STRZ - Star Buffet

[ScottHall]

This is going to be a quick one as I have to go soon.

 

This one is a post-reorg security. It is non-filing and current financials are not available.

 

The company went bankrupt during the Great Recession, and ended up getting a Plan of Reorganization approved where shareholders would retain 100% of the equity, and the company would pay down its debt through 2019. It is a restaurant business with 24 restaurants currently, plus four or five properties it leases out to other operators.

 

The debt has been substantially paid down, and ahead of schedule. The company has roughly $3.3 million still to pay down, and by my understanding, the remainder consists of a note to the CEO and his wife (about 2/3) and a claim from a company called Spirit Master Funding (about 1/3) that used to be a landlord of the company.

 

The company has not been able to agree with Spirit regarding the exact amount owed, and the issue may end up heading to litigation. This appears to be the only remaining obstacle for the company getting its final decree from the BK court. Once that happens, my guess is the company will resume filing with the SEC or otherwise updating shareholders with financial information. Over the longer term, the company could resume paying dividends.

 

The company appears to own at least 10 or 11 properties that I have been able to verify, and could own more. I have verified these properties from the bankruptcy docs, the leased property count, and cross-checking Texas property records with the company's website.

 

In the Disclosure Statement, the company estimated it would generate about $3.8 million of EBITDA this year with 33 restaurants, though it currently has only 24 (plus the properties it leases out, mentioned above).

 

At its trough, it got down to just 17 restaurants. Since then, it has acquired additional restaurants to the point that it now operates 24. Since the Chapter 11 case was resolved, it has paid off $6.7 million of debt. It also sold properties over this horizon, though, so it is not a 1-to-1 comparison for cash flow. Nevertheless, the company has remained profitable.

 

https://www.sec.gov/Archives/edgar/data/1043156/000143774914006855/ex99-1.htm

 

The company had 18 restaurants + leased properties at that time, and had paid down ~$4.7 million of debt at that point. It now has 24 restaurants + leased and has paid down ~$6.7 million of debt.

 

The current equity value is $4.3 million at $1.35 per share. The stock is very illiquid.

 

This one is more of a mosaic approach as traditional financials are not currently available. We do have the post-petition quarterly reports from the bankruptcy court that track the company's progress at paying down its debt. The company may begin paying dividends again once the rest of its liabilities are settled, as it used to pay substantial dividends from its operating cash flow. Or it may opt to use its cash flow to continue rebuilding unit count, who knows.

 

I have created a Google Drive with the bankruptcy filings in them for those who are interested in hairier situations. If anyone else has done or wants to do more scuttlebutt on this than I have, please feel free to share your research here.

 

I will be out for the rest of the day. I do own shares.

 

https://drive.google.com/folderview?id=0BxTZsm9gsPwEZ3Bvd05iNjgtSFk&usp=sharing

[Liberty]

Thanks for sharing, I was curious about it after you mentioned it on Twitter.

 

Cheers!

[LongTermView]

Yeah, the tweet got my attention as well.

[ScottHall]

Star Buffet settled with the last remaining claimant for $900k, and the final decree has been issued. The terms are that Star will pay the claim in equal monthly installments over a period of five years, at a 5% interest rate. Star can prepay in any amount it wants at any time, however.

 

This and the note to the CEO are all the debt that remains to my understanding. My guess is that once the last of it is paid, the company will resume paying dividends, but I don't know this for a fact.

 

This is a middling business at best but the stock does appear to be very cheap, at least to my eyes.

settlement.pdf

settlementapproval.pdf

finaldecree.pdf

[DTEJD1997]

Scott:

 

Thank you very much for sharing your work on this.

 

I agree, this is a middling business at best...BUT if the company can catch a break, AND management works hard, this indeed very cheap.

 

Hopefully, they will start up a dividend again.  If they do re-start a dividend (also assuming it is a non-negligible amount), then the stock might pop up a bit.  Combine that with a good year of earnings and a few more locations and you've got the recipe for a good return...

[DooDiligence]

Anyone read Management's Report on Internal Control over Financial Reporting in the 2015 10K & the list of material weaknesses?

 

That alone gives me pause given the complex nature of the business & the fact that the CEO has been in charge of finance at other much larger restaurant operations before (that may partially explain the troubles which led to bancruptcy.)

 

He was at Denny's during a very difficult time (not that this matters concerning Star...)

 

Maybe he just wears too many hats here?

 

Why doesn't he go with a more focused concept?

 

I remember visiting a Barnhills in my city (not sure if he ran it) & at first it was OK but it quickly became a trough (I quit going) not sure how much later but it closed its doors & remains vacant with a major Naval Air base about 2 miles away.

 

A proper evaluation would require visiting one or more of the different locations.

 

Their IR website has links to customer satisfaction surveys (do they get feedback in store?) (I haven't found any survey results but would think it'd be important.)

 

Looks like a soggy cigar butt that'll need a lot of fire to get re-lit...

[ScottHall]

Anyone read Management's Report on Internal Control over Financial Reporting in the 2015 10K & the list of material weaknesses?

 

That alone gives me pause given the complex nature of the business & the fact that the CEO has been in charge of finance at other much larger restaurant operations before (that may partially explain the troubles which led to bancruptcy.)

 

He was at Denny's during a very difficult time (not that this matters concerning Star...)

 

Maybe he just wears too many hats here?

 

Why doesn't he go with a more focused concept?

 

I remember visiting a Barnhills in my city (not sure if he ran it) & at first it was OK but it quickly became a trough (I quit going) not sure how much later but it closed its doors & remains vacant with a major Naval Air base about 2 miles away.

 

A proper evaluation would require visiting one or more of the different locations.

 

Their IR website has links to customer satisfaction surveys (do they get feedback in store?) (I haven't found any survey results but would think it'd be important.)

 

Looks like a soggy cigar butt that'll need a lot of fire to get re-lit...

 

You won't hear an argument from me. This is definitely a cigar butt; the reason stocks get this (at least superficially) cheap is because there's a ton of hair on them. I doubt this stock will ever trade at what a DCF would say it should, but if they keep paying down the debt and resume a small dividend I think the gap could close a bit.

 

The flagship restaurant appears to be Casa Bonita in Denver, if anyone in the region wants to visit it. Fun piece of trivia: it was central to the plot of an episode of South Park once.

[DooDiligence]

Anyone read Management's Report on Internal Control over Financial Reporting in the 2015 10K & the list of material weaknesses?

 

That alone gives me pause given the complex nature of the business & the fact that the CEO has been in charge of finance at other much larger restaurant operations before (that may partially explain the troubles which led to bancruptcy.)

 

He was at Denny's during a very difficult time (not that this matters concerning Star...)

 

Maybe he just wears too many hats here?

 

Why doesn't he go with a more focused concept?

 

I remember visiting a Barnhills in my city (not sure if he ran it) & at first it was OK but it quickly became a trough (I quit going) not sure how much later but it closed its doors & remains vacant with a major Naval Air base about 2 miles away.

 

A proper evaluation would require visiting one or more of the different locations.

 

Their IR website has links to customer satisfaction surveys (do they get feedback in store?) (I haven't found any survey results but would think it'd be important.)

 

Looks like a soggy cigar butt that'll need a lot of fire to get re-lit...

 

You won't hear an argument from me. This is definitely a cigar butt; the reason stocks get this (at least superficially) cheap is because there's a ton of hair on them. I doubt this stock will ever trade at what a DCF would say it should, but if they keep paying down the debt and resume a small dividend I think the gap could close a bit.

 

The flagship restaurant appears to be Casa Bonita in Denver, if anyone in the region wants to visit it. Fun piece of trivia: it was central to the plot of an episode of South Park once.

 

Thanks for being gentle in your reply. (I'm still trying to learn how to look at these kinds of issues...)

 

If it'd been featured on Family Guy I'd be a ton more excited about it!

[ScottHall]

As results have been coming out, I've gotten less and less interested in this stock and have been selling. I sold off the last of my position today; sold the rest previously at $1.20 - $1.30. Operating leverage could be killer here either way and my other restaurant stock has done much better and more interesting reinvestment story.

 

I am out.

[Iceman]

Looks like they had a pretty good quarter.  Got food costs under control.  EBITDA increased 100% YoY to $400k and EPS up to $0.04.  Not saying you can do it automatically, but in the past the quarters have been pretty steady, enabling you to annualize.  In this case, $1.6m of EBITDA at 6.5x less the debt spits out a stock price of about $1.70.  That's also only 10.5x annualized EPS.  With the owned RE also supporting the valuation, seems like it's still an attractive risk/reward (albeit a pretty boring one with minimal near-term catalysts).

[ScottHall]

Looks like they had a pretty good quarter.  Got food costs under control.  EBITDA increased 100% YoY to $400k and EPS up to $0.04.  Not saying you can do it automatically, but in the past the quarters have been pretty steady, enabling you to annualize.  In this case, $1.6m of EBITDA at 6.5x less the debt spits out a stock price of about $1.70.  That's also only 10.5x annualized EPS.  With the owned RE also supporting the valuation, seems like it's still an attractive risk/reward (albeit a pretty boring one with minimal near-term catalysts).

 

Yeah, I can definitely see the case for the upside. I just have found more interesting opportunities. Including another OTC co I haven't seen covered ANYWHERE I think could be worth 3-4x with seemingly great assets.  Another mosaic case, as I don't have recent financials, but much higher quality assets.

[DTEJD1997]

Hey all:

 

There is certainly potential for STRZ to go higher, especially after I sold the vast majority of my shares.  Perhaps that is a contrary indicator?

 

For all those that think STRZ might be a good company/investment...I would not get my hopes up.

 

If you go through their filings, you will see related party transactions....unlike in the past, they have no intention to pay a dividend in the foreseeable future.

 

While they have real estate holdings, and that is certainly good....a lot of their restaurants are just "dogs".  There is no rhyme or reason to them other than they are a greasy spoon and serve food.  Yelp! is very enlightening to this.

 

It appears that management's plan is now to simply run restaurants and expand modestly.  There is no/little concern about earnings, dividends, food quality and so on.

 

With the exit from bankruptcy, you would think that they could STAY reasonably profitable...but I don't think that is their plan.

 

These guys have destroyed a TREMENDOUS amount of value over the years. 

 

I don't have any confidence in them anymore.  Why take the risk when there are other shareholder friendly/aligned restaurant companies?  Places that have quality reputation/product...

 

Oh well, best of luck!

[Iceman]

 

If you go through their filings, you will see related party transactions....unlike in the past, they have no intention to pay a dividend in the foreseeable future.

 

While they have real estate holdings, and that is certainly good....a lot of their restaurants are just "dogs".  There is no rhyme or reason to them other than they are a greasy spoon and serve food.  Yelp! is very enlightening to this.

 

It appears that management's plan is now to simply run restaurants and expand modestly.  There is no/little concern about earnings, dividends, food quality and so on.

 

 

This makes no sense to me.  Do you have any evidence to support a lack of concern about earnings?  Yes, these are low quality restaurants.  Investors can still make money buying them below intrinsic value/earnings power.  Why would they pay a dividend?  Other than the fact that the restaurants are at a low price point, there is no evidence of "low food quality".  Do you have any commentary on valuation?

 

Yes, they have related party debt.  It is at market rates and subordinated to bank debt.  The company is also not over-levered.  There is a path toward paying down debt through cash flow from operations.

 

What should they be doing other than "simply run restaurants and expand modestly"?  You don't have to marry this thing but I see a compelling reason to date it.

[DTEJD1997]

 

If you go through their filings, you will see related party transactions....unlike in the past, they have no intention to pay a dividend in the foreseeable future.

 

While they have real estate holdings, and that is certainly good....a lot of their restaurants are just "dogs".  There is no rhyme or reason to them other than they are a greasy spoon and serve food.  Yelp! is very enlightening to this.

 

It appears that management's plan is now to simply run restaurants and expand modestly.  There is no/little concern about earnings, dividends, food quality and so on.

 

 

This makes no sense to me.  Do you have any evidence to support a lack of concern about earnings?  Yes, these are low quality restaurants.  Investors can still make money buying them below intrinsic value/earnings power.  Why would they pay a dividend?  Other than the fact that the restaurants are at a low price point, there is no evidence of "low food quality".  Do you have any commentary on valuation?

 

Yes, they have related party debt.  It is at market rates and subordinated to bank debt.  The company is also not over-levered.  There is a path toward paying down debt through cash flow from operations.

 

What should they be doing other than "simply run restaurants and expand modestly"?  You don't have to marry this thing but I see a compelling reason to date it.

I've watched and owned this thing off & on for 10+ years.  I've questioned insiders & have some knowledge of the company...

 

Yes, there is prima facie evidence of lack of concern re: earnings.  They lost money in several of the latest quarters AFTER EXITING BANKRUPTCY. The sales, earnings & cash flow is all over the map, sometimes they make it sometimes they lose it....

 

When they exited bankruptcy, they had very little debt and they should keep it that way...instead they are piling on debt, buying greasy spoons in the middle of nowhere...what kind of strategy is that?  What kind of synergy do they get?

 

They would pay a dividend to return earnings & cash flow to the owners of the company.  They did this for years.  Not any more.

 

The track record on acquisitions is mixed at BEST.  They bought a buffet chain (Barnhills?) out of bankruptcy...tons of capital & time wasted on that.  They lost money bigly on that. 

 

There is nothing wrong with buying or opening restaurants in a slow & steady nature...but I want them to be profitable and CONTINUE to be profitable.  Pay a dividend, fund growth out of cash flow OR very, very modest debt levels.  WASH RINSE REPEAT.  I want the stock price to go UP over long periods of time, not going down.

 

I want professional management doing the right thing...I don't want related party transactions...

 

I want a disciplined operation that has some synergy & "better than average" operations...not just going around buying greasy spoons for the sake of owning a restaurant.

 

I don't see any clear strategy from management other than we own & operate restaurants.  Sometimes we make money, but mostly we lose it & destroy value.

 

How big of a discount to intrinsic value do you need if management is not very good?  How big a discount do you need if they just run stuff to have a job and have no focus or strategy?  I would need a pretty darn big one...Nowhere near what it is trading for now.

 

Hey, maybe I'm wrong...but I would not bet my money on it.  That is why I sold 90%+ of my position and will be moving on.

 

Good luck to every one else.