Boring Portfolio

Bore Selling TCBY Enterprises
December 30, 1998

**This trade is being made under the regular portfolio policy, namely, once The Fool announces an intention to trade, that trade will be made within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section of the Hall of Portfolios.**

TCBY Enterprises, Inc. (NYSE: TBY)
425 West Capitol Avenue
1100 TCBY Tower
Little Rock, AR 72201
Ph: (501) 688-8229
Fx: (501) 688-8284

Trade: Selling 40 shares TCBY Enterprises, Inc. (NYSE: TBY)
Bought on May 20, 1998 at $10

The Boring Portfolio today announces another transaction, related to Monday's announcement of our intent to acquire five shares of Berkshire Hathaway (NYSE: BRK.A and BRK.B) class "B" common stock. We have decided to sell our interest in TCBY Enterprises (NYSE: TBY) so we can increase the number of Berkshire shares we can acquire by 20%. Sure, that's an increase from five to six shares, but the nominal price of the Berkshire shares dictates the amount of shares we can buy. Though infinitesimal, our economic interest in Berkshire still increases by a large percentage.

Why We're Selling TCBY

There's nothing wrong with TCBY at all. For a low-growth company, it's sufficiently well run and we wouldn't have a problem holding onto it if we had no alternative investments available to us. But that's not the case. We believe there is at least one higher quality company selling at a sufficiently large discount to intrinsic value that it makes little sense for us to hold onto an investment that is pretty fairly priced at $157 million.

TCBY's returns are not unattractive; don't get us wrong. Based on the following, TCBY is a nice little business:

ROA: 11.14%
ROE: 14.4%
ROIC: 10.33%

The thing that holds back growth in intrinsic value is its lack of momentum in expanding the company. Sales and other revenues are flat, though the company has adjusted to this just fine, and operating earnings through the first three quarters of 1998 were up 7.9%. The one problem we do have with the company is its lack of aggressiveness on repurchasing its shares. The company knows it's not a fast-grower and it has been repurchasing shares, but it has also issued options that dilute the effects of its share buybacks. It's not outstanding shares that one should pay attention to, it's diluted shares, because the options that represent share equivalents are contingent claims on the ownership of the company. On the basis of diluted shares, share count has only decreased 1.8% over the last year. This just doesn't do it for us.

The company's dividend yield is also attractive at around 3%. But when you take the effect of dividends paid plus net share buybacks on a pretty stagnant base of business, we don't see growth in intrinsic value any greater than we could see with other investments or with just sticking the capital we're pulling out into an S&P 500 index fund. At 14 times net cash from operations, we think we're receiving fair value for the company. Plus we're generating about a dollar per share in tax deductions (present value) in selling this at a loss, which is merely a bonus and doesn't really drive the decision.

What drives the decision is a better opportunity with significantly more attractive economics selling at a good discount to intrinsic value. That being the case, we will make this transaction within the next couple of days and consolidate the purchases of Berkshire into one transaction.

Downloadable TCBY spreadsheets: