"16.66X"

Last month appeared the 1928 financial statements of many a U. S. corporation, offering stock market students an opportunity to discuss the much-debated ratio between the earnings of a stock and its market quotations. In bygone days, when bulls were not so fat and bears were not so lean, conservatives estimated that a stock which earned $10 a share should be selling at $100, or ten times its earnings-per-share. In recent years this ratio has been considered extremely backward. Thus, in March, 1928, John Jacob Raskob announced that General Motors should rise to 15 times its earnings-per-share, and the "15X" formula has become generally accepted with regard to industrials. Meanwhile, however, during the November bull market, many a stock rose far beyond the "15X" valuation, reached a price which could be justified by earnings only through the expedient of discounting possible earnings for two or three years to come.

Consider, for example, Montgomery Ward, mail-order house. During 1927, Montgomery Ward earned $10.25 per share, should therefore have opened 1928 (according to the "15X" system) at about 154. As a matter of fact, Montgomery Ward sold on Jan. 19, 1928, at $117, a figure considerably below 15X. But this figure was also Montgomery Ward's low for the year.

On July 7 it was at 159 7/8; Aug. 11, 199 3/8; Sept. 15, 264; Oct. 13, 282. Then came rumors, followed by announcements, of chain store expansion, of a stock-split. Montgomery Ward skyrocketed. In the week ending Oct. 20, the stock climbed to 352, on Nov. 30 it reached its high for the year of 439 7/8* Thus, during the year Montgomery Ward rose from 117 to 439 7/8, an increase of 322 7/8 points or about 375%.

According to the 15X formula, Montgomery Ward, selling at 439 7/8 on Nov. 30, 1928 should have reported about $29 per share earnings for 1928. The actual report showed earnings of $14.26 per share (figured without the new issue)--a gratifying increase but not proportional to the stock market price. Inasmuch as 15 times $14.26 is $213.90, Montgomery Ward earnings, justified no higher 1928 quotation than 214; or, from another standpoint, at 439 7/8, Montgomery Ward was selling not at 15 times earnings but at 31 times earnings. Thus can a strong bull favorite make even "15X" look very conservative indeed.

An equally strong, if less sensational, bull stock was Sears Roebuck, mail-order house larger even than Montgomery Ward. In 1927 Sears Roebuck earned $5.95 per share. It sold on Jan. 16, 1928 at 82 1/8, or approximately 14 times earnings. The 1928 earnings were $6.28 per share, but on Nov. 14 Sears Roebuck sold at 197 1/2 (1928 high) ; again almost exactly 31 times 1928 earnings.

It should not be concluded, however, that even the 1928 bull market drove all stocks up to a 30X figure. Railroads, for example, were conservatively priced; so was many an industrial not blessed with pool backing. The following table shows 1928 earnings per share, 1928 high, and ratio of earnings to quotations for the following representative stocks:

Stock 1928 Earnings 1928 High "X"

American International Co. $ 6.24 Atlas Powder Company 6.50/- Bethlehem Steel Checker Cab Mfg. Corp. Detroit Edison Du Pont de Nemour & Co. Erie Railroad General Cigar Co. Inc. Gillette Razor Hudson Motors National Biscuit Packard Pore Marquette R J Reynolds US Steel Corp. Ward Baking Corp.** Western Union Woolworth Wrigley

The average ratio of earnings to quotations for the 20 stocks listed was 16.66X, or 1.66X over the theoretical 15X figure.

*The stock then fell off in the December slump. Present Montgomery Ward quotations of 141 1/4 are, of course, for the new issue. /-Atlas Powder Co. paid an actual dividend of $20.27, the difference accruing from the sale of holdings in Canadian Industries, Ltd. The $6.30 figure denotes profit from operations alone. **Ward Class "B" Common paid $.71 a share with a high for the year of 241 5/8 making a ratio of 41.7X.