Here is my submission for this weeks challenge: Dairy Queen before Warren Buffett bought it. I am going to give the valuations first and then my thoughts afterwards.
Dairy Queen valuations done using 1997 10Q and 1996 10K that were provided. All numbers in millions of US dollars, except per share information, unless otherwise noted.
| Assets: | Book Value: | Reproduction Value: | |||
| Current Assets | |||||
| Cash | 61.2 | 61.2 | |||
| Marketable Securities | 0 | 0 | |||
| Accounts Receivable (Net) | 47.4 | 40 | |||
| Inventories | 6 | 3 | |||
| Other Current Assets | 4 | 2 | |||
| Total Current Assets | 118.6 | 106.2 | |||
| Notes Receivable & Other (Net) | 28 | 14 | |||
| Franchise Rights & Goodwill | 97.4 | 40.4 | |||
| Rental Properties | 5 | 2 | |||
| Total Other Revenue Producing Assets | 102.4 | 50 | |||
| PP&E Net | 12.7 | 6 | |||
| Total Assets | 364.1 | 218.6 | |||
- Total Shares are 22
- 218.6/22=$9.94 per share reproduction value.
Second Valuation
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- Cash and cash equivalents are 61.2, including marketable securities.
- Short term investments are 0
- Number of shares are 22
- Total current liabilities are 46.5
Short term investments + Cash and cash equivalents – Total current liabilities=
- 61.2=0-46.5=14.7
- 14.7/22=$0.67 in net cash per share.
Dairy Queen has an TTM EBIT of 49.3+15=64.3
Taking the TTM EBIT by 5X, 8X, 11X, and 14X and adding Cash and cash equivalents=
- 5X64.3=321.5+61.2=382.7
- 8X64.3=514.4+61.2=575.6
- 11X64.3=707.3+61.2=768.5
- 14X64.3=900.2+61.2=961.4
- 382.7/22=$17.40 per share.
- 575.6/22=$26.16 per share.
- 768.5/22=$34.93 per share.
- 961.4/22=$43.70 per share.
I am guessing that before Warren Buffett bought Dairy Queen it was selling for around $20 per share. Warren Buffett probably bought Dairy Queen for between $25-28 a share.
- Estimate of market cap is 440.
- Estimated enterprise value=440+5.2+.6+0-61.2=384.6
- Enterprise value estimate includes market cap+ debt, minority interest, preferred shares – total cash and cash equivalents.
Estimated EV/EBIT of 6
- EBIT margin of 14.8%
- Net margin of 9.4%
Normally being a very conservative investor I take the lowest value I get, in this case the reproduction value, and use that as my base estimate of intrinsic value. I then need at least a 30% margin of safety from that and preferably a 50% margin of safety.
However, seeing as how Dairy Queen had high margins at that time, I would have used the $17.40 per share as my base estimate of intrinsic value. I would only have bought DQ at that time if it was selling for under $12 per share.
I doubt it was selling for that low of a price. I would have continued researching DQ since it had high margins, had a low estimated EV/EBIT, was paying down debt and was almost debt free after paying it down, had a decent amount of cash on hand, and had been buying back shares. I also liked that shareholder equity and sales had been growing steadily as well. I would have reevaluated buying them if they got close to that $12 per share price.
I also would have needed to do research into McDonald’s, Burger King, Wendy’s, etc before even contemplating buying. I am guessing DQ had about a 10 or 15% market share at that time and were competing against goliaths who had more resources than they did.
I am excited to read the solution and to see what other people figured out. Fastest way to learn what you could be doing better is through critique and learning from others examples.
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For those who want to follow along in the comments section or attempt the challenge themselves please go to his site.