Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
In these two chapters, the authors discuss the methods and important factors for the railroad, public utility, and industrial bonds analysis.
While there are a lot of factors related to a thorough analysis of bonds, the authors favor a simple analysis of high-grade bonds. Earnings coverage and stock-to-debt ratios should be sufficient. In calculating those, due emphasis should be given to specific industry-related adjustments. Consideration for correct maintenance capital expenditure should be given (based on appropriate industry-related requirements), as company management can reduce that to inflate earnings artificially. Debt should be adjusted for rent payments and preferred stocks of operating subsidiaries. Minority interest should be properly accounted for in earning calculation.
For public utilities, the author criticizes Wall Street abuse of the term to get financing. In addition, the use of total fixed charges is correct versus prior-deduction method used by investment banks. Moreover, appropriate depreciation charges were not accounted for in the bond prospectus. Thus, an analyst should be careful here.
For industrial concerns, additionally, working capital-related items should be kept in mind.
While going through the analysis of bonds of various types, the authors prescribe various standards that would be helpful in determining the stability of the enterprise and the appropriate margin of safety.
The authors dive into the analysis of low-price bonds which might be more suitable for an investor looking to buy speculative bonds or common stocks for such companies.
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