Jeff - CoC
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Latest Comments13 Comments
Steak N Shake's New Direction Is Terrific News for Shareholders
SNS can operate negative working capital as well.
Hedge Fund Tracking: Blue Ridge Capital (John Griffin)
About Pinnacle Airlines, and Concentrated Risk
Look at the second page of his ownings in the 13-F. He still owns Wellcare in the same amount.
101010,
I agree that the small and micro cap field can indeed be filled with landmines. I don't think that's any reason to ignore it, though.
You do need to be filled with a sense of risk and be looking for risk under every rock. As I'd highlighted in the article, risk is everywhere and, in small caps with no moat especially, you really need to be atuned to all of the risk factors that could cause your investment to take a big hit.
Maybe Mohnish didn't take enough caution, I'm not sure. Maybe Pinnacle will triple from here. I can't make that judgment. But there are some obvious lessons to be taken from a company, in this case PNCL but that includes many companies, that rely on only a few companies for business. The "tail risk" grows in that proposition.
About Pinnacle Airlines, and Concentrated Risk
Steak n Shake: Watching and Waiting as Biglari Names Himself CEO
You're right on with FRN margin debt. The investment was successful because he bought at a sufficiently low price. That's value investing. Often times if you buy at the right price, a nice franchise (Friendly' is a great ice cream franchise in the Northeast, where I live) will be bought cheaply by strategic and/or financial buyers. It's not "luck." Good decision making often leads to good results. Who are you to say what would have happened had FRN not received a bid?
WEST does indeed have operational management, the fella is named Bob Moore and he is the CEO of Western Sizzlin Franchise Corp, former CEO of Whataburger.
Since Biglari has gotten to WEST, he has pared down debt, sold off underperforming restaurant locations, created a solid ROIC business in the franchising arena, entered into an enourmously successful joint venture, made a successful stock investment in FRN, and turned a weak corporation into one run for cash flow maximization and the shareholders. Remember that no shareholder will lose more than he if WEST fails, so there is nothing in it for him to talk without results.
Why aren't institutions interested? Who could buy up at $41mm company? WEST is a micro cap. Let's say you wanted to put 10% of your assets in WEST, a pretty large position for any fund. At maximum, you could probably gobble up 10% of WEST, considering the public float. Let's even say you could get 15%. 15% of $41mm is a whopping $6.15mm. So if you put $6.15 of your $61.5mm in assets in WEST. Say you only can put 5% in WEST. That's a $123mm fund. What institutions are running $60-$120mm portfolios? WEST can't even make an impact on any reasonable portfolio. 15% is 412k shares. At a few thousand shares trading in total, every day, it would take you a year to accumulate that position without bidding the price all the way up. That's why the institutions aren't interested.
Whoever Sardar's "groupies" are, they've done pretty darn well so far.
If you held WEST since Biglari has taken over, you would have nearly doubled your investment by now; adjusted for splits, Biglari took over in 2005 between 7 and 8 per share. It is an extremely thinly traded stock to this day.
So his job isn't to "get the stock moving." He's also not "running a restaurant" (in the case of SNS, only out of necessity until the President is hired, and Bob Moore runs the restaurant operation at WEST, before that it was Jim Verney).
His job is to make capital decisions that benefit shareholders. Everything outside of SNS has worked out great. It remains to be seen whether SNS will work out, so in the end the results will lie where they may.
Steak N Shake's New Direction Is Terrific News for Shareholders
"Given $45mm in annual free cash flow, the company would then generate $90mm in free cash flow in the 2009-2010 period.
Let’s say the company takes $65mm of that to buy back shares, again likely given Biglari’s penchant for share buybacks, and the rest to reduce debt. Assuming an average buy price of $8.50, the company could buy back about $7.6mm shares, bringing the share count down to about $20.6mm from the current $28.2mm. "
Steak N Shake's New Direction Is Terrific News for Shareholders
Secondly, property sales are flowing through the cash flow statement under "proceeds from property and equipment disposal." Those aren't being included in my free cash flow number, one I defined above as (operating cash flow - maintenance capex). The cash from selling stores and land isn't in there.
Thus, they generated a normalized level of $30mm in free cash flow assuming a run rate at last quarter's level of operating cash flow minus future maintenance capital spend. Free cash flow may have been "about zero," but you're looking in the rear view instead of the windshield, I think.
Steak n Shake: Watching and Waiting as Biglari Names Himself CEO
On the proxy fee, that's going to WEST remember, mostly. It's not going right into Sardar's pockets. Without those costs, though, SNS would still be stuck in the terrible situation its been in for years. 500k is well worth it for us, and as WEST shareholder you will benefit from that.
On your last comment, yes even Biglari admitted he bought a bit too high with SNS, and value deteriorated. However, I still believe strongly that SNS is worth far more than its current price, so it should end up a decent but not great investment, depending on what Biglari can achieve. Besides being early on SNS, his capital allocation decisions have worked out very, very well. I wouldn't be so quick to throw his decision making ability off the bus, yet.
If you're not comfortable with his capital allocation decisions, you really should not own WEST. If you believe that cash flow will be distributed, I would sell the stock, because you can pretty much take it to the bank that Biglari will take what ever proceeds come out of SNS and re-invest in another opportunity.
KSW, ePlus Look Like Bargains
I was thinking about that yesteday as well, the risk/reward ratio. Indeed if the stock is worth maybe $3.15 in the worst case, the risk reward ratio is still over 3 based on what I really think it's worth. I'm not trying to know the company better than management, I believe it's a fallacy that you can really do so, I want to know everything I can from an outside perspective.
Cash is cash until they starting burning it, which is another risk in an "earnings collapse" scenario. When looking at R/R, the entire downside case must be considered. So if I say to myself "ok, what else?" in the case of an earnings collapse that might be cash burn. See TRID, which I mentioned above, for this scenario.
While these are not "probable" scenarios, they cannot be glossed over, not least of all for a small company without recurring revenues or a wide moat.
Your analysis, for the most part, is right on though. The investment is no doubt a smart one at these prices.
-Jeff
KSW, ePlus Look Like Bargains
I figured as much, that's why I mentioned my uncertainty. Thanks for the comment, I appreciate it.
Paul,
Good assessment, and I tend to agree. I am already very impressed based on the numbers and reading I've done so far. I just want to be sure.
I'm not worried about a stoppage of growth, however. What I'm worried about is an earnings collapse. I understand that the next year and a half, maybe two are pretty much covered by the current backlog of projects. I'm also trying to understand what could possibly happen to that backlog. As I said above, if the earnings are stable, not even growing, the margin of safety is a monster. If the earnings are subject to a collapse (very small company, not a recurring revenue business model i.e. they must always be receving new projects)), the margin of saftey is current cash plus future cash on already backlogged items that will be completed in the next few years. If we assume they do generate 2.2mm in cash this year, that leaves them with $20.2mm, or ~$3.35/ share.
My point is, downside risk is there in that if they lose new revenues, prices keep rising without the ability to pass them through, or there is a blip in their operations, there won't be much to add to existing cash for a full valuation.
While I'm not saying this is likely, all risks must be considered to find a true margin of safety.
Any other comments or thoughts I would appreciate.
Numbers Check on Sears Holdings - It's Cheap
Were I to pick one, I give much more weight to the second valuation, sum of the parts. At minimum, I don't see the assets being worth less than the market values them today. The range of values I presented above I believe present a conservative look at asset value, with other upsides that I mentioned.
Lastly, I caution all not to underrate the value of incentives in this case. Edward Lampert has an entire career nearly riding on the case of Sears, and should he choose, he has options to maximize the value of Sears' assets without a retail turnaround. This is a backup option, but one not to be taken too lightly considering the incentive for Lampert at some point. He's got intelligence, assets, and and incentives. That's worth a great deal, though not in a quantifiable sense.
Time Warner: Worth Keeping an Eye On
Buying 'Em Back at Western Sizzlin'
I'll point you to a previous post I made on WEST, where I outline my thoughts on the entire company and why it's underpriced.
www.circleofcompetence...