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Show nGSi2Haarr PROS AND CONS OF BOOK VALUE The book value of a stock is computed com-puted by subtracting liabilities from assets, deducting any preferred stock, and then dividing by the number of outstanding common shares. A company whose stock sells at a discount from book value might ordinarily or-dinarily be regarded as a bargain because the firm has substantial liquid assets behind each share of common stock. Yet, such as issue is not necessarily necessari-ly a solid "buy." As a matter of fact, a great number of stocks on the New York Stock Exchange are currently selling below their book value. VALUE VARIATIONS Some of the largest discounts from book value can generally be found in the capital-intensive industries such as steel, rubber, and machinery where return on assets is relatively low. The stocks of retailing establishments also frequently carry high book values. But retailers sometimes make large inventory inven-tory write-downs; which, of course, have an impact on book value. In contrast to capital-intensive companies com-panies and retailers, the stocks of service ser-vice and high-technolgoy firms whose profits depend importantly on management skills and know-how that do not show up on balance sheets usually sell at relatively high multiples of book value. Additionally, the stocks of natural resource companies often have book values that are low relative to the much higher market worth of their assets. HOW MEANINGFUL For the most part, the book value of an issue has little or no significant relationship to its market price. Over the years, stocks with low book values relative to their market quotes have scored spectacular gains during major ma-jor market advances, while other issues with high book values have been consistent laggards. The key element, of course, is how astute management is in utilizing assets to produce long-term long-term profit growth. Furthermore, few corporations are ever liquidated and their assets distributed to shareholders. When attempting to determine the market worth of a stock, it is generally general-ly accepted that a company's earnings growth rate, or the yeild its dividend payout provides, is far more meaningful mean-ingful than the book value of the stock. Nevertheless, we do not feel that book value should be completely ignored. ig-nored. It can still be an extremely useful analytical tool and could prove to be an important measure of stock's worth over a prolonged period of time. For instance, in merger situations--either in the case of a takover by another company or when a firm makes an acquisition itself the current cur-rent book value is usually considered quite important. Also, when undertaking undertak-ing external financing, high asset value can have considerable influence; in-fluence; and as a base for bettering revenues and profits over the intermediate in-termediate term, book value can be significant. SOME EXAMPLES There are many large well-known companies on the New York Stock Exchange Ex-change whose stocks are priced below book value. A few of these are Armco Steel, Ashland Oil, Avco, Burlington Industries, Chemical Bank N.Y., Continental Con-tinental Illinois, Firestone, General Tire, Gulf, Marine Midland, Owens-Illinois, Owens-Illinois, Republic Steel, and Texaco. Among the many stocks on the Big Board that are priced below their book values are several that the Research Department of Babson's Reports feels are attractive for purchase at this time. These ace Aetna Life & Casualty, Casual-ty, BankAmerica, Dresser Industries, Ingersoll-Rand, NL Industries, and Travelers. Also favored is an over-the-counter stock-Valley National Corp. Naturally, these particular issues are not being recommended for purchase pur-chase simply because they have high book values. There are many other important im-portant considerations. But the fact that they are priced below book value is a significant addtional plus factor. BIKE SALE A reconditioned bike sale sponsored by the Police Explorers will be July 23 from 10 a.m. to 4 p.m. Saturday, July 23, in the parking lot behind the police department, 500 East Main. |
