### See’s Candies

My question was in regards toward proving mathematically why it would be appropriate to apply a 3X tangible book value for See’s Candy.

Remember, however, that See’s had net tangible assets of only \$8 million. So it would only have had to commit an additional \$8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large – a need for \$18 million of additional capital.
After the dust had settled, the mundane business, now earning \$4 million annually, might still be worth the value of its tangible assets, or \$36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)

See’s, however, also earning \$4 million, might be worth \$50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained \$25 million in nominal value while the owners were putting up only \$8 million in additional capital – over \$3 of nominal value gained for each \$1 invested

How mathematically can you justify paying 3x tangible book value for See’s Candy, I realize they have some pricing power however growth in the candy industry is roughly flat.

Editor: Any smart readers want to have a go at this question?

I will chime in in a few days.

One clue might be this case study on how Buffett analyzed a start-up: Buffett_Case Study on Investment Filters Tabulating Company

### Second Question from another reader

Got a question – apologies if you’ve covered this in a post I haven’t gotten to yet.

In examining WM, I see a 16B market cap, 9B in net debt, and 2B in trailing operating income. The TTM earnings yield is therefore 2 / (16 + 9) = 8%.

Check his work here:WM_VL

Now I say to myself, 8% isn’t bad, but I’d ideally like at least 10% – so maybe I’ll wait for a pullback to make the stock a little cheaper. BUT, if you do the math, the stock would actually have to drop a whopping 30% just to move the earnings yield needle from 8% to 10%, due to debt being 1/3 of the enterprise value.

So, do you still continue to use EBIT/EV for companies with a lot of debt, or do you convert to something like EBT/MarketCap? Even if WM’s stock goes to 0, the earnings yield maxes out at 22%!

My reply: No you don’t prostitute your standards. Stick with EV because debt gets paid before equity. You wouldn’t ignore a mortgage debt when buying a house.  WM is basically a slow growth bond.  Too rich for me, but my hurdle rate may be different than yours. But would I rather own WM vs. a US Bond–yes.

Other companies like this might be Paychex, PAYX. High Dividend and slow growth. PAYX_VL. I have owned both WM and PAYX but no longer because I view them as fair value not UNfair value. But you are looking in the right place if you want a sleep at night portfolio.

### 14 responses to “Readers’ Questions”

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