Received My SNS Annual Report Today!

[wabuffo]

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.

 

Yes -- and for the latest four quarters (trailing twelve months) -- you had a grand total of $372 thousand of cash flow from receivables/inventory/payables.  So clearly -- the latest Q was an aberration - perhaps due to some seasonal effects.  I think that you are making a big mistake claiming changes in working capital as a permanent and continuing source of free cash flow.

 

For the latest 4 quarters -- net income + depreciation + plus other non-cash items was $56 million.  Subtract from that whatever one thinks is the right number for ongoing capex to maintain the quality of a steady-state number of restaurants and one would get a good starting point for owner earnings, IMHO.   I don't know what that number should be -- but I do think Biglari's estimate of single-digit millions is way too low.

 

wabuffo

[Guest Bronco]

Not to lengthen the debate, but wasn't there a several million dollar (non recurring) tax refund in the last quarter?

 

My back of the envelope fcf projection was 50 million.

 

Either way - still an interesting investment.  Sardar reminds me of the writers of "Lost", intelligent but on their own island.

[txlaw]

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

 

On a previous thread -- possibly on the old message board -- somebody mentioned that Sardar had actually said that maintenance capex was $6M annually.  Whoever said that had gone to the WEST meeting (I think), which is where Sardar mentioned the SNS maintenance capex figure.  Additionally, when somebody asked why that figure was so low, Sardar also mentioned that some of the restaurant upkeep costs were expensed rather than capitalized. 

 

I repeated that number on a later thread on this board, and I also noted that on a Seeking Alpha conference call transcript for SNS, former management had described annual maintenance capex in the $6M to $8M range.

 

So take what you will from that.  Note that this is all secondhand information, save for the conference call numbers.

 

----

 

Some other considerations to keep in mind when trying to value SNS. 

 

Sardar has mentioned franchising as the future of Steak n Shake.  First, think about what happens to the current earnings yield (adjusted for investments and excess cash) when the SNS restaurant base remains constant (no new stores, no closings) and the company begins to refranchise this existing store base.  If Sardar can make a higher return on the money freed up by refranchising than if it remains locked up at the restaurant level, the earnings coupon will go up over time.  That spread need not be very wide in order for the earnings coupon to go up.

 

Then think about the likelihood of new franchised restaurant growth and what sort of return on invested capital the company might get from such growth.  I went to the Steak n Shake in Houston, and I was pleasantly surprised by what I saw.  It had a very In-N-Out feel to it, more so than any other burger chain I've seen in Texas.  It's no In-N-Out, but I think Steak n Shake could do quite well in growth markets like Texas.  In fact, it was quite busy when I was there, though that was also at lunch on a Sunday.

 

Finally, remember that SNS is now a holding company that owns several different types of businesses.  And that could possibly include an insurance company in the near future.  So you have to do an analysis of those businesses as well if you want to try to figure what SNS is worth.

 

[cooger72]

I haven't thought about this much since the 10-Q came out, but one of the things that struck me when the annual was released was just how much cash flow you get from annualizing the comp sales growth in the 4th quarter (which was even better in the first quarter).  My thought was that 2009 recurring cash flow was something like $40mm-50mm depending on what you wanted to back out or add back, after you accounted for a slightly higher normalized capex. 

 

at $50mm CFO, a $500mm market cap company with $40mm net cash isn't all that exciting, but annualizing a 10% sales growth off of $620mm revenue with a 74% gross margin gets a little bit exciting.  This seems plausible given the fall in same store sales for the 17 quarters mentioned in the annual... But my thinking is as thus: Using round numbers you get an extra $60mm in revenue, $45mm in operating profit, and an additional ~30mm in Net Income/CFO.  would get you to $70 or 80mm CFO on a recurring basis, which gets you to something closer to 6-7x cash flow this year, ignoring any upside in continuing growth. 

 

Anyway, the real upside from here, I think comes from leveraging operating expenses by continuing to grow sales without increasing operating expenses.  If Sardar can create any value by investing this cash, all the better for shareholders.

[bookie71]

I wonder if he can sustain the rate of cash flow without hurting the core business.  A few good quarters don't necessarily mean that he can keep it up, only time will tell.  IF I thought he could keep it up, I would be buying more. As it is I'm just sitting on what I have, with a wait and see attitude.

jmho

[Guest Bronco]

Cooger - actually I look for investments with 10% FCF (obviously different than CFO). 

 

Any examples you have would be appreciated.

 

I find it tough to pull the trigger on some investments - I'll use CHK - that don't generate and FCF (after large cap-ex).  I realize there is value in properties and PPE and all that, but I like FCF that can be reinvested wisely or better yet, paid in dividends.

 

I believe SNS can get to 10% FCF using today's price on a consistent basis in the future (assuming current market cap).  But we'll see. 

 

Interesting thing about this WB wannabe is that we are in the first inning!  Buffett is near 80, Biglots is slightly over 30.

[Myth465]

I tend to like 15% - 20% similar to Pabrai, I consider 10% a fair price and look to get out around 5% - 10%. 10% with growth or a huge discount to assets is also good as well.

[cooger72]

Bronco,

 

Sorry, I meant FCF.  I was thinking CFO after maintenance capex but I guess my writing didn't make the leap.  I tend to think they're already at/close to 10% FCF yield with sort of $40mm last year and the potential for 70-80 as I laid out.  But maybe I've neglected to back out something that was more of a one off.

 

And honestly if SB is half the investor WEB is, I'd prefer he kept the dividend.  Somewhere in Snowball, I think, they talk about the additional value Berkshire would have if Warren hadn't paid the one (100k) dividend he paid in 1965.  It was a very large number, and something I'm pretty sure the average investor didn't get with his dividend. 

 

for your 10% target.. IBM had 15.1bn in 2009 and is a 167bn market cap.  Not quite but close, and growing.

[cooger72]

OK.  So I went over my math again from the annual.  52.3 cfo, and then I backed out the changes in accounts receivable and payable because I think these are more one offy.  That gets you to 47.8.  backing out $6m capex leaves you at 41.8.  The one thing I'm not sure what to do with is the tax provision.  If that is possible to maintain, then you're at $42mm in FCF, or ~35 if you end up paying all your taxes up front.... adding 30mm FCF to this gets you to a 14% FCF yield.

 

I wasn't meaning to say a FCF yield of 10% is a bad investment, and I have no plans to sell out at these levels, just that it's not quite as exciting as if it can get up to a potential 15% or more.  I guess "exciting" was used relative to when it was a 200mm market cap with no debt and 280mm in equity largely consisting of land and buildings at book.

[goldfinger]

Yes but:

- There is Sardar deploying the cash.

- There is WEST - SNS merger which in this precise case opens up:

  - cost savings, reuse of each others experience and systems.

  - new restaurant concepts.

  - real-estate division.

- There is the re-franchising/franchising strategy.

Not it should participate in any kind of conservative valuation, but it might participate in the "excitement" factor.

 

[Guest Bronco]

Cooger - I agree with you 100% on Buffett and dividends - let great capital allocators do their thing.  I believe dividends should be paid when capital can't be reinvested at high return (concept stolen from Buffett). 

 

I don't think Biglari is really the next Buffett per se, I just think that he brings the "promise" label.  And the fact that he is so young makes SNS more exciting.

 

On a side note - Canadians are kicking some ass tonight. 

[cooger72]

Bronco and Goldfinger,

Agreed that Sardar could definitely add some value... Hopefully it's a lot.  In the meantime it's a good excuse to drink milkshakes  :)