Will Steak n Shake Become the Next Mini Berkshire Hathaway?

Sardar Biglari, acting CEO of Steak n Shake (SNS), has wasted no time in turning the company into a holding company much like Warren Buffett did with Berkshire Hathaway (BRK.A). Biglari is using Steak n Shake's free cash flow to buy a 9.9% steak in Fremont Michigan Insuracorp (FMMH.OB). Fremont Michigan InsuraCorp, Inc. is a holding company owning all of the outstanding shares of Fremont Insurance Company.

Fremont Insurance Company is a Michigan licensed property and casualty insurer operating exclusively in the State of Michigan, and writes principally personal lines, commercial lines, farm and marine insurance policies through independent agents. They were founded in 1876 and have served Michigan policyholders for over 131 years. They market policies through approximately 175 independent insurance agencies.

Fremont Insurance Company has a financial strength rating of “B++” (Good) by A.M. Best. Biglari had mentioned before he would like to get into the insurance arena if the right opportunity came along. Why an insurance business? The insurance business should add another stream of income and more free cash flow to acquire other businesses as they arise. Fremont has over 10 million in cash with no debt. Current book value is $23.63 per share. This looks like a good candidate for Biglari and company, however I do not see Biglari being a passive investor in this investment.

Could this be just an initial stake, soon to be a subsidiary of Biglari's Steak n Shake holding company? Time will tell. Take note that this is much like Buffett started out over 50 years ago and we know how that turned out.

Company/Symbol	Market Cap	Cash	Book Value p/share	Price p/share
Steak n Shake	$348.3 mil	$37.8 mil	$10.02	$12.09
Fremont Mich Insuracorp	$37.4 mil	$10.5 mil	$23.63	$21.45

Disclosure: Author is currently long SNS.

Comments

[JeffDB]

Interesting article.

Freudian slip? "Biglari is using Steak n Shake's free cash flow to buy a 9.9% steak in Fremont Michigan Insuracorp"

2009 Nov 10 09:12 AM

[Dan Braem]

I own a small amount of SNS and FMMH. It will be interesting to see if Biglari uses FMMH as an investment vehicle or maintains a less than controlling interest.

A big part of Buffett's success in my opinion wasn't the cash flow from insurance operations so much, but the "float" that he talks about endlessly in his annual reports. Float = money that is borrowed from policy holders and later paid out in claims, but can be reinvested in the meantime. And of course, as anyone with car insurance knows, the process of paying premiums is recurring. So the float becomes a "permanent" source of funds for investing. Buffett was able to use the float, more so than others, to invest in equities as well as fixed income investments.

I have covered much of this in my book. SNS is such a long way away from becoming Berkshire Hathaway, but it will be interesting to see the company evolve. I look forward to all of the future capital allocation decisions of SNS.

If I were looking toward the future - I would use one of the Bermuda insurance companies as a starting point. Then, all future investments could have huge tax advantages. Imagine BRK with a dramactically lower tax rate. With questions about the U.S. dollar - a company such as SNS could become a more gloabal version of Berkshire Hathaway.

2009 Nov 18 12:54 PM

[UncleLongHair]

At WEST, book value per share went from $8.48 in 2004 (the year before Biglari took over) to $6.36 at the end of 2008, a decline of 25% over 4 years. This included doubling his money with the FRN investment. Without that, losses would have been more than 50%.

WEST closed nearly 50% of its locations in the past 5 years, and its top and bottom lines have shrunk accordingly.

Biglari originally paid as much as $15-17 for SNS and at one point was down over 80% on this investment, and is now down around 25-30% from those buys.

Biglari is also showing a loss in his smaller positions such as JACK and ITEX.

Before Biglari can be called "the next Buffett", he needs to demonstrate that he can make money for his investors.

Unlike Buffett, Biglari does not pay bargain prices for his investments, and does not develop them to make them more valuable. He does pay himself a salary of nearly $1 million though -- nearly 10x Buffett, though he controls a company about 1/500th as large. Doesn't sound very Buffett-like to me.

2009 Dec 03 11:41 AM