for the long period 1958–1970. But how relevant is this figure, gen-
erally considered central in common-stock valuations, to the case
of ALCOA? Its past growth rate was excellent, actually a bit better
than that of acclaimed Sears Roebuck and much higher than that of
the DJIA composite. But the market price at the beginning of 1971
seemed to pay no attention to this fine performance. ALCOA sold
at only 11^1 ⁄ 2 times the recent three-year average, while Sears sold at
27 times and the DJIA itself at 15+ times. How did this come about?
Evidently Wall Street has fairly pessimistic views about the future
course of ALCOA’s earnings, in contrast with its past record. Sur-
prisingly enough, the high price for ALCOA was made as far back
as 1959. In that year it sold at 116, or 45 times its earnings. (This
compares with a 1959 adjusted high price of 25^1 ⁄ 2 for Sears Roebuck,
or 20 times its then earnings.) Even though ALCOA’s profits did
show excellent growth thereafter, it is evident that in this case the
future possibilities were greatly overestimated in the market price.
It closed 1970 at exactly half of the 1959 high, while Sears tripled in
price and the DJIA moved up nearly 30%.
It should be pointed out that ALCOA’s earnings on capital
funds* had been only average or less, and this may be the decisive
factor here. High multipliers have been maintainedin the stock mar-
ket only if the company has maintained better than average prof-
itability.
320 The Intelligent InvestorTABLE 12-1
ALCOA Sears Roebuck DJIAAverage earnings 1968–1970 $4.95a $2.87 $55.40
Average earnings 1958–1960 2.08 1.23 31.49
Growth 141.0% 134.0% 75.0%
Annual rate (compounded) 9.0% 8.7% 5.7%
aThree-fifths of special charges of 82 cents in 1970 deducted here.* Graham appears to be using “earnings on capital funds” in the traditional
sense of return on book value—essentially, net income divided by the
company’s tangible net assets.