---

from Outstanding Investor Digest's December 31, 1996 Edition

---

CENTURY MANAGEMENT'S
ARNOLD VAN DEN BERG

(continued from preceding page)

OID: But is 1 times revenue really reasonable?
Van Den Berg: I think so. The S&P 400 is selling for 1.10 times sales and 1.27 times price-and-debt-to-sales. Once again, by contrast, Moore is currently selling at 35% of price-and-debt-to-sales.
And we could argue back and forth about whether Moore should be worth as much as an S&P company. However, it's certainly not worth 70% less.

OID: Although one can also argue about whether the S&P is worth more than 1 times sales.
Van Den Berg: Absolutely. Again, the S&P 400 is trading at over 1.10 times sales as we speak. And the highest price-to-sales multiple at which the S&P 400 has ever traded in this interest rate environment is 1.16 times sales in 1968-69.

OID: So that the S&P 400 has been more expensive in other interest rate environments.
Van Den Berg: Yes. In 1961, it hit 1.29 times sales. But that was with a AAA rate of 4.3%.

OID: Which still puts today's prices too close to the record highs by that measure for comfort.
Van Den Berg: And in 1968-69, that 1.16 multiple was with AAA rates at 6.2% - which is lower than where we are today. After all, AAA rates are around 7%. But it's close enough.

OID: It works for me.
Van Den Berg: So, by that measure, we're within 5% of the all-time record highs. By comparison, the S&P 400 has traded 38-40% of sales at bear market bottoms.
Incidentally, relative to cash flow and earnings, the story's quite similar. In 1968-69, the S&P 400 sold for 19.15 times earnings and 11 times cash flow at its peak. And those are about the same valuation levels we're at today - 19.5 times earnings and 11 times cash flow.

OID: If you think you can scare me, you're right...
And I gather that one of the implications is that either interest rates decline or valuations do.
Van Den Berg: That's right. Valuations are unlikely to go much higher absent a lower interest rate/lower inflation environment. And we'd need higher growth - because the economy was growing a little bit better than it is today.
But getting back to Moore Products, the only thing I'm pointing out is that sometimes you can cut through the fog by looking at valuations relative to sales - because it gets around questions about margins and accounting gimmickry and all the other things you can do internally.

©Copyright 1996-2010 Outstanding Investor Digest, Inc. All rights reserved.
295 Greenwich St., Box 282, New York, NY 10007 (212) 925-3885