Zac Bissonnette over at Blogging Stocks has an article about Sardar Biglari of Steak ‘n Shake trying to emulate Warren Buffet and Berkshire Hathaway. He starts off the story with “done an admirable job of turning around operations at Steak ‘n Shake” which I have a hard time accepting.
By nearly every measure that matters for me to be confident in a company, SNS is bad. I haven’t bothered to do an analysis of the company because they are at the bottom of every scale that I measure them on. In fact, as a company the only way they could score less is to not be profitable! Rather than do a reverse stock split to bump the price up to the hundreds, they should spend time running a business that is growing and profitable. While their revenue trend isn’t terrible, their earnings growth is a sin! I don’t invest in companies that cannot figure out how to grow.
Here are the first few thoughts that Zac shared. Click through to read the rest.
Sardar Biglari has done an admirable job of turning around operations at Steak ‘n Shake (SNS), but over the past few months, he’s made a few less-than-subtle efforts to imitate his idol Warren Buffett.
Back in December, he announced that he would do a 1-for-20 reverse split of the stock to boost the share price over $300 and “dissuade speculators.” “We are attempting to eliminate those who erroneously think that it is easier for a $10 stock to go to $20 than a $200 one to go to $400,” he wrote in a letter to shareholders.
The New York Post has called him a “wannabe Warren.” Last month he made headlines when he announced that he would be changing the name of the company to Biglari Holdings. C.L. King analyst Michael W. Gallo wrote that “While progress over the last couple of quarters has been encouraging, we believe the key determinant of value creation going forward will be the success of Steak ‘n Shake in transitioning into a conglomerate-like holding company similar to the Berkshire Hathaway model.”
Editor’s update: On April 8, 2010, Steak ‘n Shake changed its name to Biglari Holdings. I am not going to change the article as written but I am adding the tag for Biglari Holdings [stckqut]bh[/stckqut] so that readers can track this company. The stock symbol SNS no longer is associated with Steak ‘n Shake nor Biglari Holdings.
SNS has come under new management in the last 2 years and is in the process of using the franchise model for growth. The CEO has explicitly stated that earnings was not his main concern and that cash flow was most important to him.
Quote from CEO Biglari:
“Maximizing profit in fiscal 2010 is not our goal. Our rationale is that doing so could derail our prospects of building long-term value through strengthening our competitive position. … Instead, we aim to grow long-term cash flows, not reported earnings. Our view on reported earnings is that they are not real until they are cash. And inasmuch as companies don’t go out of business because they run out of earnings but because they run out of cash, our propensity, logically, is to generate cash flow.”
Long SNS
While I acknowledge that it is possible for a company to do well even though my analysis says that they will likely not do well (in other words, I may be wrong), I do not feel that one can confidently invest in SNS. Cash flow is very important however it is almost always a result of well run operations that continuously grow against the competition. In this case, SNS has not shown that they can consistently grow in a very competitive market. Restaurant operations are not like Berkshire’s insurance operations – they don’t just generate cash that can be invested elsewhere.
While the cash position has improved, this is simply because it was so poor in the past. SNS has a history of buying fixed assets. They stopped that last year and their cash improved – which makes one wonder if their existing operations will falter as they restaurants get used as a cash cow to drive other investments.
I hope that SNS is successful in the long run. I will watch on the sidelines and invest in companies that are more likely (although not guaranteed) to succeed. SNS simply has not done enough historically to make me confident that they will be successful.
I understand your reasoning for being less than confident in SNS. The picture was bleak under previous management.
While I agree restaurant operations are not ideal for generating cash, the expensive part of running a restaurant, the opening, has long passed. The cost cutting measures have given SNS a better cash position in the immediate term, but I am betting that the cash position will continue to improve due to low costs of current SNS locations.
It is my belief that because Steak n Shake only has 485 operating restaurants, the opportunity for growth within a franchising model is great.
I am also wary of cash being siphoned off from existing operations. This I believe is inevitable, however the severity will determine the detriment. As we both know, Berkshire Hathaway floated along as an underperforming textile company (well… the whole industry was) while the growth of the net worth of the company came from insurance and securities holdings.
Thanks for the fun back and forth. Good luck in your investments.
I would probably like the company more if it was trying to expand out of the Midwest where it is so strong. Growth is the number one driver for growing the stock price (not doing reverse splits). I don’t think this company has what it takes to beat out the companies that I list on my Watch List. All of those companies have proven a strong record of increasing revenue and increasing profits.