Opinion ID: 1106788
Heading Depth: 1
Heading Rank: 12

Heading: Earnings-Price Ratio.

Text: Southern Bell complains that the Commission erred in taking an earnings-price ratio which it obtained by dividing earnings by the market price of certain utility stocks and then applying this earnings-price ratio to the par value of the common stock of Southern Bell and at that only to that portion of the common stock which represents the hypothetical 55% of the capitalization. In fixing the earnings-price ratio used in this case the Commission made a summary of average earnings-price ratios of various utilities whose stock was sold on the market covering the years 1954-1957, both inclusive. The Commission in its opinion made the following summary of average earnings-price ratios: 4-Year 1954 1955 1956 1957 Average Moody's 24 Electric Utilities 6.48% 6.11% 6.34% 6.80% 6.43% Dow-Jones 15 Utilities 6.35 6.20 6.67 6.80 6.51 10 Leading Elec. Util. in U. S. 6.67 6.18 6.67 7.00 6.63 3 Largest Elec. Util. in U. S. 6.41 6.13 6.71 7.13 6.60 Duke Power Company 6.85 6.13 6.12 6.82 6.48 Louisiana Electric Utilities 6.35 5.77 5.82 5.90 5.96 5 Bell System Oper. Companies 6.17 5.84 6.23 6.75 6.25 After analyzing these, the Commission adopted an earnings-price ratio of 6.75% which it applied to the par value of the hypothetical 55% of common stock capital of Southern Bell. The fallacy of using an earnings-price ratio based on the relationship of current earnings and current market prices is pointed out by the Company's expert witness Langum. As earnings go up or down, the market price of the stock correspondingly goes up or down, so that the earnings-price ratio remains the same. One utility may be earning an excessive rate of return and another a rate of return so low as to be confiscatory, yet the earnings-price ratio would be approximately the same because of the consequent high market price of the stock of the former and the consequent low market price of the stock of the latter. Langum produced numerous exhibits, which it is not necessary to detail here, illustrating the absurd results that would follow the application of the earnings-price ratio used here to various utilities. Indeed, one of the experts, in applying this formula to all of the large utilities in the United States, was able to show that the market price of their stocks would be so depressed as to amount to a national calamity. Langum concludes: that earnings-price ratios do not provide any determination of the proper level of earnings per share or earnings per dollar of equity capital as stated on the books. This is particularly true when market price is far above book value. About all earnings-price or price-earnings ratios provide is a measure of how high the market is for a particular stock, both in comparison with previous periods for the same stock, and in terms of averages of how high the stock market is in the overall. They are not an adequate guide to the level of earnings. The Commission's expert Hirsch stoutly defends the use of the earnings-price ratio in this case. This witness, however, was shown to have given contradictory testimony in other cases. The same is true of the Company's expert witness Badger. After reviewing the record, we conclude that we cannot place too much reliance on the opinions of these two witnesses. Be that as it may, we are of the view that it is not necessary in this case to determine whether the earnings-price ratio formula used by the Commission is sound or not. Here again we point out that it is the end result, not the method used, that counts. [32] And the end result, we conclude is grossly discriminatory.