American railways as investments

Front matter

\MERICAN RAILWAYS AS INVESTMENTS

CARL SNYDER

Class H S ^ 4 173

Contents

, Page.

Alabama Great Southern Railroad 67

Ann Arbor Railroad (See Detroit, Toledo & Ironton) 292

Foreword

The aim of this work is to provide the general investor, the banker and the investment broker with the means whereby he may judge intelligently and readily, so far as the accessible facts will permit, of the value of the securities of the different railroads passed under review. The volume covers the operations of nearly 200,000 miles of road, or about 90% of the total for the country.

More especial attention, and detail, has naturally been given to the more important lines and systems, on the theory that they present greater opportunities for safe investment, greater stability, wider fluctuations in value and therefore larger opportunities for profit, with less liability to suffer from the minor accidents of trade reverses, manipulation or bad management.

At the end of each analysis or review, conclusions and opinions are offered, but only for what they are worth ; that is to say, all the material facts upon which these conclusions are based have been given in full. The details, the figures, the tables are there; the investor may therefore judge for himself as to the validity of the conclusions reached. The inductions offered are suggestions and nothing more.

The aim has been to provide the broadest possible basis of judgment, to offer the largest perspective, to cut out that which is evanescent, not to look at last year's results or this year's conditions merely, but to consider what has been done through a series of years, and under varying conditions. Only in this wise is it possible to frame any intelligent opinion of the future. Tendencies do not rapidly change. Established roads do not suddenly become great earners ; they do not as a rule radically change their policies, save under a radical change of ownership.

On the other hand, companies do not default their bonds, they do not pass their dividends, unless conditions have been preparing for such a result. Given a reasonable degree of honesty

12 FOREWORD

in the published reports and these possibilities may be more or less foreseen.

Throughout, especial emphasis has been given to the elementary fact that Operating Ratios, Surpluses, Per Cent of Surplus on Stock, and all their like are for the most part simply matters of bookkeeping and often little more. Earnings may be concealed, operating expenses may be heavily charged for improvements, or maintenance may be slighted. It is the business of this book to consider all these questions in each case, and to state all the facts that are known.

Especial attention has been given to the matter of maintenance and to the sums devoted to improvements from earnings. To permit of an intelligent judgment as to these matters, reliance has not been placed upon the charges for one year or two years, but for a series of years, compared each year with the traffic density. The showings for the different years are then averaged, and this average is in turn compared with an exactly similar average of four, five or six other roads in the same territory, with the same general character of traffic, and therefore with the same general needs.

It is in this manner that the nominal surplus profits shown in the reports are judged, and conclusions formed as to how far the percentage which these profits show on the stock are real profits or not.

Questions as to capitalization, style of capitalization, increase of capitalization, the relation of capital to net earnings, the proportion of fixed charges to total net income have been considered in much more detail than is customary, in the belief that these items are highly significant and vital.

Particular consideration has been given to the Factor of Safety or margin of income over fixed charges. In the judgment of bond values this factor is of primary interest. The small investor, in particular, has a just dread of receiverships and reorganizations. He will be perspicaciously shy, therefore, of securities on which cessation of interest payments have ever been threatened, no matter how valuable, intrinsically, may be the property on which these securities are a lien.

In the same manner, the investor in stocks, common or preferred, has a vital interest in knowing how far the earning

FOREWORD 13

capacity of the road may be impaired before dividends are endangered.

In each case the treatment has been uniform, so as to permit of rapid comparisons and ready reference, the exposition following the appended

General Scheme.

Importance and notable characteristics.

History.

Territory (Mileage, etc.)

Ownership (Directors, number of shareholders).

Affiliations (Community of Interest).

Capitalization (Including Rentals, Leases, etc.).

Value of Equities Owned.

Style of Capitalization.

Increase of Capitalization from 1900.

Character of Traffic (Passenger Earnings, etc.).

Stability of Earnings.

Maintenance (amount of extra work, etc.).

Improvements from Earnings.

Surplus Earnings.

Dividend Record (and "rights").

The Balance Sheet, Profit & Loss account.

Investment Value (Price and Yield).

It will be seen that the present work is as different as possible from the ordinary manual, which, however valuable it may be, is not always used to the best advantage by the general investor, who has no time for exhaustive study nor to acquire the training that is requisite for its most intelligent use.

The aim has been to present an exposition which any reader may follow with understanding, no matter if he has never seen a railroad report or never purchased a railway bond or a share of stock. There is no mystery about railway management or bond or share values and if there be any mystery about a company's securities, or if its reports are not adequate and clear, the general investor will do well to let its issues alone.

ACKNOWLEDGMENTS.

A full expression of obligation is due the authors and proprietors of the following publications, for their free use in the preparation of this work:

Moody's Manual of Railroads and Corporation Securities, published by The Moody Corporation, New York.

Poor's Manual of Railroads, published by Poor's RR Manual Company, New York.

The Financial Review, published annually by The Commercial & Financial Chronicle.

The Wall Street Journal, New York.

The Railroad Gazette, New York.

The Railway Age, Chicago.

"Earning Power of Railroads," Floyd W. Mundy, published annually by Metropolitan Advertising Co.

Mr. Mundy's handy little manual presents an original analysis of the income account of all the important companies, together with an analysis in percentages of the distribution of the gross income of each road over the various items of maintenance, cost of conducting transportation and surplus. This very useful publication is now in its seventh year.

Readers who are interested to go further will find Mr. Thos. F. Woodlock's "Anatomy of a Railroad Report" a wonderfully clear and compact exposition of the subject; it includes also an illuminative discussion of ton-mile costs and the reduction of railway expenditures to their elementary units.

In his "Art of Wall Street Investing," Mr. John Moody has dealt broadly and sensibly with much the same subject which is dealt with here specifically and concretely; and Mr. Thomas Gibson in his "Pitfalls of Speculation" has presented a sufficient warning to those who prefer to "speculate" (that is, gamble) rather than invest, showing that 90% of marginal accounts result in a loss. An admirable review of "The Work of Wall Street" has been presented by Mr. Sereno S. Pratt, well known as the editor of the Wall Street Journal.*

Many items of historical interest have been drawn from the descriptive work, "American Railroads as Investments," by S. F. Van Oss, published 15 years ago. Thanks are also due to several railway friends for their kindness in looking through different chapters and for suggestions and criticisms offered.

* A very complete catalogue of financial works, including all of those here named, is published by The Moody Corporation and will be supplied post-paid upon application.