On idle plant expenses

“Example: The practical implications of this point are illustrated by the
case of New York Transit Company, a carrier of oil by pipe line. In 1926,
owing to new competitive conditions, it lost all the business formerly carried
by its principal line, which thereupon became “idle plant.” The depreciation,
taxes and other expenses of this property were so heavy as to
absorb the earnings of the company’s other profitable assets (consisting
of a smaller pipe line and high-grade-bond investments). This created an
apparent net loss and caused the dividend to be passed. The price of the
stock accordingly declined to a figure far less than the company’s holdings
of cash and marketable securities alone. In this uncritical appraisal
by the stock market, the idle asset was considered equivalent to a serious
and permanent liability.

In 1928, however, the directors determined to put an end to these
heavy carrying charges and succeeded in selling the unused pipe line for
a substantial sum of money. Thereafter, the stockholders received special
cash distributions aggregating $72 per share (nearly twice the average
market price for 1926 and 1927), and they still retained ownership of a
profitable business which resumed regular dividends. Even if no money
had been realized from the idle property, its mere abandonment would
have led to a considerable increase in the value of the shares.

This is an impressive, if somewhat extreme, example of the practical
utility of security analysis in detecting discrepancies between intrinsic
value and market price. It is customary to refer with great respect to the
“bloodless verdict of the market place,” as though it represented invariably
the composite judgment of countless shrewd, informed and calculating
minds. Very frequently, however, these appraisals are based on mob
psychology, on faulty reasoning, and on the most superficial examination
of inadequate information. The analyst, on his side, is usually unable to
apply his technique effectively to correcting or taking advantage of these
popular errors, for the reason that surrounding conditions change so rapidly
that his own conclusions may become inapplicable before he can
profit by them. But in the exceptional case, as illustrated by our last example,
the facts and the logic of the case may be sharply enough defined to
warrant a high degree of confidence in the practical value of his analysis.”

                                                — Security Analysis