Homework done: My toughts

[ExpectedValue]

On the other hand: Sardar has a brand that people seem to really like. Sears is pretty universally looked down upon -- i'm pretty sure their brand equity has fallen considerably in the past few years.

[Rabbitisrich]

True, but Lampert also let the brand suffer under his micro management and his inability to nurture a deep management roster. I'm entering pop psychology territory, but it seems that the obsessiveness and inflexibility that made Lampert a great investor also hurt him as an operator.

[ExpectedValue]

True, but Lampert also let the brand suffer under his micro management and his inability to nurture a deep management roster. I'm entering pop psychology territory, but it seems that the obsessiveness and inflexibility that made Lampert a great investor also hurt him as an operator.

 

Oh I definitely agree. One of the biggest failures I see with the Sears turnaround is the fact that Lampert does not seem to be able to attract the right types of talent to run the different business lines in the company. Warren Buffett has a great reputation as a value investor, but's also an amazing attractor of talent. He manages to consistently get some really amazing managers to run Berkshire's different businesses -- this is a quality that I think Lampert lacks and it inhibits the turnaround at Sears.

[Parsad]

The Sears brand isn't nearly as bad as you guys are making it.  The department store model is suffering, but the brand is actually the only thing keeping it alive.  Lampert's mistake was spending billions buying back tons of shares well above book and at a small discount to intrinsic value.  

 

The Steak'n Shake model is a successful one and one that can be replicated and expanded.  Sears is a business where Lampert needed to reduce the footprint by a hell of a lot more.  The fact that SNS isn't selling any other company-owned stores or existing franchises should tell you about the viability of their business.  Sears should have closed down another third of their stores over the last few years.  Cheers!

[Parsad]

Incidentally, the first thing Sardar did was get rid of virtually all of SNS's long-term debt and increase the amount of cash in the holding company.  Lampert could have used all that cash now, and Sears still has quite a bit of debt.  As far as operations are concerned, if anyone could turnaround a broken down restaurant business like Western Sizzlin and turn it into the cash cow that it is now, they've got some real operational business skills.  Cheers!

[ragnarisapirate]

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.

 

thanks for that link.

 

My favorite tidbit was this: "But then this new CEO came in and only focuses on the shareholders."

 

That makes me happy. =D

[MarioP]

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.

 

I think this will happen some day. When? At the time where Sardar will have more money then idea. This is the same problem all great investors have : so much ideas so little capital. To solve it you can issue shares or borrow money. Or you can have other peoples pay you to take there money. Just view the funds as a way to raise capital cheaply. And with WEST being fold in SnS some of them profit all the shareholders.

[Zorrofan]

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.

 

I think this will happen some day. When? At the time where Sardar will have more money then idea. This is the same problem all great investors have : so much ideas so little capital. To solve it you can issue shares or borrow money. Or you can have other peoples pay you to take there money. Just view the funds as a way to raise capital cheaply. And with WEST being fold in SnS some of them profit all the shareholders.

 

With all due respect the Lion Fund is not a way to raise cheap funds for SNS. It seems to me that the potential for a conflict of interest looms large if the Lion Fund is not either wound up or changes it's holding to SNS only. If Sardar is presented with an investment opportunity who gets it? SNS, the Lion Fund? WEB had his money invested in the partnership but then he wound it up and  moved his base of operations to BRK, he did not keep both running. If Sardar wants to emulate WEB, he must hold himself to the same high standards WEB does. While I do believe the Sardar will operate with integrity, based on Sanj's comments as I have never met Sardar myself, I recall the old saying that you must not only do good, but you must be seen to be doing good. IMHO the sooner Sardar & the Lion Fund issue is dealt with, showing a clear alignment of interests for all parties, the better.

 

cheers

Zorro

[txlaw]

It seems to me that the potential for a conflict of interest looms large if the Lion Fund is not either wound up or changes it's holding to SNS only. If Sardar is presented with an investment opportunity who gets it? SNS, the Lion Fund? WEB had his money invested in the partnership but then he wound it up and  moved his base of operations to BRK, he did not keep both running. If Sardar wants to emulate WEB, he must hold himself to the same high standards WEB does. While I do believe the Sardar will operate with integrity, based on Sanj's comments as I have never met Sardar myself, I recall the old saying that you must not only do good, but you must be seen to be doing good. IMHO the sooner Sardar & the Lion Fund issue is dealt with, showing a clear alignment of interests for all parties, the better.

 

cheers

Zorro

 

I've been combing through some of the archived board threads, and I found a very interesting post by a board member who attended a Western Sizzling AGM. 

 

Apparently, Biglari's vision with regards to WEST's investment operations was this:

 

-The holdco would invest in restaurant operations

-The Western Investments LP would invest in control situations only

-The Lion Fund would focus on passive investments and would also invest alongside the control investment vehicle owned by WEST.  The Lion Fund would remain separate and would NOT be sold to WEST. 

 

In other words, the primary asset management business that SNS investors now control is a Pershing Square-like vehicle, where asserting control is the fund's competitive advantage.  I think Biglari has mostly shown that he is very good at control situations where he can unlock the potential of a poorly run business.  It's harder to determine whether he is a good passive investor if you don't have access to his Lion Fund letters.  Yes, you can look at his WEST and SNS letters to try to figure out his investment process -- but it would be much better if you could confirm his words with his actions. 

 

While it would be nice to own a business like the Lion Fund, I'm okay with just owning the control investment vehicle.  I don't think that Biglari will misappropriate any control investments situations that should rightfully go to SNS.  The one thing I suppose you could worry about is that Biglari will take excessive risk in these control situations because he will have hedged his bets in the Lion Fund in such a way that all the risk remains primarily with SNS.  For example, if SNS invests in distressed debt with the Lion Fund investing alongside, he could possibly buy a mispriced CDS on the debt in the Lion Fund only.  This becomes a situation where the Lion Fund doesn't really lose much in case things go wrong, but SNS could lose quite a bit.  Would Biglari do this?  Probably not, but people who have actually spoken to him would know better.

 

It will be interesting to see how things unfold in the next two years.

[maxprogram]

Here is a snapshot of a spreadsheet I put together that shows some of the metrics of SNS you asked about:

http://www.futureblind.com/images/snsmetrics.PNG

Sardar has lowered prices, but traffic increases have more than made up for the lower margins.

 

What was the justification for the large pay increase at Western Sizzlin' given how small the company is?

 

I believe you mean Steak n Shake -- Sardar still receives no compensation from WEST (other than some director fees).

[Zorrofan]

Thanks for the comments txlaw. I look forward to seeing the results Sardar produces going forward.

 

cheers

 

 

It seems to me that the potential for a conflict of interest looms large if the Lion Fund is not either wound up or changes it's holding to SNS only. If Sardar is presented with an investment opportunity who gets it? SNS, the Lion Fund? WEB had his money invested in the partnership but then he wound it up and  moved his base of operations to BRK, he did not keep both running. If Sardar wants to emulate WEB, he must hold himself to the same high standards WEB does. While I do believe the Sardar will operate with integrity, based on Sanj's comments as I have never met Sardar myself, I recall the old saying that you must not only do good, but you must be seen to be doing good. IMHO the sooner Sardar & the Lion Fund issue is dealt with, showing a clear alignment of interests for all parties, the better.

 

cheers

Zorro

 

I've been combing through some of the archived board threads, and I found a very interesting post by a board member who attended a Western Sizzling AGM. 

 

Apparently, Biglari's vision with regards to WEST's investment operations was this:

 

-The holdco would invest in restaurant operations

-The Western Investments LP would invest in control situations only

-The Lion Fund would focus on passive investments and would also invest alongside the control investment vehicle owned by WEST.  The Lion Fund would remain separate and would NOT be sold to WEST. 

 

In other words, the primary asset management business that SNS investors now control is a Pershing Square-like vehicle, where asserting control is the fund's competitive advantage.  I think Biglari has mostly shown that he is very good at control situations where he can unlock the potential of a poorly run business.  It's harder to determine whether he is a good passive investor if you don't have access to his Lion Fund letters.  Yes, you can look at his WEST and SNS letters to try to figure out his investment process -- but it would be much better if you could confirm his words with his actions. 

 

While it would be nice to own a business like the Lion Fund, I'm okay with just owning the control investment vehicle.  I don't think that Biglari will misappropriate any control investments situations that should rightfully go to SNS.  The one thing I suppose you could worry about is that Biglari will take excessive risk in these control situations because he will have hedged his bets in the Lion Fund in such a way that all the risk remains primarily with SNS.  For example, if SNS invests in distressed debt with the Lion Fund investing alongside, he could possibly buy a mispriced CDS on the debt in the Lion Fund only.  This becomes a situation where the Lion Fund doesn't really lose much in case things go wrong, but SNS could lose quite a bit.  Would Biglari do this?  Probably not, but people who have actually spoken to him would know better.

 

It will be interesting to see how things unfold in the next two years.

[Zorrofan]

Nice work Max!

 

cheers

Zorro

[Parsad]

Great work Max!  Cheers!