Complete Growth Investor

Steak N Shake's New Direction Is Terrific News for Shareholders

Not figuring in capital lease obs. into the debt calculation. They work differently than straight debt. So they currently have less than $30mm in straight debt.

SNS can operate negative working capital as well.

Steak n Shake: Watching and Waiting as Biglari Names Himself CEO

ULH,

You're right on with FRN margin debt. The investment was successful because he bought at a sufficiently low price. That's value investing. Often times if you buy at the right price, a nice franchise (Friendly' is a great ice cream franchise in the Northeast, where I live) will be bought cheaply by strategic and/or financial buyers. It's not "luck." Good decision making often leads to good results. Who are you to say what would have happened had FRN not received a bid?

WEST does indeed have operational management, the fella is named Bob Moore and he is the CEO of Western Sizzlin Franchise Corp, former CEO of Whataburger.

Since Biglari has gotten to WEST, he has pared down debt, sold off underperforming restaurant locations, created a solid ROIC business in the franchising arena, entered into an enourmously successful joint venture, made a successful stock investment in FRN, and turned a weak corporation into one run for cash flow maximization and the shareholders. Remember that no shareholder will lose more than he if WEST fails, so there is nothing in it for him to talk without results.

Why aren't institutions interested? Who could buy up at $41mm company? WEST is a micro cap. Let's say you wanted to put 10% of your assets in WEST, a pretty large position for any fund. At maximum, you could probably gobble up 10% of WEST, considering the public float. Let's even say you could get 15%. 15% of $41mm is a whopping $6.15mm. So if you put $6.15 of your $61.5mm in assets in WEST. Say you only can put 5% in WEST. That's a $123mm fund. What institutions are running $60-$120mm portfolios? WEST can't even make an impact on any reasonable portfolio. 15% is 412k shares. At a few thousand shares trading in total, every day, it would take you a year to accumulate that position without bidding the price all the way up. That's why the institutions aren't interested.

Whoever Sardar's "groupies" are, they've done pretty darn well so far.

If you held WEST since Biglari has taken over, you would have nearly doubled your investment by now; adjusted for splits, Biglari took over in 2005 between 7 and 8 per share. It is an extremely thinly traded stock to this day.

So his job isn't to "get the stock moving." He's also not "running a restaurant" (in the case of SNS, only out of necessity until the President is hired, and Bob Moore runs the restaurant operation at WEST, before that it was Jim Verney).

His job is to make capital decisions that benefit shareholders. Everything outside of SNS has worked out great. It remains to be seen whether SNS will work out, so in the end the results will lie where they may.

Steak N Shake's New Direction Is Terrific News for Shareholders

I know that SNS can't buy back shares yet. However, I'll bet those credit lines are #1 in line to be paid off with all of their restrictive covenants now in place. This should happen in the next 2 quarters or so. At that point, the buying can, and most likely will, begin. I started the buyback scenario in 2009 if you look above:

"Given $45mm in annual free cash flow, the company would then generate $90mm in free cash flow in the 2009-2010 period.

Let’s say the company takes $65mm of that to buy back shares, again likely given Biglari’s penchant for share buybacks, and the rest to reduce debt. Assuming an average buy price of $8.50, the company could buy back about $7.6mm shares, bringing the share count down to about $20.6mm from the current $28.2mm. "

Steak N Shake's New Direction Is Terrific News for Shareholders

Free cash flow, as you're defining it, was depressed because previous management had an issue with capital spending. The newly placed Chairman and CEO has already stated that from next quarter forward, capital expenditures will halted to a maintenance level, $10mm or less as I stated above.

Secondly, property sales are flowing through the cash flow statement under "proceeds from property and equipment disposal." Those aren't being included in my free cash flow number, one I defined above as (operating cash flow - maintenance capex). The cash from selling stores and land isn't in there.

Thus, they generated a normalized level of $30mm in free cash flow assuming a run rate at last quarter's level of operating cash flow minus future maintenance capital spend. Free cash flow may have been "about zero," but you're looking in the rear view instead of the windshield, I think.

Steak n Shake: Watching and Waiting as Biglari Names Himself CEO

If Sardar is successful in his plan with SNS, you won't be complaining, I promise. If he really cuts costs, stabilizes revenue, and generates the free cash flow SNS is capable of, the stock price will nearly triple from here.

On the proxy fee, that's going to WEST remember, mostly. It's not going right into Sardar's pockets. Without those costs, though, SNS would still be stuck in the terrible situation its been in for years. 500k is well worth it for us, and as WEST shareholder you will benefit from that.

On your last comment, yes even Biglari admitted he bought a bit too high with SNS, and value deteriorated. However, I still believe strongly that SNS is worth far more than its current price, so it should end up a decent but not great investment, depending on what Biglari can achieve. Besides being early on SNS, his capital allocation decisions have worked out very, very well. I wouldn't be so quick to throw his decision making ability off the bus, yet.

If you're not comfortable with his capital allocation decisions, you really should not own WEST. If you believe that cash flow will be distributed, I would sell the stock, because you can pretty much take it to the bank that Biglari will take what ever proceeds come out of SNS and re-invest in another opportunity.

Buying 'Em Back at Western Sizzlin'

Hi,

I'll point you to a previous post I made on WEST, where I outline my thoughts on the entire company and why it's underpriced.

www.circleofcompetence...