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Strategies & Market Trends : Value Investing
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To: Mike 2.0 who wrote (6172)3/3/1999 9:45:00 AM
From: Freedom Fighter  Read Replies (1) of 78490
 
Mike,

>>I suggest you check out the premium Buffet paid for
Dairy Queen (INDQA I think was the symbol); how did he calc it? <<

That was one of the deals I casually looked at in my effort to understand the values in that business. My "guess" is that he liked it because they make a lot of their money as franchisers as opposed to owners. That model has an advantage over ownership in that the capital expenditures are lower. (offset by slightly less money making in ownership) If I remember correctly, the ROE was about 20% (give or take). That's pretty impressive. The free cash generation was also high. Lastly, they also had what I would consider to be excess cash on the balance sheet that could immediately be depoloyed elsewhere. So if you subtracted the excess cash, adjusted earnings for interest income, the price starts looking kind of attractive even though it was a slow grower. Buffett can always deploy the excess cash and future free cash into more profitable ventures where Dairy Queen seemed more limited.

My thinking on Sbarros was the same when I bought it. But that deal has not worked out especially well for me even though I'll make some money. The eventual price offered by the Sbarro family to take it private was disappointing to me. Sbarro has about $5-$6 in excess cash and many other similar qualities.

Wayne

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