My analysis of a valuation exercise – Dairy Queen 1997

Whopper Investments (an excellent blog) has started a valuation exercise series. He is going to post information about companies from the past and ask his readers to value the company. Read the instructions for the challenge here . For the first one he has provided the information about Dairy Queen from 1996-1997. As many of you may know, Dairy Queen was acquired by Berkshire Hathaway in 1997.

Here is my response to the exercise based on about 10 minutes of taking short cuts through the 1996 10-K. This is similar to what I do when I come across an interesting looking idea.

1) Growth Check: First thing you can notice from the income statement that sales have grown steadily each year and almost doubled from $210m to $411m in the decade. So, this is a nice growing business. Good start. Profits have followed the growth in sales as EBIT and Net Income have more than doubled over the same period.

2) Balance sheet: Cash and marketable securities $41m. Debt $14.5m. Net cash $26m. Also more shareholders equity than total liabilities.

3) ROIC: (using magic formula approach)
Invested capital = 89 – 40 + 14 = $64million (with excess cash not subtracted)
EBIT = $57 million.

Pretax ROIC = 89% ( likely more than 100% if you subtract excess cash). Sign of very high quality business.

4) FCF = $42million

5) Valuation as of 10-K, Market Cap = $306million
EV = $280 million
EV/EBIT = 280/57 = 5x! Certainly quite cheap given the profitability, growth, ROIC, etc

What would be fair value?
I would consider 8-10x EBIT as fair value. More closer to 10x EBIT given the high quality business as seen by ROIC.

EV = 10 * 57 = $570 million
Equity Value = $570 + $26 = $596 million (round to $600 million)
Share Count 22.2m shares

Per Share = $26.8 or $27 rounded.

I encourage everyone to participate in this series and post your responses on the original post

About Adib Motiwala

Portfolio Manager at Motiwala Capital LLC
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