WEST vs. SNS and DINE

[Packer16]

I have compared WEST to SNS and DINE at current prices and WEST appears overvalued.  About 8.4x FCF vs. 3.4 for DINE and 4.9 for SNS.  The only piece I am unsure of is the 23 acres of San Antonio, Texas land.  Does any body know if land in the area has increased in value over the last few years?  Does any insight to what Sadar's plans are for WEST vs. SNS?  TIA.

 

 

Packer

[Packer16]

I meant DIN not DINE

[ExpectedValue]

DIN has a massive debt load... something to keep in mind.

[ShahKhezri]

Packer,

 

I don't currently own WEST.  However, I know that area of land very well, and this is more recent knowledge because of my job. 

 

1.  It is in the RIM http://www.therimshopping.com/

 

2.  It is the best sales per square footage in the Country.

 

3.  This is more speculative, but Six Flags just filed for bankruptcy on Friday.  There has always been talk in San Antonio that at some point Disney would purchase that Six Flags location in San Antonio (it just happens to be within a 5 mile radius of the RIM) and it makes perfect sense because San Antonio is one of the more tourist friendly locations in the country ("remember the Alamo").  Nine months out of the year, it's Summer time, plus the Mexico-tourist/shopping in San Antonio is very robust.  About 5 years ago, USAA landowner of the La Cantera area built La Cantera Shopping Center because most Nationals (people of hispanic background) would travel to Houston and Dallas to shop.  La Cantera is about 5-7 miles from the RIM/Six Flags.

 

4.  Average income in San Antonio, and this is from 3 years ago was around 35-40K, I was having a lunch with a friend who owns a couple of businesses around San Antonio yesterday, according to his research, income in the RIM area is around 130 to 150K.  Now I know some people will say that's not high at all, but then you need to do your San Antonio research.  Housing has only declined 5-7% total here.  Point being, the area is the prime land.

 

5.  I've worked on two big projects on the financing side, that will remain confidential.

 

I can tell you for sure, the land has increased value in the last few years, if Disney purchases Six Flags in San Antonio, it will probably have a 50% overnight increase, at some point will have something on it and bring in attractive cash. 

[ragnarisapirate]

A lot of the future earnings of WEST seem to be made up of stock purchases (SNS). Now, it seems to me that this offers pretty bad tax treatment for the owners of WEST, since if I own WEST stock, the corporation will pay corporate income taxes on stock gains. THEN, I will have to pay my own personal capital gains tax on the increase in my WEST stock... It seems to me that I would be better off investing along side WEST, in my own accounts. In addition, while I love WEST as a company, I'm not wild about their restaurant operations, especially at these prices. It seems to me that there are better deals out there (e.g. SNS)

 

Granted, WEST will probably be investing in companies at times in which the info may not be made public, but history has shown that they are pretty vocal about their acquisitions.

 

to anyone reading this, please give me your thoughts.

 

On another note, it seems to me that SNS is freakin' cheap. There are still a ton of shorts out there too... which, I don't get; SNS seems like too much of a 'slam dunk' to me for them to have a short ratio of over 12!

 

In any case: 'In Sardar we trust'

[prevalou]

from a net asset value perspective, I 'm wondering if SNS is the inverse of Sears Holding.

-Sears has undervalued real estate  (below market rents because it is the anchor tenant)

-SNS has overvalued capital leases (important investments in restaurants from 1998 to 2003)

 

does somebody have an idea about these leases? thanks

[link01]

..Now, it seems to me that this offers pretty bad tax treatment for the owners of WEST, since if I own WEST stock, the corporation will pay corporate income taxes on stock gains. THEN, I will have to pay my own personal capital gains tax on the increase in my WEST stock... It seems to me that I would be better off investing along side WEST, in my own accounts. In addition, while I love WEST as a company, I'm not wild about their restaurant operations, especially at these prices. It seems to me that there are better deals out there. In any case: 'In Sardar we trust'

 

ragnar, i dont understand why you think you'll get bad tax treatment on your west shares (if you owned them) in the event of, what, a sale of sns? 1st, i dont see that as being in the cards. sns looks like a one sardar would like to keep. but if he DID sell it, yes, west would pay corp inc taxes on the gain. and you would only have to pay cap gains on your west stock IF you sold west....which you would do why? because you see west's greatest value residing in its sns ownership, & little else to recommend it beyond that?

 

granted, west's restuarant ops are in need of some revitalization. maybe that's why jim verney was let go & new mngt was brought in. he was able to stem the bleeding when things were really bleak a few years ago after sardar 1st got control but he didnt appear to know how to go further than that. and west's sizzlin ops still look challenged. witness the store closures the last few qtrs. but then there's these glimmers of hope that peer out from behind the clouds: "Last month, franchisees opened two dine-for-one-price Wood Grill Buffet units in Southern California that officials say average close to $100,000 per week in sales in roughly 9,000 square feet. Similar units in Virginia average $5 million in annual sales, and company officials hope to "replicate the magic" in other markets... At the same time, Roanoke-based Western Sizzlin has been testing a steak-and-salad-bar prototype that essentially removes the concept's hot-buffet aspect, moving that concept more solidly into the grill category. An 8,000-square-foot test unit in Parkersburg, W. Va., open almost a year, is tracking toward $3.5 million in annual sales, more than double the $1.7 million average-unit volume of older versions of a similar size."

 

http://findarticles.com/p/articles/mi_m3190/is_47_42/ai_n31126593/

 

i should probably appologize for having posted this link 3 or 4 times now. but it is the only evidence i have seen that things are cooking behind the scenes. unfortunately, wests 10Q's & k's give scant info about these goings on. and, disappointly, we have not had a shareholders letter from sardar in a while that touches on this or gives this kind of color.

 

i'm especially curious about this part, since the wood grill buffet concept has had a bit more ink:

 

"testing a steak-and-salad-bar prototype that essentially removes the concept's hot-buffet aspect, moving that concept more solidly into the grill category. An 8,000-square-foot test unit in Parkersburg, W. Va., open almost a year, is tracking toward $3.5 million in annual sales, more than double the $1.7 million average-unit volume of older versions of a similar size."

 

so, is this a new & improved version of the OLD western sizzlins? will they develope a plan to convert the old to the new if they see continued success beyond the testing stage? will the conversion costs be minimal due to the fact that its still a western sizzlin, but with a changed salad bar & maybe a few other tweaks here & there? is the 'removal of the 'hot-buffet aspect' the only change involved (seems too simple)?

 

and as i posted earlier there are now 109 west restuarants listed on their website vs 104 at the end of 2009 Q1, so they might be busy testing more confidently.

[ragnarisapirate]

..Now, it seems to me that this offers pretty bad tax treatment for the owners of WEST, since if I own WEST stock, the corporation will pay corporate income taxes on stock gains. THEN, I will have to pay my own personal capital gains tax on the increase in my WEST stock... It seems to me that I would be better off investing along side WEST, in my own accounts. In addition, while I love WEST as a company, I'm not wild about their restaurant operations, especially at these prices. It seems to me that there are better deals out there. In any case: 'In Sardar we trust'

 

ragnar, i dont understand why you think you'll get bad tax treatment on your west shares (if you owned them) in the event of, what, a sale of sns? 1st, i dont see that as being in the cards. sns looks like a one sardar would like to keep. but if he DID sell it, yes, west would pay corp inc taxes on the gain. and you would only have to pay cap gains on your west stock IF you sold west....which you would do why? because you see west's greatest value residing in its sns ownership, & little else to recommend it beyond that?

 

My statement, in regard to WEST's stock holdings, was more of a generalized one, relating to ANY of their investment in common stocks. The value of all stocks comes from their cash flows, distributed as dividends- so any taxes that WEST would have to pay in the event that they sold their stake in anything (be it mustang capital, SNS, or ITEX) should be accounted for in yours AND the markets valuation of the company.

 

I do hold the view that if a company is overvalued/the market gets a super rosy view of it, that it should be sold. For example, if SNS went to $50 bucks a share tomorrow, I would gladly sell without batting an eye. Holding on to a stock that is expensive, just because you like management and the company, isn't something that I am interested in-even though, doing so has worked out well in the past for WB.

 

The Woodgrills seem to be great restaurants, don't get me wrong; I am just not a fan of them, or WEST at these prices... Obviously, if it went to a buck a share (and there was any real amount of liquidity), you can bet that I would be buying up enough stock to file a 13G! ;-)

[bookie71]

I believe that WEB discusses this in one of the annual reports as not being the best way to invest in stocks  (but then BRK hasn't done too bad over the years)

[omagh]

Hi Packer,

 

What's your source for the FCF number for WEST?  Are you using look-through earnings?  After a browse through the following links, I'm not seeing anything resembling $4.1M of FCF on a market cap of $34.7M at today's prices.  Much as I like Biglari's attitude and focus, his capex numbers are not sustainable at ~$0 indefinitely, so any FCF numbers generated today will need a haircut down the road.

 

http://finance.yahoo.com/q/cf?s=WEST&annual

http://www.google.com/finance?fstype=ci&q=NASDAQ:WEST

 

Cheers,

-O

I have compared WEST to SNS and DINE at current prices and WEST appears overvalued.  About 8.4x FCF vs. 3.4 for DINE and 4.9 for SNS. 

[Parsad]

Much as I like Biglari's attitude and focus, his capex numbers are not sustainable at ~$0 indefinitely, so any FCF numbers generated today will need a haircut down the road.

 

I think they are relatively sustainable based on what he is attempting to do.  Capex won't be zero long-term.  It's just minimal right now, because any future expenses should be in line with growth in cash flow...increase cash flows, increase percentage allocated to capex. 

 

Long-term, capex for future stores would be covered by franchisees, as most stores will not be company owned.  As other operating costs become more efficient, he will be able to extend some of those savings to refurbishing existing company-owned stores as well.  Bottom line right now is a spending freeze to get things in order, which he is doing rapidly.  Cheers!   

[omagh]

Long-term, capex for future stores would be covered by franchisees, as most stores will not be company owned.  As other operating costs become more efficient, he will be able to extend some of those savings to refurbishing existing company-owned stores as well.  Bottom line right now is a spending freeze to get things in order, which he is doing rapidly.  Cheers!   

 

Agreed...if you look at MTY.V under the direction of Stanley Ho, they are already well ahead of Biglari and being rewarded with a 3xBV market cap on a ROCE of >20%.  But both MTY.V and WEST pale in comparison to franchise gross margins of MCD.  I can see Biglari's general directions and look forward to his success in moving WEST onto at least a similar operating profile as MTY.V.

 

-O

[Parsad]

Omagh, you mean Stanley Ma right?  I think Stanley Ho is the gambling magnate from Macau.  He lives between Hong Kong and Vancouver.  Ma started MTY. 

 

Yeah, I don't think Sardar will be able to achieve any sort of margins close to MCD.  I think he's aiming for a Chik-Fil-A type of operation, crossed with an In-&-Out type of reputation.  Probably margins that are a little better than half of MCD's, but an extremely loyal following.  Cheers!

[Packer16]

My numbers are as follows:

 

Mkt Sec (SNS, ITEX) - $13.4 m (based upon 1Q holdings times share price)

+ Mustang Holdings  - $6.1 m (from latest 10-Q)

+ SA Land - $3.8 m (BV - purchased in 07)

+ Cash - $4.0 m (latest 10-Q)

- Debt - $3.0 M (latest 10-Q)

= $24.3 million

 

Mtk Cap = $34.6 m - Invest ($24.3 m) = $10.3 m

 

FCF from restaurants ($1.0 m to 1.2m per year), thus the 8.6 to 10 x FCF number.

 

Packer

[omagh]

Yup...sorry, was talking to someone else while finishing the post...my mistake

 

 

Omagh, you mean Stanley Ma right?  I think Stanley Ho is the gambling magnate from Macau.  He lives between Hong Kong and Vancouver.  Ma started MTY. 

 

Yeah, I don't think Sardar will be able to achieve any sort of margins close to MCD.  I think he's aiming for a Chik-Fil-A type of operation, crossed with an In-&-Out type of reputation.  Probably margins that are a little better than half of MCD's, but an extremely loyal following.  Cheers!

[ShahKhezri]

John,

 

Just out of curiosity, how long ago did you visit/live in San Antonio?

 

In regards to #2, I wish I could provide numbers without risking my job.  San Antonio has the highest gross sales Olive Garden and Chili's in the country, not at the RIM, but at two shopping centers in San Antonio that if anyone drove by and saw would be shocked.  Now, the problem with the LA vs. San Antonio comment in relation to income is not one I will argue, I was simply stating the level of income 3X as much as the average income in an area where WEST owns a piece of land.  Granted, old people spend less money than young people (as a % of their gross/net income, but not total dollars) however, the number of tourists that visit San Antonio doesn't have anything to do with the income surrounding the location, just another catalyst that adds value to that  location.  Bass Pro Shop, one of the retailers located at the RIM is not geared towards young people.

 

I agree with you that he has a good grasp of value and the land. 

[link01]

My numbers are as follows:

 

Mtk Cap = $34.6 m - Invest ($24.3 m) = $10.3 m

 

FCF from restaurants ($1.0 m to 1.2m per year), thus the 8.6 to 10 x FCF number.

 

Packer

 

packer, are your no.s pre or after tax? i have pre-tax FCF (or normalized pre-tax owner earnings) from wests restuarant ops of 2.2 mil for 08:

 

-Total income (loss) from restaurant and franchise ops

$176,583 (ref pg f-3 of wests 2008 10k)

 

add back non recurring, extraordinary, or non cash expenses:

 

-d&a

$1,041,818

 

-maintenance cap ex

$(35,493)

 

-lawsuit/claims settlement exp (note 1)

$180,044

 

-severance expense (note 2)

$250,000

 

-yoy increase in sub-leased property expense

$444,000 (note 3)

 

-pretax loss on single western express tupelo concept

$152,000

 

=adjusted pretax cash flow of 2.2 mil from resturant ops

 

note 1) The bulk of these lawsuit expenses were related to sub-leased properties

 

note2) The departure of Jim Verney from Western Sizzlin Franchise Corp

 

note 3) Sub-leased property expenses increased by $444,000 in 2008 as compared to 2007. Total 08 sub-lease exp was $545,226…all these will expire at end of 08

 

[link01]

btw, the eagle-eyed ragupati over at his riskvsrewardinvesting blog has a great post on west's compensation & bonus policy with particular focus on bob moore's.

 

a few snippets:

 

<<a. The normal levels of cash flows expected from the business for which Mr.Moore gets no extra credit. In this case, the amount is $2.3 million annually>>

 

<<An item to note is the cash flow metric upon which the bonus calculation is made. The capital expenditures necessary to maintain the business’ current levels of profitability are charged against EBITDA so that the cash flow so computed is truly pre-tax “owner’s earnings”. The use of EBITDA also suggests that debt is going to be rarely used, if at all, in Western’s restaurant business>>

 

<<The most important part of the compensation policy though is the charge that is applicable to incremental capital that is reinvested in the business for growth. The compensation policy provides for a charge of 20% on any incremental capital investment. This implies that if a bonus were paid out to Mr.Moore, the pre-tax return on incrementally invested capital to Western will necessarily have been above 20%. >>

 

 

http://riskvsrewardinvesting.blogspot.com/search?updated-min=2009-01-01T00%3A00%3A00%2B05%3A30&updated-max=2010-01-01T00%3A00%3A00%2B05%3A30&max-results=13

[Packer16]

My numbers are post tax so are numbers are reasonably close.

 

Packer

[calonego]

Yeah, I don't think Sardar will be able to achieve any sort of margins close to MCD.  I think he's aiming for a Chik-Fil-A type of operation, crossed with an In-&-Out type of reputation.  Probably margins that are a little better than half of MCD's, but an extremely loyal following.  Cheers!

 

Sanjeev, are you talking about WEST or SNS? I thought they were talking about WEST...

 

There's a new book out on In 'n Out - it's pretty good. I hadn't seen much written on the company before and the author seems to have done some good digging, although it's a little gossipy. Apparently quite a few people at SNS HQ have read it...

[Parsad]

Sanjeev, are you talking about WEST or SNS? I thought they were talking about WEST...

 

There's a new book out on In 'n Out - it's pretty good. I hadn't seen anything on the company before and the author seems to have done some good digging, although it's a little gossipy. Apparently quite a few people at SNS HQ have read it...

 

Sorry Jordan, I was talking about SNS.  I think the In 'N Out playbook is the one they want to use.  Not entirely different than Chik-Fil-A as well.  The food is good at both places, but nothing incredible.  But it friggin' works!  Brand loyalty for both is notorious.  While McDonald's competes on value and uniformity, these guys have cult followings.  I can see the In 'N Out model working for SNS, but they have to execute.  Cheers!