Writ is right for long haul

Donald Saltz

May 15, 1992|By Donald Saltz

Last week, this column noted that a financial adviser offered the opinion that shares of Bethesda-based Washington Real Estate Investment Trust (Writ) were overpriced and should be sold, a remark that triggered some selling in the stock and lowered the price from above $25 a share to $22.

Not long afterward, Writ released a solid first-quarter earnings report showing a 19 percent increase in profits and a gain of 16 percent in cash flow, along with strong overall occupancy of 94 percent as well as the near-elimination of all mortgage debt.

The stock rebounded to about 24.

Those who sold made the mistake of toying around with a successful long-term holding that, over the years, has appreciated consistently.

This week, Writ split its shares 3-for-2 and raised the dividend slightly, its third such split in seven years.

In the early 1980s, Writ split its shares 3-for-1. The firm's management likes to position the share price in the upper teens, a base from which it has risen after prior splits.

This latest news boosted the share price again above 25, once again suggesting that shareholders should keep their positions and not tamper with a good thing.

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For several quarters now, management of Giant Food has accompanied its earnings reports with the comment that the recession has affected sales and profits. After a slight earnings increase in the first quarter last year, Giant has gone through three reported declines in profits and that trend is apparently continuing in an economy that remains sluggish and extra competitive.

David Sykes, Giant's chief financial officer, says there "has not been enough improvement to establish a trend" that economic times are getting better.

Giant, which is the major food store chain in both the Baltimore and Washington areas -- it has 29 percent of food sales in and around Baltimore and 46 percent in the Washington area -- says it's facing the same tough competition that has been around for most of the past year, thus sharply affecting earnings.

The share price is now at its low of the year, near 20, down one-third from its high of 30 3/8 .

A couple of years ago, Giant traded at 36. Giant earned $1.47 a share last year, giving it a price-earnings ratio of 14.

If earnings in Giant's first quarter drop off at a rate comparable to the declines of the three most-recent periods, 12-month earnings will total $1.29 a share.

Maintaining the same P-E of 14 would translate to a share price of 18.

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The price-earnings ratio, or P-E, guides stock buyers as to value; if it's too high the shares might be super growth, or overpriced; if too low, a real buy, or a major problem might be waiting to emerge.

And then, of course, the general prevailing mood -- optimism or pessimism -- affects price-earnings ratios.

Over the years, a standard of 10, representing 10 times annual earnings, has been a general rule for P-E's -- for example, a stock with earnings of $2 a share selling for $20 a share.

However, P-E ratios are higher for stocks whose earnings are growing at a better-than-average rate, or lower than 10 if earnings are suffering.

Some stocks have no P-E's at all because the companies are operating at a deficit, but they have value.

Traditionally, shares of utility companies such as Baltimore Gas & Electric have sold for about 10 times earnings. BG&E's P-E now is 14.

A 10 P-E is also normal for retailers but shares of Landover-based Hechinger Co. are going for 15 times earnings, and those of spices and flavorings leader McCormick & Co. for 23 times earnings.

By historic standards, these are all high and suggest, at least, that the market might be fully priced.

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