Received My SNS Annual Report Today!

[Parsad]

Finally got my Steak'n Shake 2009 Annual Report.  I get three copies, since we hold SNS in both our funds and our corporate account...12 free coupons for shakes!  ;D 

 

Look at that pristine balance sheet at year-end 2009...$51M in cash and virtually no debt relative to equity.  Interestingly enough, Steak'n Shake in the first 12 weeks of 2010 or the last fiscal quarter, earned almost the same amount in net income that it earned in all of 2009...$5,998M in 2009 and $5,447M in 1st Q 2010...on pace for about $24M in net earnings for 2010! 

 

It is humming along, a terrific cash cow now, with I would think about $70M in cash and another $9M in investments.  Imagine if Sardar gets 15% annually on that pile...about another $8M after tax income...$32M total net income or around $22/share!  And the cash keeps rolling in quarter after quarter. 

 

I don't like the name change, but I love everything else about this business and where he's going!  Cheers! 

[Ballinvarosig Investors]

Finally got my Steak'n Shake 2009 Annual Report.  I get three copies, since we hold SNS in both our funds and our corporate account...12 free coupons for shakes!  ;D 

 

Look at that pristine balance sheet at year-end 2009...$51M in cash and virtually no debt relative to equity.  Interestingly enough, Steak'n Shake in the first 12 weeks of 2010 or the last fiscal quarter, earned almost the same amount in net income that it earned in all of 2009...$5,998M in 2009 and $5,447M in 1st Q 2010...on pace for about $24M in net earnings for 2010! 

 

It is humming along, a terrific cash cow now, with I would think about $70M in cash and another $9M in investments.  Imagine if Sardar gets 15% annually on that pile...about another $8M after tax income...$32M total net income or around $22/share!  And the cash keeps rolling in quarter after quarter. 

 

I don't like the name change, but I love everything else about this business and where he's going!  Cheers! 

I won't be at there, but I think it would be amusing if someone asked whether Sardar will have a mobile Steak N' Shake burger stand at the annual shareholder meeting ;D

[Parsad]

That's actually not a bad idea.  Not necessarily for the AGM, but they could use one of those things at the Superbowl, etc.  I know Hooters is setting up one around the World Cup venue in South Africa.  That thing is the size of a semi-trailer and has a full restaurant-bar for about 200-300 people, plus a big-screen tv and dance stage.  Cheers!

[OracleofCarolina]

Speaking of hooters...

Restaurant chain Hooters, famous for scantily clad waitresses serving wings and beer, is apparently looking for prospective buyers, the New York Post Reports. Although an asking price couldn't be learned, it might go for as much as $250 Million:

 

Some analysts estimate the chain might fetch more than $250 million despite the bumpy business climate. Hooters' 450 owned and franchised restaurants, which are as far-flung as Australia and China, racked up more than $1 billion in sales in 2008, according to Technomic, a food-industry research firm.

The Post also ventures a guess that there may be more than financial matters weighing on the decision to sell.

 

If an upcoming episode of the CBS reality show "Undercover Boss" is any indication, there may be management issues, too. In an episode slated to run Sunday, CEO Coby Brooks discovers a restaurant supervisor staging an eating contest for female employees, forcing them to bury their faces in platefuls of food without using their hands.

 

"Ladies, if you want to leave early today, you're going to play my reindeer game," the manager says, howling "Hoooo, doggie!" as the women eat.

 

 

 

 

[Parsad]

This should get interesting!  Chanticleer, as part of their first fund where they bought a $5M note from Hooters of America, has first right of refusal on any offer which was granted by Robert Brooks himself.  Thus, if anyone wants Hooters of America, they have to go through Mike Pruitt and Chanticleer first.  Cheers!

[Zorrofan]

Thanks for keeping us abreast of the Hooters situation.....

 

;D

 

cheers

Zorro

[EdWatchesBoxing]

That BS is sure starting to look pretty, but still not as pretty as the women in SI...

http://news.yahoo.com/s/ap/20100209/ap_on_sp_ot/us_fea_fashion_sports_illustrated

[Mungerville]

Sanjeev,

 

$22 in net income per share relative to a share price of 350 isn't such a great deal.  I take it you are excited because the cashflow is much greater than $22 per share?

[goldfinger]

It is 22$ to start with. There might be a lot of opportunities to increase that 22$ conservatively speaking...

[Parsad]

Sanjeev,

 

$22 in net income per share relative to a share price of 350 isn't such a great deal.  I take it you are excited because the cashflow is much greater than $22 per share?

 

Hi Mungerville, I didn't say it was a good deal.  It's close to fair value at about 15-16 times earnings.  I was just saying SNS is a cash cow with roughly $22/share in net income per year and virtually no debt outside of leases.  It's now priced like the premium fast food chains it should be compared with.  Cheers!

[sdev]

I'm missing something...if the company is generating 45-50m in cash flow annually and you discount the future cash flows (growing annually at say 5%) at 15%, isn't the company still quite undervalued? What am I missing?

[Mungerville]

Given the board keeps talking about SNS, can someone provide a quick outline of what the owner earnings per year are relative to price paid (after deducting the cash hoard from the price paid) using reasonably conservative assumptions?

 

Lots of people must have a back-of-the-enveloppe calc. off the top of their heads.  Sanjeev,are owner earnings higher than the $22 per share in net income?  Why the hell is Gabelli or any other good investor buying at 15-16 times earnings if owner earnings are not higher?  I believe some earlier thread on this board indicated that the cash flow is much higher after netting taxes.  Can someone a brief summary?

 

 

[goldfinger]

The restaurant business alone seems to be generating around 25$ free cash flow per share at this point.

But he is changing so many things (franchising-re-franchising, WEST acquisition and merger to decrease cost

for both chains, product mix and marketing, selling un-productive properties - real estate reported at cost and depreciated on the balance sheet) and then there is the investment side (investment of cash, Mustang, real-estate). So that I would not be surprised to see that 25$ in between 50% and 100% higher over the next 3 to 4 years.

[sdev]

Forgive me for misunderstanding, but by looking at the annual report, I see the following figures:

Net income: +$6 million

Depreciation: +31.4

Amortization: 0

Non-Cash Items: 5.68

Capital Expenditures: -5.8

 

Owner Earnings = 6+31.4+0+5.68-5.8 = $37.3 million

 

If I made a mistake and deferred taxes or changes in working capital should be added to that, then the number is simply cash from operations - capex which is FCF. That number was $46.6 million.

 

Help regarding owner earnings/FCF would be appreciated. As it is, I had projected that SNS was worth a lot more than $350 with the assumptions that the company would produce $40m of cash annually and grow that at a rate of 5% (to be conservative).

[Mungerville]

Thanks guys.  So sdev, that's $40 M a year in owner earnings on a market cap of $500 M (less $70 M in cash and investments?).  So 430/40 or around 10X earnings growing at 5%.  Is that roughly where we are at?

 

Does anyone get down to a P/E in the 6x range (deducting the cash and inv'ts net of debt from the P, and using owner earnings for the E) looking out 2 to 3 years?

[sdev]

any help on these numbers would be appreciated..

[Parsad]

Mungerville and Sdev, use the 1st Quarter 10-Q as your guide:

 

Cash flow from operations ($19.686M) - Capital expenditures ($2.357M) = $17.329M

 

Divide that by 12 weeks and multiply by 52 weeks = $75M in free cash annually

 

Remember though that Steak'n Shake's Capex is probably understated right now.  That cost will depend on how many stores remain company-owned and how many are refranchised.  If they remain company owned, and I believe Sardar said something previously about using $7-8M a quarter for capex long-term, then you have about $28-32M that you have to subtract. 

 

I actully think Sardar is overstating that, as it is likely some stores will be refranchised and capex costs will no longer be Steak'n Shake's responsibility.  I think $5-6M is more reasonable quarterly.  So you have about ($75M - $24M) or $51M in free cash flow for this business annually.

 

Subtract the $70M in cash and investments from market value ($500M) and you get $430M.  Divide by the $51M and you get about 8.5 times owner earnings.  Not cheap, but not expensive.  It is priced closer in line with many other high quality fast food chains.  Valuation will increase as cash flows grow and retained earnings are reallocated to other ideas.  Cheers!

[wabuffo]

Cash flow from operations ($19.686M) - Capital expenditures ($2.357M) = $17.329M

Divide that by 12 weeks and multiply by 52 weeks = $75M in free cash annually

 

I'm not sure I agree with this analysis.  

 

The $19.686M of operating cash flow includes $7.073 of cash from working capital.  This is clearly a one-timer and can't be thought of as part of annual, recurring cash flows.  You can stretch out your payables to vendors to the tune of $5m as SNS did in this quarter once but not every quarter forever.  In fact, it could easily reverse next quarter and be a drain on operating cash flows.

 

I also think SNS/Biglari's estimate of maintenance capex is too low given the number of restaurants SNS has.  I don't know what the right number should be -- but anything less than $10-$15 million per year (and perhaps more) strikes me as too low to maintain the long-term performance of the business (even without adding any new restaurants).  But what do I know?

 

That's not to say that a strategy of slowly liquidating the SNS business and putting it into a gentle decline by choking off capex won't allow the business to continue to perform for awhile while the free cash flows are reinvested in other businesses.  The real dynamic here is whether the cash coming out of SNS can be reinvested at high ROICs -- and whether the decline of the SNS business will be more than offset by a growing pool of other investment assets over time.

 

 

wabuffo

[Mungerville]

Thanks Sanjeev.  That is a very useful summary / starting point.    

 

At 8.5 x its making some ense in terms of buying or holding anyway and seems too cheap to sell given taxes - of course that is discounting any future value add from capital allocation which is an assumption that is nice to make but probably erroneous.  Buying cheaper at 5 to 7x earnings becomes a no-brainer on the assumption the guy isn't that bright but can reasonably intelligently allocate the 14% to 20% yields annually.  If you really believe in the guy, 8.5x seems reasonable as well - essentially 12.5% yields to reinvest plus that $70 M.  The key here will be how well the guy can reinvest and is he prepared, in terms of those investments, for a very tough US economic environment if it transpires (which would mean keeping conservative leverage and investing in the least cyclical areas or demanding a cheaper price other things being equal).  

 

As an aside, I am reminded of the simple math that when you can buy at P/Es of 5 to 7x or 14% to 20% yields, and the guy has the cash and is smart enough to buy in stock at those yields, earnings per share will grow at at least 14% to 20% per year if the stock stays the same or goes lower even if the aggregate earning power and growth of the business stays constant at zero.  This is an important concept to keep in mind and demonstrates the power of the combination of 1) a solid slow growth business, combined with 2) a manager that can allocate/buy-in stock, and a 3) P/E of 5 to 7.  Not much of an insight but shows that growth of the business is overrated/not required when a solid business has a decent capital allocator in charge and you can buy at the right P/E.

 

1) 8.5 isn't that far off 5 to 7x;

2) the guy seems to be trying to do some other things with the stores, etc. so growth of the business may be greater than zero

3) besides mind-numbing share buy-backs, at a p/e of 8.5, he could find a better use of capital - again, which adds to the growth of the business and thus is better than the no-growth model I describe above

 

Once #3 is exhausted, cash can cumulate, the share price can decline, and mind-numbing share purchases can begin.  8.5x is therefore not crazy if the guy is reasonably good but not hitting the ball out of the park - and you shouldn't bank on the guy hitting the ball out of the park anyway (that should a bonus if it happens).

 

Obviously, I am not adding much here.  Just posting some very general valuation thoughts and basically rambling.

 

 

[Mungerville]

Your initial yield matters most if you are not banking on Boy Wonder. 

 

If you are banking on Boy Wonder, in terms of future returns on invested capital, if he can invest, the $70 million is worth more than $70 million so subtracting it off the price is too conservative.  Your initial yield still matters a lot and your assessment of annual returns matters a lot too.  Can he do 30% a year? 20%? What has he done over the last 10 years?  If he can't get at least 20-30%, there is no point investing unless you have done your homework and see more value somewhere else that is not obvious to others.  From reading these threads, there seems to be other potential areas where some value could reside.

[Mungerville]

Wabuffo,

 

You are saying $40 to 60 million in capex per year.  Why do you think it would be that amount?  How many stores, how much is that per store per year? 

 

I put a new roof on my house for $6000 - the house is 2200 square feet, the roof covers probably 1800 square feet.  In a few years I'll do some windows for about the same.  There will probably be a surprise for the same amount.  How much is that per store per year and just how much should it cost to maintain these things if you are smart with your money? 

[Nnejad]

I think there's some initial confusion because:

1) Sanjeev mentions at the beginning that Sardar predicts 6 million in cap. ex. per quarter.

2) In actuality (i'm pretty certain) Sardar said 6 million is sustainable per year.

3) Wabuff missed the per quarter comment of Sanjeev, assuming he meant per year.  And wabuff thinks 10-15 million is more appropriate per year.

 

I think.

[Mungerville]

I also read somewhere on these threads that Sardar said 6 M per year.

[goldfinger]

Wabuffo's comment on payables seems rather appropriate. Looking at yearly data, it seems difficult to keep that 5M per quarter (looking at receivables also).

6M capex equates to 15K per restaurant: seems a bit low.

But talking about the decline of the fastfood operation is far fetched: it seems to me that sales are actually increasing with the right mix to further increase traffic at higher profitability.

[Parsad]

I also read somewhere on these threads that Sardar said 6 M per year.

 

If most of the company-owned stores are monetized through refranchisement, then a low capex number can be used.  My assumption is based on the existing company-owned stores staying within the company...in which case my original number of $6M per quarter works out to about $58,000 per store annually.  That's probably a bit high, but I would rather be conservative.  New stoves, dishes, roofs, paint, furniture, tills, etc. can add up.  I would think a busy store would need a minimum of $25-30K per year in maintenance costs.  That would work out to about $12M per year, or double Sardar's estimate.  If he can do it for $6M, then all the power to him, but that will be tough to keep a decent looking chain over the years.

 

I'm not sure I agree with this analysis. 

 

The $19.686M of operating cash flow includes $7.073 of cash from working capital.  This is clearly a one-timer and can't be thought of as part of annual, recurring cash flows.  You can stretch out your payables to vendors to the tune of $5m as SNS did in this quarter once but not every quarter forever.  In fact, it could easily reverse next quarter and be a drain on operating cash flows. 

 

The question is where is that change in working capital occurring?  Restaurant businesses usually operate with negative working capital.  In the case of the 1st Q, you had an increase due to changes in accounts payable.  In the previous quarter, you had an increase due to changes in receivables and inventory.  The net cash provided by operating activities is still between $15.5M and 19.7M.  You can't really use the previous year numbers because store traffic, cash flows and operating costs have all changed dramatically.  I would guess that the $19.7M number is probably closer to reality...but even so, use the $15.5M number over 12 weeks and you get $67M per year before capex.  Cheers!