@willbeuttenmuller:disqus

I just posted my latest BOBS article https://www.valueinvestingjourney.com/2013/07/29/brazil-fast-food-update-after-huge-run-up-the-company-is-still-undervalued/ if you want to see my updated thoughts on BOBS valuation and why I still think that they are undervalued today.

@willbeuttenmuller:disqus

After revaluing BOBS with its updated numbers I have decided to turn it into a mini article and plan to post my findings next week. I think you will be very interested to see what I have found.

Thanks for the reply Red.

Will

I will get back to you later today or tomorrow about what I value BOBS at now since I have not revalued them at all since my original article and just got back from vacation yesterday.

I calculate everything myself now and the major calculations I use are below.

ROIC=EBIT/(Equity-goodwill+debt-cash) or ROIC=EBIT/(Equity+debt-cash)

Enterprise Value=Market cap+debt+minority interest+preferred shares-cash and cash equivalents

EV/EBIT is the above calculation divided by EBIT or operating margin and I use it as one of many relative valuations to see how a company stacks up valuation wise to other companies. Generally the lower the better and I love this number to be below 8 when considering buying into a company.

Total Enterprise Value which I learned from Red’s wonderful The Red Corner Blog. I cannot recommend going back to the beginning of his blog enough, going through all of his posts, reading, and taking notes. I still do to this day actually.

TEV=Market cap+all debt equivalents (including the capitalized value of operating leases, unfunded pensions, etc) – cash, cash equivalents, and short term investments-long term investments-net deferred tax assets.

TEV/EBIT uses the above calculation and divides it by EBIT. This is one of my favorite metrics to use because it incorporates a companies total debt and obligations and I think shows a much truer picture of a company. Again I love his number to be lower than 8.

Earnings yield-either EBIT/EV or I prefer EBIT/TEV. I like this to be in the ~15%+ range.

The TEV number in the above calculations is almost always a more conservative number than regular EV.

Got it. Thanks. A couple questions and thoughts:

+ What’s the difference between enterprise value and total enterprise value?

+ Can you provide back-up for your calculations for EV/EBIT, EV/EBITDA, TEV/EBIT and TEV/EBITDA? I’m currently getting that the company is trading at 5.9x Firm Value / LTM EBITDA and 7.3x Firm Value / LTM EBIT (for what it’s worth CapIQ has pretty similar numbers, and the only difference is the exchange rate from R$ to US$)

– I’ve got an equity price of US$13.50 with shares out of 8.129mm for a market cap of US$109.7mm
– Firm Value of adjustments of R$38.6mm (US$17mm of cash), R$16.3mm (US$7.2mm) debt and $4.5mm (US$2mm) of NCI
– Thus my firm value is US$101.9mm (US$109.7 – US$17mm + US$7.2mm + US$2mm)
– I’ve got LTM EBITDA at R$39mm (US$17mm) and LTM EBIT at R$32mm (US$14mm)
– With a firm value of US$101.9mm, LTM EBITDA of US$17.2mm and LTM EBIT of $14mm, I get FV / LTM EBITDA of 5.9x and FV / LTM EBIT of 7.3x
– Please break-out the NOL value, as I do not include NOLs in my analysis
– To see my Firm Value / LTM EBITDA and Firm Value / LTM EBIT calculations, please refer to the overview tab of the BOBS_vMaster.xls file to which I linked above

+ I think we are talking past each other when you say that you are not basing your analysis on the market’s re-rating the company: if the company has traded at 5.1x firm value / EBITDA over the last twelve years, and it currently trades 5.9x firm value / EBITDA, then it cannot be cheap relative to its historic multiple

+ Now you can argue that its historical multiple isn’t relevant because the stock has undergone a transformation—this point is, in fact, what you implied when you asked “Why would you continue to use its historical valuation range . . . when the company has completely transformed”–but by arguing that the historic multiple isn’t relevant, you’re arguing that the market will value the company at a higher multiple in the next twelve years than it has in the last twelve years, i.e., that the market will re-rate the company at a higher multiple

+ I use the historic multiple because it is more conservative than assuming that the transformation will cause the market to view the multiple differently going forward or that it will cause the market to value the company more aggressively going forward

Great discussion here and if anyone else has something to add feel free to jump in.

I am not valuing the company expecting Mr. Market to rerate its multiple, I am valuing the company based off of a very conservative estimate of its operations, cash, cash equivalents, and NOL’s now. None of that is based off expecting Mr. Market to rerate its value.

Why would you continue to use its historical valuation range going back 12 years when the company has completely transformed itself for the better by your own admission in the last 5+ years?

In my valuations and analysis I do not look out into the future and try to guess how many restaurants they will expand to or what their margins will look like. My valuations and analysis are based off of the present and to some degree on the past but anything in the future is just icing on the cake in most circumstances to me. I do think that BOBS will continue to grow its franchise base and that the upcoming huge events in Brazil will help its results in the short and medium term but as long as the company keeps growing efficiently and profitably like they have been than I do not really care how many restaurants it has because it will continue to gain value if those things happen. I do agree that it is going to be a bit harder to open a bunch more restaurants due to more competition but Brazil is a gigantic country, almost the size of the US, so there is still plenty of room to grow. The Brazilian middle class is growing pretty substantially too as I linked to in the original article which should also help.

EV is enterprise value in that calculation. That EV/EBIT, and also TEV/EBIT which is total enterprise value, is a way I use relative valuations to see how it stacks up against other companies. BOBS EV/EBIT of 2.72 is by far the lowest valuation using this metric that I have found up to this point. Stated another way if you think that BOBS is fairly valued at an EV/EBIT of 2.72 than I would not have found any company to buy into yet in almost 5 years of doing research. That is of course just one of the valuations I use but I found it to be undervalued by pretty much everyone of my other valuations as well.

What’s the matter with NOL’s adding substantial value to a company? Anything that adds value to a company and is tangible I am all for. My conservatism is why I discount NOL’s as well.

Looking forward to your thoughts again.

Jason,

Thanks for your response. To be clear, I am evaluating this as an investment today, not when you wrote up the company.

My issues are as follows:

+ While I agree that the company has undergone a transformation, I prefer not to invest in a company based on the concept that the market will re-value the company at a multiple at which it has not valued the stock historically

– To argue that BOBS is cheap at 5.8x FV/EBITDA (note my 5.1x number was based on a stale R$/US$ exchange rate), you have to argue that going forward, the market will rate this company at a higher multiple than it has over the last ten years
– For what it’s worth, the market may very well re-rate this stock because management has transformed the business, but I’m not a believer in the notion that the stock is cheap assuming the market will re-rate it
– Again, here is the Excel back-up on multiples over time:
https://www.dropbox.com/s/jd84dpoisivi15f/BOBS_Market%20Data_vMaster.xlsx

+ With the conservative assumption that EBIT/store is constant, the number of stores required to double the base of R$30mm is 3x larger than the number of stores that were required to double an EBIT base of R$10mm

– Opening stores 950 – 1200 is more difficult than opening stores 600 – 950, as markets become saturated
– Half of the EBIT that management added from ’09 – ’12 came from a one-time franchise mix shift that they will not be able to replicate
– Again, here is the Excel model in full:
https://www.dropbox.com/s/ugibjw62brvtq2c/BOBS_vMaster.xlsx

+ The company should not require R$26mm capex to open franchised restaurants, so I’m left to conclude that they are opening/renovating owned-operated stores

– Franchised restaurants require minimal investment by the franchisor (that’s the beauty of the model)
– They’ve disclosed that (a) they are targeting opening 150 stores in 2013 and (b) expecting to spend R$26mm in capex; in 2010, they opened 90 franchises with capital expenditures of R$5mm, and in 2011 they opened 101 with capex of $9mm
– Of their owned-operated stores, both Bob’s and Pizza Hut operate at much lower EBIT margins than the franchised stores (2.7% and 15.5% 2012A EBIT margins, respectively), so I’m a little worried that they’re putting R$26mm of cash into them. KFC has been a negative EBIT business for the last five years, so hopefully, they aren’t allocating any capital to it.

+ Maybe, I’m just too conservative on the NOL front, but I have a hard time buying into the idea that 20% to 40% of the value of the company ($2.15 to $4.30) is in the NOLs

Basically, on a go-forward basis, I’m left to conclude that for this stock to be a double to triple in the next three years, I must believe one or more of the following: (a) there is enough white space for the company to open a lot more franchised restaurants (i.e, 600+), (b) management will drastically improve the profitability of their owned-operated stores (i.e., owned-operated EBIT margins rise from ~10% to ~20%), or (c) the market will permanently re-rate the multiple of this stock (i.e, to 9x FV/EBITDA) going forward. To me, it’s a perfectly valid investment thesis that any of or all of these three things happen; that being said, given that (a) the stock currently trades in-line with its historical multiple and its intrinsic value (as estimtaed by EPV) and that (b) an investment in Bob’s is now predicated on growth or on a multiple re-rating, I just don’t see the stock as cheap.

One final point/question: when you talk about an EV/EBIT ratio of 2.72x, is “EV” Equity Value? If so, I don’t think an Equity Value/EBIT ratio is appropriate, as EBIT is available to all of the company’s owners of capital (both lenders and shareholders) whereas equity value is only available to the shareholders.

I’d love to keep up the conversation—please let me know your thoughts when you get a moment. Thanks again for the write-up!

Best,
Will

Thanks for your well thought out comment Will.

Going back and using BOBS historical numbers back as far as you did doesn’t make much sense to me in this case since it has completely transformed itself from a horribly run nearly bankrupt company in the mid 90’s and early 2000’s to a very well run, multi restaurant company, that has focused a lot more on expanding its very high margin franchised restaurants, improving profitability, and reducing costs pretty substantially. Even as closely back as 2007 BOBS was still mainly a single company restaurant entity. So taking their historical numbers from 2001 makes little sense to me.

Even putting all of that aside though and just concentrating on how they were operating when I wrote the original article in December (Its numbers and results have actually improved pretty dramatically since my original article and BOBS is even better off now than they were) if you think that they were fairly valued at that time that would mean that you think that a) It wouldn’t keep up its more recent improved profitability over the last 5 or so years, b) that it has no competitive advantages at all, c) that its NOL’s are worth nothing, d) that its current operations, cash, and cash equivalents were worth less than 5X EBIT, e) that the company that was selling at an EV/EBIT of 2.72 and a TEV/EBIT of 6.75 were fairly valued. By the way the EV/EBIT of 2.72 is still the lowest EV/EBIT I have found when doing my full evaluations of all the companies I have researched.

BOBS should actually be able to continue to improve its profitability since it is now concentrated almost fully on expanding its franchised restaurants which have a currently garnering around a 60% EBIT margin and cutting costs in recent years. Its sales and profitability should also continue to improve due to the recent Confederations Cup and upcoming World Cup and Olympics all within the next several years.

Assuming that BOBS has no moat at all is a safe assumption and is actually what I based my analysis off of.

Even if you discount BOBS NOL’s by 50%, which is a very very conservative estimate, you get an extra $2.15 per share added to the companies valuation. Which would mean that for BOBS to be fairly valued its operations, cash, and cash equivalents + NOL’s would have to be valued at approximately 3-4X EBIT. This in my opinion is way too low of an estimate considering how well the company has been doing in the last 5 years or so and would mean that you think that its operations, cash, cash equivalents, and NOL’s are adding very little value to the company. You would struggle to find anything more undervalued than this, especially when it is running as well as BOBS is now and I have not found anything this well run that has been even close to that undervalued.

Along with the above is that BOBS EV/EBIT of 2.72 is by far the lowest of any company I have done a full evaluation on. If you think that is a fairly valued company you are a far more conservative investor than I am and I am one of the more conservative value investors that I have come across and you would struggle to buy much of anything except during a recession.

The company requires more cap ex because of all the restaurants it has been opening lately and some updating of its current restaurants.

Please post your thoughts back as I would love to spark a discussion about this here and thanks a lot again.

+ Relative to its trading history over the last twelve years, BFFC seems fairly valued
– It’s trading at 5.2x FV/EBITDA vs. at median from 1/01 to 7/13 of 5.1x
– Back-up here: https://www.dropbox.com/s/jd84dpoisivi15f/BOBS_Market%20Data_vMaster.xlsx

+ Relative to EPV, it seems fairly valued
– I calculate R$40mm of adjusted EBIT and use a 15% discount rate

+ Most of the EBIT growth from a shift mix has already played out
– It’s much harder to increase the mix from 93% to 98% vs. 88% to 93%
– Growth required is exponential

+ Projected and 2012A capex doesn’t square with the mix shift story
– 2012A capex was R$18mm (the highest in the ´09 – ’12 period) a
– Projected capex is R$26mm

My full thoughts are here: http://www.texantiger.com/post/55473800333/brazil-fast-food-corp-the-easy-moneys-been-made, and my financial model is here: https://www.dropbox.com/s/ugibjw62brvtq2c/BOBS_vMaster.xlsx

I’d love to hear your thoughts if you get a minute. Thanks again for the idea!