An obvious remark here would be that investors should not pay
any attention to these accounting variables if the amounts involved
are relatively small. But Wall Street being as it is, even items quite
minor in themselves can be taken seriously. Two days before the
ALCOA report appeared in the Wall Street Journal,the paper had
quite a discussion of the corresponding statement of Dow Chemi-
cal. It closed with the observation that “many analysts” had been
troubled by the fact that Dow had included a 21-cent item in regu-
lar profits for 1969, instead of treating it as an item of “extraordi-
nary income.” Why the fuss? Because, evidently, evaluations of
Dow Chemical involving many millions of dollars in the aggregate
seemed to depend on exactly what was the percentage gain for
1969 over 1968—in this case either 9% or 4^1 ⁄ 2 %. This strikes us
as rather absurd; it is very unlikely that small differences involved
in one year’s results could have any bearing on future average
profits or growth, and on a conservative, realistic valuation of the
enterprise.
By contrast, consider another statement also appearing in Janu-
ary 1971. This concerned Northwest Industries Inc.’s report for
1970.* The company was planning to write off, as a special charge,
not less than $264 million in one fell swoop. Of this, $200 million
represents the loss to be taken on the proposed sale of the railroad
subsidiary to its employees and the balance a write-down of a
recent stock purchase. These sums would work out to a loss of
about $35 per share of common before dilution offsets, or twice its
then current market price. Here we have something really signifi-
Things to Consider About Per-Share Earnings 317pany and thus “remove” those financial risks from the company’s balance
sheet. Another element of distortion is the treatment of marketing or other
“soft” costs as assets of the company, rather than as normal expenses of
doing business. We will briefly examine such practices in the commentary
that accompanies this chapter.
- Northwest Industries was the holding company for, among other busi-
nesses, the Chicago and Northwestern Railway Co. and Union Underwear
(the maker of both BVD and Fruit of the Loom briefs). It was taken over in
1985 by overindebted financier William Farley, who ran the company into
the ground. Fruit of the Loom was bought in a bankruptcy proceeding by
Warren Buffett’s Berkshire Hathaway Inc. in early 2002.