If everything goes according to plan, Dart Drug Corp. will test its subsidiary-spinoff strategy again this week with the initial sale of stock in another of its highly successful new companies, Crown Books.
The success of an earlier public offering in Trak Auto Corp., also a former Dart Drug discount operation, and speculation over the relative value of Crown Books have pushed the price of the Crown issue from a proposed offering price of $23 a share to an indicated range of $32 to $36.
That has fed speculation that Crown might make a bigger splash than Trak Auto did in its market debut. Trak opened at $22 and spiraled to 33 1/2 bid and 33 1/2 asked by the end of the first day in over-the-counter trading. It has since climbed as high as 45 bid.
Analysts say the indicated range of Crown Books reflects current investor interest in new issues. It's not uncommon for some of the new issues to be gobbled up regardless of the underlying value, and, in many cases, investors fall victim to herd instinct.
Meanwhile, Dart Drug's own stock has been in orbit since March 15 when it took off from 35 1/2 and rocketed to 48 1/2 in only 24 hours. It closed yesterday at 143 bid, 148 asked, a phenomenal runup for a stock that had dawdled around $5 not too long ago.
By taking Crown public, Dart is posing a multiple-choice test for investors. In effect, they are being challenged to judge the best value among three companies with the same roots.
Regardless of investor preference, Dart Drug Corp. and its principal stockholders can't lose so long as Trak Auto and Crown continue to enjoy the impressive growth that they have had in their brief existence.
By spinning off the subsidiaries and retaining a majority interest in them, Dart has the best of both worlds.
Although the corporation's mainstay since 1954 has been its drug chain, the Trak Auto and Crown Books subsidiaries combined to fuel its growth in the past two years, contributing almost $7 million to Dart Drug Corp.'s net income of $9.1 million last year.
Even if the drug chain's sales and profits remain flat, so long as Dart retains controlling interest in subsidiaries it chose to spin off, it's ahead of the game.
In fact, Kenneth Gassman of Wheat First Securities has calculated that for every $1-a-share profit Trak Auto realizes, the return for Dart is $2.15.
Dart has only 1.7 million shares outstanding and is thinly traded, but it retains 71 percent of the stock in Trak Auto compared with only 29 percent that was made available to investors.
Similarly, Dart and Thrifty Corp. of California will own 5.5 million shares, or 69 percent, of the stock in Crown Books while making about 2.7 million shares available to the public.
In recent weeks, one of the more intriguing questions has been, what makes Dart's stock so attractive to speculators willing to pay as much as $148 a share? Aside from Crown, Dart's only subsidiary is its drug chain, which perennially faces stiff competition in a market dominated by Peoples Drug Stores Inc.
One clue to speculators' interest in Dart is the rationale offered by Eliot Benson, director of research at Ferris & Co. Inc.
"At one point, based on the current price of Trak and the indicated price of Crown, you could literally buy Dart for nothing," Benson said.
For every share of Trak, Dart has 2.3 shares, and it has 1.6 shares for every share of Crown. Multiply the price of Trak by 2.3 and the result is $103.50, or the value of Trak stock behind each share of Dart.
By the same token, multiplying Crown's indicated opening of 32 by 1.6 gives us $51.20, or the value of Crown's stock behind each share of Dart. Hence, the combined value of Trak and Crown is $154.70 compared with Dart's closing price of 143 bid yesterday.
Even so, it's possible that, despite their impressive growth to date and expansion plans, the prices of Trak and Crown may be higher than the true value of the companies. And investors will have to decide whether these companies can command prices of proven performers in the manner of a Woodward & Lothrop Inc., Peoples or Giant Food Inc., to name a few.