TAB Ell'S MARKET lEnER September 16, 1955 The market extended its gains during the week and the Dow-Jones indus- trial average reached a newall-time high at 485.73. This average is approach ing its short term objective of 490 and may need some consolidation. The 470 level should furnish near term support. The rail average pushed through a lOG of overhead supply to reach a fractional new high at 164.89 compared with the June high of 164.59. Perhaps a more decisive penetration is needed and this may occur either shortly or after a consolidation. An upside penetration would -indi-c-a-te -a pos-sef-bcle 172—-l'J9. i-f they– peFlet-rate, a safer trading opportunity than the industrials which have already advanced sharply. The market of the past week clearly illustrates the futility of paying too much attention to the various averages at this stage of the market pat- tern. Individual issues moved ahead sharply and the industrial average ad- vanced ten pOints and yet, from Monday to Thursday, the total number of daily declining stocks of 1860 almost equalled the daily number of advancing stocks of 1896. This, together with other breadth-of-the-market indications of waning upside momentum dictates the advisability of a rather cautionary attitude despite the seeming strength in the averages and spectacular runups in individual issues. It warrants a continuation of the policy of lightening commitments on strength in both overvalued and below average issues and confining purchases to seemingly undervaluei situations that are selling at realistic price to earnings ratios and are sl-owing reasonable yields and have strong technical patterns with a minimum dcwnside risk. Issues of this type are continually reviewed in this letter anJ remain suitable for longer term and intermediate term holding in capital appreciation accounts. In investment accounts, there is no need to disturb sound holdings. The long term trend of prices is still toward higher levels. In trading accounts, the situation is different. This stage then of the omr agrokeota;ifsOratutrrfae dtoer's paradise – handful of stocks that are really moving. – , f I GENERAL RAILVIAY SIGNAL StatistiCS Perhaps more than any other industry Current Market Current Dividend Current Yield Funded Debt & Pfd. Common Stock Net Per Share,1955 Net Per Share,1954 59 2.50 4.2 None 337,587 shs. 3.50 (E) 3.25 the railroads of America are faced with a problem of cost control. Competition from other carriers,federal regulation and other factors have necessitated comprehensive programs on the part of rail carriers to trim operating expenses and protect thinning profit margins. Heretofore, the major effort in this Sales, 1955 Sales, 1954 17,000,000 (E) 15,990,000 direction has been dieselization,the replacement of antiquated steam loco motives by up-to-date diesel equip- Market Range,1955-52 60i' – 25 ment. On most of the country's major Preferred issue to December 31, -1955. be redeemed – – carriers, these programs are either complete or well on their way. Now — the raii-men are beginning to slash at another item — track maintenance One of the best ways of cutting down maintenance of way is to eliminat surplus track — by making one track do the work of two, or two do the work of three or four. New elec tronic developments, similar to those whicr,' have revolutionized the business machine industry, are making this possible. Most important of these new developments is CTC, Centralized Traffic Control. Under this system, one man can keep watch over miles of track, with the movement of each train plotted on an elect-ronic board in front of him. By pressing a button he can accuate switches and signals many miles away and arrange for two high-speed trains approaching each other on a single track to pass on a high-speed siding without either train having to stop. By means of this system it often is possible to make one track -2- and a few sidings handle the same amount of traffic that two tracks handled before. The savings provided by CTC are often astronomical. If it is installed when track is due to be replaced, replacement costs of 30,000 per mile of track can be eliminated. In an average case, maintenance of one track instead of two may save a railroad 2000 to 3000 annually per mile. From this it should be obvious that CTC can pay for itself in many cases within a very short while. In addition to CTC, new electronic signalling and switching equipment can help railroads to effect great savings in yard costs, enabling one or – .,,– -twG,,–men-tG-Har.ld 1e-a–l-lsw-it G-h.;ingand-c-las s 1-fy-ing-on,., Itis also possible that CTC can be applied to industrial plani traffic controls and airport and highway controls. All electronic switching devices made in this country are manufactured by two companies Union Switch & Signal and General Railway Signal, which cross-license all patents between each other. Union is a wholly-owned subsidiary of viestinghouse Airbrake and accounts for a fourth of Irlestinghouse I s business. General Railway Signal almost entirely is in the switching business and the 337,000 shares of common will be direct beneficiaries of any growth in demand for electronic signalling devices. On this basis the shares of General Railway Signal seem to have attraction for long-term holding. General Railway Signal was established in 1889 and has long been a major producer of railway signalling equipment. Reported earnings over the past five years have averaged 3.73 with last year, as could be expected due to railroad results, a poor one at 3.25. However, there is a strong indication that the downward earnings trend has reversed itself. For the second quarter of 1955 the company showed 93 cents a share, an annual rate of 3.72. Backlog has increased to a point 65 above the end of 1954 and this should begin to manifest itself in earnings shortly. With railway Signal demand still in its infancy, the future looks extremely promising. Aa-jor-newerd-ero-was- one- road amounti1g to million. New York Central will remove two of the four main tracks in 185 miles between Buffalo and Cleveland and install CTC. This may set the stage for Similar elimination by major roads. Another plus factor is that reported earnings during the years 19511953 do not tend to show the true earning power of the company. During those years the company operated at a huge profit margin and was subject to heavy excess profits tax. Reported earnings for the three years were 11.21 or an average of 3.73 per share. Had the present 52 tax rate then beenin effect, per share earnings would have averaged close to 6.00. It can thus be inferred that, given an increase in demand,such as that foreseen, earning power can be increased conSiderably due to widening profit margins. Furthermore, the company will, in all probability, be 'able to increase production without a dollar spent on additional plant. It is now operating on a full one-shift capacity. vlere demand to justify it, it would be very easy to add another shift. With demand increasing and no capital expenditures called for, all benefits accruing from increased sales will pass on directly to the common stockholder since there is no debt or preferred. This,together with the small commoncapi talization,iso.f great benefitto th,……commonholder. – The lack of any capital reqUirements, together with an excell'ent working capital position, insures the continuance of the high 60 payout ratio. With the outlook pointing to generous future earnings and dividends,plus stable and continuing demand,General Railway Signal appears to have exceptionally attractive long-term prospects. The technical pattern is very constructive with a long-term 140-150 indicated. Over the near-term, the objective appears to be 64-69. There is support around 50-48, thus offering a small downside risk with a huge upside potential. This recommendation, as are all the recommendations of this letter, is for long-term holding and not necessarily for trading purchases. ; EDMUND vi. Tf,BELL VlAL.3TON & CO.