RAILWAY SECURITIES 1. Characteristics of railways.—Some of the spe cial features which characterized the railway business from an investment point of view, and which distin guished it from other businesses, were the unique character of the physical equipment necessary, and the commercial geography and interline traffic rela tions that determine the rise, volume, and permanence of the different types of traffic. Other characteristic features were evenness of income and of consequent high bonding limit; the public control of rates, of car service, and of labor conditions by the states and the Federal Government; the increasing cost of supplies and labor; the profitable real estate investments in ter minal properties; the instalment plan used in paying for equipment, and the perpetual life of the business. When the government assumed control of the rail roads it definitely fixed the income which is to attach to each species of security and guaranteed it. During the continuance of this guarantee prices will be deter mined by general interest rates, not by specific risks.
Some special tests of operating efficiency which grow out of these conditions and the technic of the business are: The uniform and public nature of railway accounts resulted in making railway securities sell upon their established reputation more than any other class of securities. Even the bond houses trusted more to the reputation of the borrower and made commitments with less thoro individual investigation in the case of railways than would be required in the case of public utilities and industrials. This was not due alone to the fact above mentioned, but to the fact that an orig inal investigation was exceedingly expensive. If the investor desires to develop his independent judgment further thru the study of reports as a supplement to the advice he receives from his bond house, the suggestion is made that he begin with Mr. John Aloody's excellent book "How to Analyze Railroad Reports." 2. Integration of properties.—Railway securities derived many of their characteristics from the consoli dation of independent lines into systems. The move ment which proceeded so rapidly in the early nineties was carried-to the point where barely twenty per cent of the lines once distinct now remain as independent concerns, and the bulk of listed railway bonds are ob ligations of parts of twenty great systems. As a re
sult of this assemblage of properties we have an ex traordinary diversity of types of bonds. Lien has been superimposed upon lien. The original local issues have been overlaid, first, by broader mort gages representing the intermediate steps of consoli dation, and these in turn have become subordinate to comprehensive obligations which are spread like a blanket over an entire system. These conditions have produced many differences of degree among mortgage issues "from those next to the rails to those next to the stock." For example, the Erie Railroad Com pany's prior lien bond is actually the seventh mort gage on the line, the other mortgages being issued by the companies which operated before the organization of the Erie Company.
With liens of such complexity, it is no longer pos sible to compare the earnings of the mortgaged prop erty with the fixed charges, for the earnings of the particular mileage involved are not likely to be given separately in the reports of the system. The investi gator was driven to make roundabout calculations from the earnings of similar properties, from the earn ings of the separate property before it was absorbed, or from valuations of particular parts made by state boards of control. He could also calculate the total outstanding indebtedness per mile of the line, and compare this with the probable value of the property. The position of any particular security was then determined by subtracting the total sum of prior liens.
This smothering of essential details is one of the drawbacks of suspending the reports of constituent companies and summing up their accounts in consoli dated balance sheets and income accounts. The pos sibility of secrecy may be illustrated by the case of the borrowing done by the Oregon Short Line. After the merging of that line in the Union Pacific Com pany it ceased to issue annual reports, its accounts being lost in the great totals of the parent company. The stockholders were unaware that their company owed the Union Pacific Company nearly $72,000,000, until, after the lapse of a number of years, the man agement announced a stockholders' meeting to vote an increase of capital stock from $27,460,000 to $100,000,000, to pay off the indebtedness.