Saturday, July 7, 2012

Deliberate Practice: Dairy Queen 1997

In a first of what should be a long and educational series, Whopper Investments has a valuation exercise on Dairy Queen in 1997 right before Warren Buffett bought it. This post outlines how much I would have paid for it from an EV point of view.

DQ is a franchise business selling fast foods and dairy products. Financials suggest it is a steady business with pricing power. Based on the table below, I estimate paying for earnings before taxes of about $55M / year. 

Income before income taxes 56,745,147
EV multiple 12.5
EV = EBIT * Multiple $709,314,338
Debt $24,760,321
Cash and cash equivalents $38,384,589
Equity Value $646,169,428
Outstanding Shares 22,122,240
Price Per Share $29

I would not want to pay for more than 15 times earnings, so I expect that EV is not more than $850M and more than likely to be between $700M - $750M. So the buy out price should not exceed $35 and my preferred price would be between $29 - $30 per share.

Multiple EV Equity Value Price / Share
8 $453,961,176 $390,816,266 $17.67
9 $510,706,323 $447,561,413 $20.23
10 $567,451,470 $504,306,560 $22.80
11 $624,196,617 $561,051,707 $25.36
12 $680,941,764 $617,796,854 $27.93
12.5 $709,314,338 $646,169,428 $29.21
13 $737,686,911 $674,542,001 $30.49
15 $851,177,205 $788,032,295 $35.62

The Goal

This blog is really the result of  Whopper Investments post about merits of  writing a blog to improve investing skills and accelerate learning. I am a value investor focused on investing in companies with a sustainable competitive advantage at fair / low prices. I have learnt enough about myself to know that I am not that good at sticking with distressed investments/ net-net investments. I prefer to buy really good companies at fair prices and then have the patience to hold for long periods of time.

I have tended to identify companies in a formulaic manner. While my performance so far has been average, I feel the strong need need to move to a more concentrated portfolio with higher amount invested per position and fewer positions. I'd like to have conviction to put at least 20% of my portfolio into a single idea. My present approach involves identifying businesses with long term competitive advantage through financials. It does not identify the specific advantage and whether the next 10 years will look like the past 10 year. Without this knowledge I am forced to diversify. As I look back at my past investments, a few ideas have generated substantially higher returns - not an uncommon occurrence. If I can get closer to understanding the business better, I can increase amount invested per position and improve returns in the process. The outcome should be higher returns with lower risk - Risk being defined as not know what I am doing.