The Steak n Shake Company (SNS), an operator of 485 burger and shake focused casual dining restaurants in 21 states, has recently been quietly transformed by a new management team into a small Berkshire Hathaway (BRK.A) type holding company. The move is very Warren Buffett-esque, with a 1-for-20 reverse stock split aimed at boosting the share price to well above normal levels (above $300 currently) and a bid to buy an insurance company among the noteworthy actions taken thus far.
What I find almost as interesting as the moves made by new CEO Sardar Biglari (a former hedge fund manager who has gained control of the firm and inserted himself into the top management slot) is the fact that this move has largely gone unnoticed by the financial media. Granted, Steak n Shake is a small cap regional restaurant chain ($450 million equity value) but the exact same strategy undertaken by Sears Holdings (SHLD) chairman Eddie Lampert garnered huge amounts of press.
Clearly Sears and Kmart are larger, more well known U.S. brands, but there seems to be a lot of interest from investors for any company trying to mimic the holding company business model that Buffett has perfected for decades. As a result, I would have thought Steak n Shake would have gotten some more attention.
Essentially, Biglari is using similar methods Lampert used when he took control of Kmart and later purchased Sears. Steak n Shake has dramatically cut costs, reduced capital expenditures, and will add to its store base going forward solely via franchising new locations, rather than building them with shareholder capital. The results have been impressive so far. During 2009, the first full year under new management, Steak n Shake’s free cash flow soared from negative $20 million to positive $31 million.
Biglari has made it clear that he plans to deploy the company’s capital into the best investment opportunities going forward, and that likely does not include heavy investments into the core Steak n Shake business. He has announced plans to rename the company Biglari Holdings (an odd choice if you ask me) and recently offered to acquire a property and casually insurance company (the Warren Buffett comparison is worth noting here) but was rebuffed by Fremont Michigan InsuraCorp (OTC:FMMH).
In the short term, Biglari and his fellow shareholders have reaped the benefits of his shift from a capital intensive negative free cash flow restaurant business to a more lean and efficient holding company. The stock has more than doubled from the $144 price ($7.20 pre-split) it fetched on the day Biglari took over.
The larger question remains how well this young former hedge fund manager can further deploy Steak n Shake’s operating profits in the future. At more than $300 per share, the stock trades for 1.6 times tangible book value of around $196, versus about 1.9 times for Berkshire Hathaway.
In my view, any price over 1.5 times tangible book value for an unproven concept and management team is too much to pay. However, given the results thus far it should come as no surprise that investors are willing to shell out more for the stock than they were previously, despite a lot of uncertainty over Steak n Shake’s future. Count me as one who will be interested in monitoring the situation going forward but would only take a flier on Biglari if the price to do so got cheaper.
Disclosure: No position in Steak n Shake at the time of writing, but positions may change at any time