Tabell’s Market Letter – October 04, 1974

Tabell’s Market Letter – October 04, 1974

Tabell's Market Letter - October 04, 1974
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TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON. NEW JERSEY 08540 DIVISION OF MEMBER NEW YORk STOCK eXCHANGE. INC MEMBER AMERICAN STOCK EXCHANGE I – October 4, 1974 All right, let's put it this way. Let's say you are thinking of buying a candy store. You have – on-e'pickedout;'a s amatter -of'fact-It ch-asthe-'f,-gst'lo-ian6niiit-(jwfi;-ana;–a s!1eaY'''a-s- you- can– – –,-II figure out, has for quite some time been doing close to half of the candy business in the entire area. The store, showcases and other equipment which you would be buying cost about 16,000 originallY,although they have been depreciated on the books to around 9, 000. The previous owner has done a good job of maintaining the property. As a matter of fact, over the past ten years he sunk a little better than 10,000 into the business. The store has something over 3, 000 in the bank and that bank account would come along with the business. Another 3, 000 is owed to it by some of the best families in town who maintain charge accounts with the store. Also coming along with the business is about 5,200 worth of eminently saleable inventory of candy and like goods sitting in the back storeroom. About 1, 000 of this year's expenses have been prepaid. You would be asked to assume some liabilities. The store has accounts payable to candy suppliers and other near-term liabilities of about 6,200 ,and there is a small mortgage of 756. You look at the past ten years operating record for the store, and it is pretty interesting. Last year, in fact, was its best year ever, and it sold more than 36, 000 worth of candy. That is more than twice the amount of candy that it sold ten years ago. Its operating income also set a record of 4,500 before taxes, and over the past decade.its record has been fairly consistent It has never prodd an operatingTe ofless than'3;'060 in a-ny -ye-r ,furtng- th-;-past ten, except for one year when the employees went on strike. In addition to operating income there was, last year, 900 of additional cash flow from depreciation. Operating income is, of course, figured after paying the manager a salary comparable to what he would earn elsewhere. 1- This year figures to be somewhat of a problem. The people in your town have gotten dietconscious and aren't likely to buy as much candy as they used to. Sales will probably be off some 20, and earnings before taxes may drop under the 3, 000 level for the first time in ten years except for that one strike year. You think this problem is largely temporary, though, and you expect an adequate earnings recovery in 1975. O. K. Now look at the above figures again. What would you be willing to pay for this business — 16,000 in property at original cost, 6,200 of working capital, negligible debt, earnings which in good years exceed 3,500 before taxes, cash flow which, last year, was well over 5,000. Would 10,000 be a fair price It would certainly seem so. Now, take all of the above figures and multiply them by one million. Change the business from candy to automobiles. What we have just given is an essentially accurate description of General Motors,and it can, indeed, be bought for one million times 10,000, the value of its -287,617,041 shares at 351/4 being approximately 10.14 billion. There is a simple point to this exercise. Benjamin Graham has repeatedly suggested, and has again reiterated in a recent article, that, In a large area of the present stock market, we could return to a very old-fashioned but nonetheless useful criterion for equity investment –namely the value of the company as a private enterprise to a private owner, irrespective of market quotations for the shares. We chose General Motors above, not to recommend it specifi- cally, but Simply because it is the largest company in American industry. It is simply used to make the point that it is just one of hundreds of listed companies whose securities are available at prices which appear patently absurd if the underlying companies are viewed as on-going concerns. Dow-Jones Industrials (1200 p.m.) S & P Compo (1200 p. m.) 577.99 61. 56 ANTHONY W. TABELL DELAFIELD, HARVEY, TAB ELL Cumulative Index (9/3/74) 355.80 AWT/jb No totement or expression of Opinion or cny other matter herein contomed IS, or IS to be deemed to be, directly or indirectly, on offer or the SOIICI'otlon of on offer 10 buy or sell any security referred to or menTIoned The motter IS presented merely for the converlence of the subSCriber Whde He believe the sources of our informa- tion to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statemena mude herein Any action to be taken by the subSCriber should be based on hiS own investigation and information Janney Montgomery Scott, Inc, as a corporation, and lIs officers or employees, may now hove, or moy later take, 1Il.'- 1IIl'L- poSitions or tradc, In respect to any securities mentIOned In thiS or any future ISsue, and such position may be different from any views now or hereafter expressed In this or any other Issue Janney Montgomery call, Inc, which IS registered With the SEC as on IOvestment adVisor, may give adVice to Its Investment adVISOry and ather ruom''d'P'd','YOfOY''om','mod','h,,o,,oyo'h''''Fh'',fo'mooOOy,,ru..,ym,,,o'dh''''ovo'ob',o''q'-J

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