Selling An Excellent Asset

Andrew Cherng, the Chinese immigrant who moved to the United States as a teenager, obtained a degree in Applied Mathematics from the University of Missouri in 1972, and then moved to Los Angeles that same year to help a family member run a restaurant, subsequently obtained an SBA loan and launched the Chinese restaurant Panda Express.

Cherng gained a reputation for his refusal to sell to outside investors, citing a desire to run the business right and not have to answer to the often short-term interests of a shareholder base. That is why Panda Express never had any pink slime episodes.

In several interviews, Cherng has discussed the terms under which he would consider selling his ownership stake in Panda Express. His simple response? “If I could get a valuation on it like Chipotle’s.” At the time, Chipotle was trading for around 55-60x earnings.

There is a lot of wisdom in that response.

Excellent, cash-generating assets should not be discarded lightly. By definition, the hard work is acquiring them–the passage of time is your friend that will make you richer. The sell question is essentially an inquiry, “At what point do I want to take on the burden of making the tax payment associated with selling and also find an asset offering an equal or superior mix of quality and growth characteristics?”

In other interviews, Cherng has indicated that he pays close attention to his suppliers, one of which was Coca-Cola (though Panda Express engages in a mostly exclusive relationship with PepsiCo). Although he has never said this explicitly, I suspect that Cherng is aware that Coca-Cola, arguably the best business in the entire world, was a mediocre investment when purchased at 60x earnings, giving only 3.5% returns over the two and a half decades that followed.

There is a price point at which great assets become poor investments, and for mid-caps and large-caps, that is usually when the business is selling for twice what it is worth. Practically, that would mean selling Brown Forman, Hershey, and Colgate Palmolive stock when and if they ever traded at 40-45x earnings. At that point, too much future growth is being paid for today.