Steak 'n Shake Preparing for Tasty Cash Flows

In light of the recently released Chairman's Letter from Sardar Biglari of Steak 'n Shake (SNS), I figured that I would take some time to sing the praises of my favorite milkshake supplier. I'm going to go out on a limb here, and say that this letter will help move the price of the company closer to its intrinsic value by a nice bit.

First and foremost, it is expected that the company will reduce G&A by nearly $20 million in 2009, which will put the total in the neighborhood of $37 million. This is pretty awesome, and will alone triple the earnings of the year ended in September of 2007. It also represents roughly 12% of the market cap of the company. They have also reduced unnecessary insurance programs and outside service costs by $8 million.

Obviously, working on decreasing distribution costs is music to the ears. In addition, with inflation and commodity costs going down (most notably transportation costs associated with gasoline), these efforts will only have better results in the financial improvement of the company.

The company is also working on a new menu, which made my stomach the happiest of all the new initiatives. I never really minded the lack of music, the lighting that made your dining partner look like a corpse, or how the albino white walls showed dirt too easily - which are all problems that are being addressed. I was, however, bothered by the menu not making much sense. In addition to the menu being assembled in a piss-poor manner (which I actually moaned about last Friday while eating there with a friend), I have always wanted a meal that wasn't on the menu... apparently a Double Steak burger, cheese fries, and a Root Beer (with vanilla, of course!) is too much to ask for in a convenient meal form. Hopefully, this will change - certainly having a menu based on price variances will be a revenue helper and sanity keeper.

I found it interesting that Sardar and company recruited a guy from Friendly's, which they took over and forced the sale of a few years back (talked about here, at Noise Free Investing).

In addition, there will be $1 million in savings just from reducing the hours at 75 stores. Closing under performing and untested/un-constructed units will be good for preserving cash, and will also focus the company on fixing its internal problems. With a total of 24 pieces of property for sale, we can guesstimate the value at a super low fire sale price will be more than $10 million. There was also mention of $16 million in taxes that will be reclaimed from 2006, with an additional $6 million in future taxes, that included a $400K study that will help increase near term cash flows from the gift of accelerated depreciation.

The one thing that I don't like is that the board is now being compensated with stock, due to the stock being so ridiculously undervalued. The board members are getting a great price on the company (or a dollar of intrinsic value for significantly less in their fees). 

Between the cost cutting and cash inflows previously mentioned, we are sitting on well over $60 million in the near term - over a 1/3 of the present market price of the company... WOW...

Disclosure: I guess that I should disclose that I own shares of SNS-I also own a call option for a triple bypass on 20 years due to all of the Steak burgers, fries, and shakes that I have eaten to try to bolster company earnings

Comments

[It Figures:]

Cute but not compelling. Some mention of same-store sales, capital structure, little things like earnings would make it more persuasive.

Nothing wrong with loving the product, but that, plus a few random data points lacking any context, is not sufficient analysis.

2008 Oct 23 09:07 AM