Western Sizzlin's Secretive Quarter

Earlier in the year I reported about an over-valuation of Western Sizzlin (WEST) relative to its major investment Steak 'n Shake. I predicted dire numbers for '07 and more challenges ahead in Q1 08. I also mentioned that WEST had delayed their 10-k and that it seemed that they had become more and more quiet as the investment losses mounted. Finally I suggested a pair trade to go long SNS and short WEST.

Since then SNS reported a terrible Q1, sending the stock down under $7. WEST reported terrible 07 numbers and sort of reported their horrendous Q1 loss of $3.9 million: they filed their 10-q on the last allowed day (5/15) but have yet to issue a press release. Look here to see that this is the first time no press release has been issues with the 10-q.

Why no press release? Maybe because WEST has just last week finished their ITEX tender offer, interestingly timed two days ahead of the Q1 numbers? Broadcasting the biggest losses in years may not be the best way to welcome former ITEX stockholders especially since WEST stock was issued for the purchase.

Looking ahead to Q2 SNS is already down more than 12% vs Q1 for another unrealized loss for WEST of ~$1.5M. So unless SNS turns quickly we'll get yet another terrible quarter.

How's the pair trade going? Things looked good until SNS tanked last week - now with the new losses for WEST coming in Q2 it looks like WEST needs another price adjustment downwards to be fairly valued against SNS.

Disclosure: I am maintaining my pair position long SNS, short WEST.

Comments

[LTValueguy:]

I do not agree with your post... check your facts. Biglari has issued letters no earlier than late May or early June. Furthermore, he has purchased more SNS at a better price as well as assembled more shares for the block to take out SNS managment. Finally, the WEST loss is directly attributed to the mark to market on the SNS loss. This is a deal for long term players, the shorts will be net losers.

2008 May 22 02:04 PM

[Joe Lucid:]

I was talking about the press release for q1 earnings, not the letter. WEST actually has issued one now on 5/20th. Better late than never I guess.

One comment for all the folks who keep pointing out they believe SNS is undervalued and hence WEST a better value than it looks marking SNS to market: If you think that's the case why not go long SNS instead of WEST? That way you can avoid WEST's corporate capital gains tax if/when WEST sells SNS. You're profit will be a nice ~20% better than participating via WEST.

2008 May 22 04:29 PM

[Joe Lucid:]

I need to correct myself. The release is still not visible on any of the usual news aggregators (see finance.yahoo.com/q?s=... for example). It seems like it has only been posted on their website, not broadcast via pr newswire etc.

2008 May 22 04:54 PM

[RJM2:]

WEST is a long term bet on Biglari.

Untill very recently, SNS was a bet on SNS only.

Im long both. SNS is more deeply undervalued but Bilgari hopefully will not get complete control over SNS the way he has with WEST.

What I mean is, if a few years from now, operations have turned around, they've done sale & leasebacks on the owned properties and franchised most of the company owned stores, Im not sure I want Biglari playing "hotdog" with SNSs $15-18 per share. (Or whatever)

If SNS board doesnt either, they could do a one time dividend, with which every shareholder could choose to invest as he saw fit.

Biglari could then reinvest his proceeds back into WEST via another rights offering.

My biggest issue with Biglari is his lack of diversification.

Hopefully, SNS has taught him something in that regard. But, if get gets control over SNSs future cash, Im not sure it will have.

2008 Jun 25 10:29 PM