Steak 'N Shake (NYSE: SNS), a decades-old iconic restaurant chain, served up more than its regular fourth-quarter and full-year earnings, which were very positive. The company also announced a new direction, as Chairman Sardar Biglari said Steak 'N Shake will function as a holding company and invest heavily in other businesses. Indeed, this change is already under way and will intensify as Steak 'N Shake moves ahead. The question has been asked: Will Steak 'N Shake become a mini-Berkshire Hathaway (NYSE: BRK.A)? So you might add: Will Biglari become a mini-Warren Buffett? (Learn more about Warren Buffett in Warren Buffett: The Road To Riches and What Is Warren Buffett's Investing Style?)
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First The Earnings
Steak 'N Shake achieved a major advance in its earnings, as the Q4 shows. The company earned $3.4 million, or 12 cents a share, compared to a $9.2 million loss, or negative 32 cents a share, in last year's Q4. Sales increased to $158 million from $138 million. For the full year, the company earned $6 million versus a $23 million loss in fiscal 2008, which came out to positive 21 cents a share against a negative 81 cents a share last year. Revenue was up slightly to $622.8 million compared to $606.07 million the previous year. These are all diluted share numbers, as they include losses and impairment charges both years, largely due to Steak 'N Shake's aggressive cost-cutting and restructuring.
The Steak 'N Shake Strategy
Biglari, who comes from running the Lion Investment Fund originally, has clearly set out the plan for Steak 'N Shake in his chairman's letter. He details not only the recent acquisition of Western Sizzlin' (Nasdaq: WEST), which will bring cost efficiencies to Steak 'N Shake, but also the need for and success already achieved by the extreme cost-cutting that the company has undertaken. Biglari slashed company capital expenditures from more than $31 million in 2008 to $5.7 million in 2009. This is part of his plan to put the restaurant on a footing where it can compete in a difficult casual dining space with burger places like Red Robin Gourmet Burger (Nasdaq: RRGB), not to mention fast-food burger giant McDonald's (NYSE: MCD), both of which had a recent sales downturn in a tough industry.
Reverse Split And Long-Term Investing
In a move that looks right out of Buffett 101, Biglari is having the company undergo a 20-to-1 reverse stock split; so the shares, trading in the $10-$12 range before the split, will fetch a $200-$240 per share price. The goal is to encourage more long-term holding of the stock. Coupled with his "demon on cost" approach and his emphasis on intrinsic value - also strong echoes of the Buffett approach - Biglari has already invested excess cash in a small insurance company, Fremont Michigan Insurance (Nasdaq: FMMH).
A Method Or Madness?
Although Biglari's letter to shareholders is filled with candor but lacks the humor, wit or charm of Warren Buffett's annual tutorials, he gets his point across. He is operating his companies not for quarterly earnings growth, but for long-term increases in cash flow. He bluntly states that he will make all the investment decisions, and he will put the excess cash from Steak 'N Shake and any other holdings into investments that do not necessarily follow any theme, pattern or related industries. The clear, guiding investing principle will be intrinsic value and long-term growth. Nor will the company employ investment banks, road shows or the whole extravaganza of advisors and presentations favored, or at least traditionally done, by most companies. With Steak 'N Shake you now get Biglari - big time - and he freely admits that many shareholders won't like this, and that Steak 'N Shake stock won't be for everyone.
Steak 'N Shake Stock
The ongoing changes, self-described by Biglari as a turnaround and a transformation, will be fascinating to see as he executes this new plan. Investors will want to watch and carefully judge Biglari's acquisitions over the coming months and years, but they have been given a clear road map of what to watch and expect. Whether it will produce a strong, growing, diverse capital allocation company worth investing in, or a disparate, far-flung, weakened former restaurant company, will be fascinating to see.
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