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Author: Petronilo One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 711  
Subject: Buffett buying YUM?? Date: 2/9/2000 3:01 PM
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I am wondering if Warren Buffett is checking YUM as of this writing. After all, he has shown interest in the restaurant sector many times before. He bought McDonalds and then unloaded it because he tried to avoid conflicts of interest with his fresh entire purchase of International Dairy Queen. Now YUM wouldn't be in conflict with Dairy Queen since it sells pizzas, tacos and chicken (maybe a bit of overlap in chicken but not a biggie).
In 1996 Buffett accumulated MCD at an average price of about $42 per share when MCD had $17 billion in assets, $5.5 billion in debt and $10.68 billion in sales or about $15 per share in sales. Thus, Buffett paid almost 3 times sales for McDonalds.
Later on Buffet paid about 1.46 times the sales of International Dairy Queen. This was about half of the P/S ratio he paid for MCD but this is understandable based on the much attractive brand value of MCD.
YUM AT CURRENT PRICE OF ABOUT $29 1/2 PER share has a market cap of about $4.7 billion. Total sales for Fiscal Year 2000 are expected to be $7.4 billion and from there they should grow about 10% per year.
Of course we all know that YUM has about $2 billion in debt and negative book value because of it but this would eventually change because Taco Bell, KFC and Pizza Hut will stay in business for many decades to come. Therefore, if Buffett values YUM in between MCD and Dairy Queen then a P/S of about 2.00 can be applied. As a result, we can expect Buffett to pay $14.80 billion minus long term debt of $2 billion for a cash price of $12.80 billion or about $78 per share. Definitely Buffett wouldn't offer so much based on current prices but let's say $60 or a 100% premium over current prices. In this situation he would be buying YUM for a smaller P/S than Dairy Queen.....but getting three times the strength of a global brand
Just an opinion......
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