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

| About: Biglari Holdings (BH-OLD)
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Here it is folks, the first quarter for Steak N Shake (SNS) under the watch of Sardar Biglari is now in the books.

Instead of me giving you all the quotes, you might as well just go ahead and read the press release.  There are too many great quotes for me to choose one or two. Basically, Biglari is doing with Steak N Shake exactly what he told shareholders he planned to do.  Here’s how I’d sum up the release:

  • They plan to close 12 stores in FY Q4.
  • Cash flow from operations totaled almost $10mm for the quarter, with $4.7mm in capital expenditures due to the roll out of a new point of sale system, CFFO $23mm for the 9 months.
  • Capex from here on out will be mostly maintenance capex. (aka a huge slowdown from past levels)
  • GAAP Net loss was $9.8mm, but there were $8.7mm (net of tax) of non cash impairments and $7.8mm of depreciation in that figure.
  • Cut debt by $20mm.  Without including capital leases, total debt stands at ~$27mm
  • Now managing business for creating shareholder wealth.
  • Shareholder letter to be issued in the next 60 days with discussion of future plans, in lieu of a conference call there will be an “Investor Day” in the next 3 mos.

Obviously, all of this is just terrific news for shareholders.  In the first 3/4 of the year, the co. was able to generate $23mm in operating cash flow.  Once you bring capex down to maintainence level (which is about $9mm annually according to previous management), they are on track for a good $22mm in free cash flow ($23/.75 = $31mm  - 9mm = $22mm) on the year.

The first two quarters weren’t under Biglari though, and at least part of the 3rd quarter indeed was, so let’s take this quarter as representative of the normal quarter under Biglari before major operational or cost improvements.  For an EV of about $240mm, you get a $30mm run-rate in depressed free cash flow ($10mm x4 - $10mm = $30mm) .    Within the next year or two, it’s pretty easy to see SNS generating $45 - 50mm in free cash flow annually, merely assuming some cost reductions and operational improvements, giving shareholders a 21% yield on today’s enterprise value.

Let us say that Steak N Shake can generate $45mm in free cash flow, a number they’ve achieved in the past several times under very poor management.    (Remember this is based on a $9mm in maintainence capital expenditures, not the crazy level of empire building that previous management was so hell bent on completing.)   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.  We can safely say that debt would be near zero after paying down $25mm worth.

What’s a fair multiple?  I’d venture 6x pre-tax free cash flow, $70mm assuming a 35% tax rate, would bring the valuation to $420mm.  (This is less than 10x after tax).

On our newly minted 20.6mm shares, what are our shares then worth?  $20/share, almost a  triple from today’s price.

Now, you can quibble a little with my math or some of my assumptions, tell me they can’t possibly do it, whatever you like.  Regardless, I haven’t been very aggressive here.  But I’m not assuming growth, any major new sources of cash, a management miracle, or anything where I’d say “well, that’s a stretch.”  All I’m saying is Biglari continues the now-in-process turnaround and allows SNS to regain the former level of cash inflows and doesn’t blow it with stupid cash outflows, assumptions that would realistically allow for $45mm in free cash flow.    $420mm intrinsic value is still about than 2/3 of annual revenues, as a “sanity check” on our valuation.

The main point is that even if SNS isn’t ultimately worth $20/share, the company sure won’t be worth $7 1/2.  If management does anything above and beyond bringing costs and capex down to reasonable levels, well then CHOO CHOO;  the gravy train is comin’ down the tracks.  Margin of safety at its best..

Disclosure: Long SNS and WEST