Homework done: My toughts

[beerbaron]

Ok, here are my toughts on SNS after looking deeper at this company.

 

The business

I just can't evaluate the business on the Internet. Seems to be in the Harvey's type of price point. Good prospect for the next few year but I would see it as a stable asset rather then a growing asset. As for the investment aspect I'll account it in the valuation later.

 

USD based asset, inflation foreseeable. Restaurant are not notorious for being able to pass inflation to their customers easily.

 

The numbers

My estimate on owner's earnings are about 40M for this year. I find that a CapEx of 5M per year is quite low if you consider the company owns 416 restaurants. That gives about 12K per restaurant per year... on a 1.5M restaurant! I would consider the long term maintenance CapEx to a minimum of 8M a year.

 

Owners earnings:

41.1 Op CF

-8 CapEx

-7.5 Inv and Receivables

+5.2 Dep

--------

30.8 for 3 qtr x 4/3 = 41M

 

Discounted Net Asset value:

82.6 Current Assets

+300 Net Property and equip

+7 Goodwill

-224 Liabilities

--------

165.6

 

Owner's Earning/Share

7.9

 

Optimist ROE of 15% (5% discount) 10 years

Owner Earnings = 106M

Estimated Cap (15x) = 1595M

 

Realistic ROE of 10% (5% discount) 10 years

Owner earnings = 66.7M

Estimated Cap (12x) = 800.4

 

Bad ROE of 5% (5% discount) 10 years

Owner earnings = 41M

Estimated Cap (9x) = 369M

 

The Manager

 

Sardar seems good at reducing costs and optimizing profits. I like it.

He eliminated LT debt. I like it.

Possibly under estimates CapEx. Keep an eye.

He has success into restaurant business but has not stated he will stay in his niche. Possible problem here.

10 Year experience running hedge fund, very successful. Private data, I'll believe it when I see it.

 

Conclusion

I don't have enough track record of Sardar to value his skills. The company has good potential and healthy finances. It's definitely worth keeping a look at but I would let the kid run a little bit for a while. At least until he does it's next financial move...

 

BeerBaron

[ragnarisapirate]

While $5 mil is a bit low for cap ex in the future, a huge amount of the restaurants are pretty new, thus, needing fewer immediate repairs.

 

 

[Parsad]

The business

I just can't evaluate the business on the Internet. Seems to be in the Harvey's type of price point. Good prospect for the next few year but I would see it as a stable asset rather then a growing asset.

 

How can someone evaluate Berkshire Hathaway or Fairfax Financial on the internet, which are very, very complex businesses, yet a simple restaurant business cannot be analyzed?  There is absolutely no reason why you cannot value a business simply by reading the last three years of 10-K's.  I invested in Steak'n Shake before ever visiting a location, yet visiting one had no impact on my decision to invest or not to invest.  I just enjoyed eating the burger!

 

I find that a CapEx of 5M per year is quite low if you consider the company owns 416 restaurants.

 

Capex isn't fixed permanently.  Sardar just said that he sees it at that level currently.  As revenues grow and costs relative to revenues remain level, he will be able to allocate slightly higher amounts to capex to maintain stores and rejuvenate older ones.  Also, most of the future growth will come from franchisees who will foot the bill for their own stores, including all future maintenance.

 

The Manager

 

Sardar seems good at reducing costs and optimizing profits. I like it.

He eliminated LT debt. I like it.

Possibly under estimates CapEx. Keep an eye.

He has success into restaurant business but has not stated he will stay in his niche. Possible problem here.

10 Year experience running hedge fund, very successful. Private data, I'll believe it when I see it.

 

Conclusion

I don't have enough track record of Sardar to value his skills. The company has good potential and healthy finances. It's definitely worth keeping a look at but I would let the kid run a little bit for a while. At least until he does it's next financial move...

 

This is what I always hear about virtually every successful manager.  They said the same thing about Buffett, the same thing about the guys at Google, the same thing about Prem, and now the same thing about Sardar.  By the time people realize what they have, they will have forgone considerable gains.  Cheers!

 

 

[arbitragr]

doesn't look cheap ... imo

[Parsad]

It's not cheap.  Cheap was at $5 when people were afraid they may break their convenants.  At $11.50 it's a little closer to current fair value.  The problem is that Sardar can do the same thing with overvalued stock that Buffett and Watsa did.  He can use it to acquire cheaper companies and more intrinsic value relative to what they are giving up.  There will be periods when the stock will be cheaper than it is now, but they probably won't be as often as people like.  Cheers! 

[kyleholmes]

The best of advice I ever got

 

Eddie Lampert

 

Almost every weekend when I was 7,8,9, 10 years old, my father and I would toss a football in the year or play basketball in the driveway. When we played football, he'd say, "Go out ten steps. Turn to your right." The ball would reach me just before I turned, and it would hit me right in the chest. Why would my dad do this? He told me, "If I waited for you to turn, you and the defensive players would have an equal chance to get the ball. Your opportunity is gone."

 

This idea of anticipaction is key to investing and to business generall. You can't wait for an opportunity to become obvious. You have to think, " Here's what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?"

 

People can read into that anyway they want, but I am in agreement with Sanjeev based on "What Sardar has done under certain circumstances" starting  back when he started the Lion Fund to today...... some (certain jockey investments) investments have more optionality than most people like. Saying  "Well, the managers smart, owns alot of stock himself(incentives aligned), and is someone we like, trust, and admire, but I really don't know whats going to happen!" is not something most people like for there elaborate spreadsheets! Obviously it's not just a qualitative investment, it also has to be cheap based on other valuation frameworks, but management is something that is part of the valuation process.. sometimes a big part!... In my mind (from experience!) there is a big difference between good management with incentives aligned and bad management collecting a pay cheque and investing there money elsewhere!

 

"You don’t have to predict the future if you know the company has the assets and management to do well in difficult times." -Bruce Berkowitz

 

 

 

 

[txlaw]

I agree with Sanjeev and Kyle.

 

Although I would like to see the Lion Fund letters to really make a proper assessment of how Biglari can do going forward (anyone know where to find them?), I believe I can tell based on interviews, letters, and Biglari's investment actions that he should easily return 10% on reinvested funds going forward.  But I'd be extremely disappointed if he doesn't do much better than that given the current environment.

 

As for the current price, I would say that SNS is trading at a better than fair price, and that's only if you look at the current state of the business.  This is a low risk, potentially high return situation, or a heads I win a lot, tails I don't lose much (if any at all) situation, as Mohnish Pabrai would say. 

 

As an investor in SNS, you get:

 

-Restaurant businesses that now generate a good amount of free cash and that will generate even more through restaurant growth and conversion to an asset-lite business

-Valuable real estate, including properties in Texas that will be worth much more, I believe, in the next 20 years

-Asset management businesses (Mustang Capital, Western Investments, Western Real Estate, and possibly the Lion Fund in the future) in a prosperous state that has a large number of potential customers.  AUM could grow substantially if people act rationally.

-ITEX (possibly a dud; I don't care for this investment actually)

 

There is a very good risk/reward situation here.  Time will tell if I'm right, of course. 

 

Note that I own SNS, but it's a pretty small percentage of my portfolio at the moment.  I plan on increasing it over time if Biglari makes the right moves.

[beerbaron]

I agree with you that by waiting for Sardar to show more track record I'm exposing for a cost of opportunity. But there is always a new hot shot in town that seems to be doing things better then other. I don't know how many of those hot shots actually kept the pace for a long time but my guess is the list is short. I do like what Sardar did with the company, he putted a hold on growth to grow returns, that is music to my ears.

 

He implicates in the management of companies he buys, that is it's way to increase the business value and I find it's even better then pure simple money management. He has proven that he is good at restructuring restaurants, so I'll be in in it's next purchase if it's a restaurant or a similar business. I know he's good at it. But if he goes from restaurants to semiconductor I would be really afraid.

 

Buffett invested heavily in companies he fully understood, he had lots of experience in the banking/insurance and newspaper industry, but if I remember correctly he did not have lots of experience in textile and he was not really successfull releasing the value of Berkshire's Textile, there was headwind in this industry and if he had more experience with textile he would have realized it sooner and chosen a better investment vehicle. This is from it's own words.

 

So to summarize, Sardar is good in restaurants YES. Sardar is good in all business (Not likely).

 

BeerBaron

[dcollon]

This post isn't directed at any one member of this board.

 

I think the thing that I find most compelling about Sardar, and other managers like him, is his philosophy and process.  I think many people spend too much time focusing on the outcome and not the process.  Investors/Managers who are successful over time have a process that they stick to and that works.  Although there are years when it won't they don't let the outcome dictate the process.  

 

Whether you have the Lion Fund returns or not shouldn't matter.  That is simply past performance.  If you are investing in SNS, you are investing in the restuarant business, but also Sardar's investment process.  There is plenty of material around to allow anyone to understand how Sardar thinks and invests.  If you agree with it great, if not move on to another manager who fits more with your way of investing.

 

 

[Guest kawikaho]

ITEX sort of reminds me of this other company I heard about 5 years ago called Prosper.  It has a pretty interesting business model in that their loan marketplace matches individual lenders with individuals needing loans.  I just checked Prosper's website and they have definitely grown and blossomed.  Pretty interesting.  I hope they IPO someday.  I'd like to see their SEC filing.  ITEX, on the other hand, has an oddball business model.  I don't care for it much either, and I'm not sure it will work.  But, who knows, Prosper did alot better than I expected.

[dual_bid]

They said the same thing about Buffett, the same thing about the guys at Google, the same thing about Prem, and now the same thing about Sardar.  By the time people realize what they have, they will have forgone considerable gains.  Cheers!

 

I think Buffett's reputation was evident since the early 80s... so you might be wrong here.

 

As for Google, chances are not that good to foresee "a Google" (or a Microsoft, etc.)

 

9 out of 10 times you get in early - thinking it's the next GOOG, MSFT, or Buffett - you get in wrong.

 

On the other hand, in truly great businesses/situations, you have enough time/opportunities to get in... e.g. WeB getting into KO ~100 years after formation.

 

Bottom line, it's a question of character... what do you prefer... loss of capital or loss of opportunity. It seems people low on capital are generally willing to favor the first and People high on capital prefer the last.

 

I think you can make tons of money even when getting in late, if you are right about the business/opportunity and have some patience.

 

p.s. Parsad, it's interesting, what brings you to place Sardar on the same theoretical level of WeB, Prem, Google, etc.?

[Parsad]

I think Buffett's reputation was evident since the early 80s... so you might be wrong here.

 

I'm talking about Buffett when he simplified his and Munger's holdings and then focused on Berkshire.  People were still discrediting his abilities...six-sigma event...a flash in the pan.

 

As for Google, chances are not that good to foresee "a Google" (or a Microsoft, etc.)

 

9 out of 10 times you get in early - thinking it's the next GOOG, MSFT, or Buffett - you get in wrong.

 

Most times you would be correct.  This one, I think virtually any shareholder of Berkshire had a heads-up.  Google before their IPO said they were going to steal some ideas from Buffett and Berkshire.  Buffett discussed this briefly in response to a question at the AGM just before Google's IPO.  I was there, as were thousands of other Buffett disciples.  We all thought those guys were a flash in the pan!  A couple of wannabes!  They even sent Buffett a letter and a copy of their owner's principles.

 

On the other hand, in truly great businesses/situations, you have enough time/opportunities to get in... e.g. WeB getting into KO ~100 years after formation.

 

That's true.  Although Buffett has often mentioned that one of his greatest mistakes ever was not buying Walmart earlier.  He is not going to get the same return today by buying Walmart at $45/share.

 

Bottom line, it's a question of character... what do you prefer... loss of capital or loss of opportunity. It seems people low on capital are generally willing to favor the first and People high on capital prefer the last.

 

I think you can make tons of money even when getting in late, if you are right about the business/opportunity and have some patience.

 

Our average cost is less than $4 per share.  I'm assuming that even those high on capital apparently missed this one.  You won't get SNS at $4 per share ever again.

 

p.s. Parsad, it's interesting, what brings you to place Sardar on the same theoretical level of WeB, Prem, Google, etc.?

 

He has a head start on Prem by about seven years, and he's stealing the Buffett playbook.  I know alot of young investment managers...lots!  No one that I know, including myself (and I'm not young), has the same investment and operational skills Sardar has.  Many have one or the other, but I have yet to meet someone who is exceptionally capable at both at that age.  Cheers!   

 

[dual_bid]

Our average cost is less than $4 per share.  You won't get SNS at $4 per share ever again.

Question, if you may: Average cost of <$4 means you aggregated most of the position in less than 2 weeks in 11/2008. Would you say you were more lucky or more skillful?

[Parsad]

Question, if you may: Average cost of <$4 means you aggregated most of the position in less than 2 weeks in 11/2008. Would you say you were more lucky or more skillful?

 

Very skillful.  We purchased hundreds of $2.50 call options six months out because we estimated that Sardar would quickly implement cost savings and asset sales.  He exceeded our expectations, as we did not expect him to add so much cash to the balance sheet in such a short period of time.  The increased traffic and sales were icing on the cake, and those numbers also exceeded our estimates by quite a bit.  Cheers!

[netnet]

Buffett invested heavily in companies he fully understood, he had lots of experience in the banking/insurance and newspaper industry, but if I remember correctly he did not have lots of experience in textile and he was not really successfull releasing the value of Berkshire's Textile, there was headwind in this industry and if he had more experience with textile he would have realized it sooner and chosen a better investment vehicle. This is from it's own words.

 

Buffett started buying into BRK when he was still practicing the cigar butt style of investing.  He never thought he was a textile expert.  he just thought that he had an asset rich company which could redeploy cash.

 

Sardar is good in all business (Not likely).

Not even Buffett is good in all business; the genius is in knowing your circle of competence and enlarging it.

 

Dcollon:  excellent point-- focus on the process not the outcome.

 

[netnet]

 

 

He has a head start on Prem by about seven years, and he's stealing the Buffett playbook.  I know alot of young investment managers...lots!  No one that I know, including myself (and I'm not young), has the same investment and operational skills Sardar has.  Many have one or the other, but I have yet to meet someone who is exceptionally capable at both at that age.  Cheers!   

 

 

Wow,  that's an incredible recommendation.  I have read his letters and looked at his results, and I think he is the real deal, but I'm going to have to think about increasing my position, given your views.  And frankly buying at 5 or 15 for a future of 20% compounded is almost, but not quite immaterial.

 

So what do you think elevates him to such a degree?  Is it the combination of investment, operational and ethics? (Can you bottle it and spare a drop for me ;)?)  Seriously though, that is quite a recommendation.

[EricSchleien]

Why did you multiply by 4/3?

[DCG]

One of my main questions about this company is how Sardar plans on using free cash flow toward new investments compared to paying down debt. Anyone know what the interest rate on their debt is?

 

I've never been to a Steak and Shake in person, so only go by reviews. I like the potential of Sardar more than I like the potential of the Steak and Shake franchise. They are in an industry with intense competition, and I prefer to see true revenue growth related to sales than just based on cutbacks. One other thing I like to look at when evaluating companies is employee satisfaction. While I haven't had the opportunity to speak to any employees directly, employees who've posted on Glassdoor.com have a lot of negative things to say about the current management (Read that here: http://www.glassdoor.com/Reviews/Steak-n-Shake-Reviews-E1296.htm). Granted, I think it's also important to acknowledge that since employees have had to take pay cuts over the last year in the cost-cutting efforts, its only natural for them to be disgruntled about that. Also, upset employees tend to have more of a tendency to post reviews on sites like that than happy ones. Happy employees usually equals happy customers though, so these comments, while they are an extremely small sample of their total employees, concern me a bit.

 

I do like the company becoming a holding company, but it's still unclear exactly what Sardar's plans are for the future (and I think any comparisons to a company like Berkshire are very premature, as the business model of BRK was largely built on using float from the insurance business toward investments; SRS will not have that same ability). One other question: What is Sardar's current role with his hedge fund and how is his time divided among that and SNS? Keep in mind that people are often quick to try to find the 'next Buffett' and most of the time they do not pan out. Look at Eddie Lampert. Him running both his hedge fund and Sears/K-Mart has had bad results for both his fund holders to Sears Holdings shareholders.

 

When looking at companies like SNS, Buffett's quote "When management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact" comes to mind.

[Parsad]

Wow,  that's an incredible recommendation.  I have read his letters and looked at his results, and I think he is the real deal, but I'm going to have to think about increasing my position, given your views.  And frankly buying at 5 or 15 for a future of 20% compounded is almost, but not quite immaterial.

 

So what do you think elevates him to such a degree?  Is it the combination of investment, operational and ethics? (Can you bottle it and spare a drop for me ?)  Seriously though, that is quite a recommendation.

 

I have no idea!  But it's in there...gobs of it.  I probably know Prem better than anyone on this board that isn't directly related to Hamblin-Watsa, a friend for 20 years, or his family.  But it's in him as well!  I can't quantify it...but it is certainly a combination of skill, confidence, ethics, integrity, intellect, determination and leadership.  Think Tiger Wood's making that 40-foot putt to win the Masters by one stroke...how do you quantify that?  Luck or skill?  If he did it once...luck.  If he did it fourteen times?  

 

And before someone decides to misread my post...no, I'm not saying Sardar is on the same level as Woods, Buffett or Prem.  Just that he seems to share some very important traits.  They never tip their hands.  They don't need second opinions if they believe their analysis is correct (a big problem with alot of investment managers and private investors - they lack conviction).  Generally they are great capital allocators and smart businessmen.  They learn quickly.  They rarely make the same mistake again.  They act quickly and efficiently.  They are fiercely loyal to those that share the same principles and work hard for them.  They let things go, but never forget.  Their compensation is almost always in alignment with shareholder interests.  I'm probably missing many other things.

 

I'm in no way, shape or form advocating that anyone pay $11.50 or more for Steak'n Shake, nor what your annualized return will be going forward.  I can just tell you that it won't ever hit $4-$5 again.  Cheers!    

[Parsad]

I do like the company becoming a holding company, but it's still unclear exactly what Sardar's plans are for the future. One other question: What is Sardar's current role with his hedge fund and how is his time divided among that and SNS? Keep in mind that people are often quick to try to find the 'next Buffett' and most of the time they do not pan out. Look at Eddie Lampert. Him running both his hedge fund and Sears/K-Mart has had bad results for both his fund holders to Sears Holdings shareholders.

 

When looking at companies like SNS, Buffett's quote "When management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact" comes to mind.

 

I don't think the book is completely out yet on Lampert.  And I was quite surprised Mohnish is negative on Sears right now.  I think they will be in tough with commercial property prices and leases over the next couple of years, and the department store business is dying a slow death, but he's smart enough to work his way through this.  It wasn't worth the $200 per share people were paying in the past, but it certainly was worth more than the $30 per share people were selling at a few months ago.  The story lies somewhere in the middle.  Cheers!

[oldye]

I can just tell you that it won't ever hit $4-$5 again.  Cheers!

 

You could of said the same thing about Fairfax.more so I think than sns, over the last 4 years and been perfectly rational but last two summers you could have picked up shares for sub 220.  It doesn't make any sense but no one knows what some other idiot will sell their shares for.

 

 

 

[DCG]

 

I don't think the book is completely out yet on Lampert.  And I was quite surprised Mohnish is negative on Sears right now.  I think they will be in tough with commercial property prices and leases over the next couple of years, and the department store business is dying a slow death, but he's smart enough to work his way through this.  It wasn't worth the $200 per share people were paying in the past, but it certainly was worth more than the $30 per share people were selling at a few months ago.  The story lies somewhere in the middle.  Cheers!

 

The main thing that relates to Lampert is how Sardar will do handling both a hedge fund and a restaurant business at the same time.

 

Sears & K-Mart are terrible businesses that Lampert paid a cheap price for, largely as a real estate play, but real estate is only worth what you can sell it for.

[Parsad]

You could of said the same thing about Fairfax.more so I think than sns, over the last 4 years and been perfectly rational but last two summers you could have picked up shares for sub 220.  It doesn't make any sense but no one knows what some other idiot will sell their shares for.

 

I would say SNS at $4-5, was comparable to the period when we had the opportunity to buy Fairfax sub $100 in 2003.  It was brief and won't happen ever again.  Alot of us on the old board said that at the time.  I believe "Lotsofcoke" still holds his shares that he purchased for his children's trusts at $58 back then, along with the sub $4 shares in Marvel he bought...another company that you now definitely won't see at those levels, since they've been acquired by Disney for what would be about $52/share today.  Cheers!  

[Zorrofan]

To add my $0.02 to the discussion. At this point investing in SNS is a "jockey" bet pure and simple. A belief - like Sanj has - that Sardar is the real deal. IMHO he has shown potential, but only time will truly tell. I would like to see the Lion fund either wound up or have it only hold SNS stock, so that SNS becomes Sardars sole investment vehicle - ala WEB and BRK. IMHO this aligns everyones interests and leaves him free to concentrate on making everyone happy.

 

Sanj - as for the comment SNS will never hit sub $5 again, the market may yet have a correction if this is a bear market rally.  :-\  Only time will tell!

 

cheers

Zorro

 

[Rabbitisrich]

To add my $0.01, the attributes required to forestall bankruptcy and to restore the competitive base of a company sometimes differ from the traits you need to run a successful company.

 

In the first case, you want someone to cut costs, improve the balance sheet, and renegotiate credit positions. In other words, at the brink of bankruptcy, a solid CFO can be more helpful than a similarly gifted CEO. But that financial savvy doesn't automatically translate to operations as Bob Nardelli and Eddie Lampert demonstrate. As previous posters have mentioned, margins have improved due to cost control and to lower commodity prices. I'm being stingy here, but even the same-store sales improvement benefits from comparison to the previous management's unwillingness to lower prices. I could get credit for Ambercrombie and Fitch's SSS increase if I lowered prices by 20%.

 

My only point is that we've seen some good things from Sardar Biglari. But we also saw some incredible things from Eddie Lampert at various points. It's always healthy to remember that people can succeed in some areas, and disappoint in others.