Blog@Motiwala Capital

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

The Ira Sohn Investing Conference is an exceptional event and is dedicated to a great cause. The conference is organized to support the Sohn Conference foundation. Here is a snippet from the website – “The Foundation honors Ira Sohn, a Wall Street professional whose life was cut short when he passed away from cancer. For more than fifteen years, the Foundation has raised significant funds for pediatric cancer research and care by bringing together Wall Street’s most savvy investors to share their expertise with attendees. Through the dedication of the conference founders, esteemed speakers, volunteers, and generous donors, the Foundation has invested more than $20 million in innovative research and institutions at the forefront of cancer research and pediatric care.”

Since last year, the Conference added a stock contest where folks are invited to submit a stock idea to the panel. The panel comprised of Seth Klarman, Michael Price, David Einhorn, Bill Ackman, and Joel Greenblatt. Twelve entries are selected as semi-finalists and then four as finalists. One of the finalists gets the once in a lifetime opportunity to present his investment idea to the audience including this esteemed panel.

I submitted my entry this year and was pleasantly surprised to be included in the semi-finalists. I get to attend this awesome event on the 16th May 2012.

If anyone is going to be attending or is in the area and would like to meet after the event, drop me a note

thanks
Adib

On this blog, I usually discuss investing philosophy, great investors, discuss some of my stock picks. In this post, I am going to take a slight deviation and talk about one of the best tax efficient investment vehicles in the US. And that my friends, is the Roth IRA account.

A ROTH IRA account is an individual retirement savings account that allows investments to grow on a tax free basis. The contributions to the ROTH IRA account are always taxed (unlike a 401K or traditional IRA account). However, once the money is in the account, it not only grows tax deferred (like a 401K/traditional IRA), but the entire account becomes tax free once you are 59 1/2 years old. ( There are some other conditions that may let you withdraw tax and penalty free).

A good blogger has written an excellent detailed post on the various aspects of a ROTH IRA account. Check the blog post here.

Motiwala Capital LLC manages separate accounts including Roth and Traditional IRA accounts in addition to individual / joint / trust accounts. Please contact me if you have want to talk about our managed services.