There are some out there in the online value investing community who have been enthusiastic about Sardar Biglari, Western Sizzlin’, and finally Steak ‘N Shake (SNS). I’m not going to go into details about these figures as it would take too much time, so this post is for those who are already in the know.
I have followed the news on all these figures and I have yet to buy into the hype that Biglari is and has been trying to create. After some serious thinking about SNS and Biglari, here are some reasons that should at the least provide pause to any serious investor.
Reasons For Caution
Though having accomplished some impressive things in the past at a young age, Biglari is still unknown and young. There is no value investor that I know and respect that has invested with Biglari or in any of the stocks Biglari has targeted. But the same could have been said about Buffett way back. I ask myself if I would have invested in Buffett’s partnership when he first started going and I really can’t come up with an answer. My criteria probably would have been whether I intimately knew Buffett or I was friends with someone who knew Buffett. And so it should be with Biglari I think. Unless you know him personally, and you know he is not just saying all the right things to attract attention and money, then it’s not a good idea to invest with him or in any of his target companies.
Secondly, the restaurant business is a horrible business from which to launch a successful, long-term company, though the same could have been said about the textile industry. Looking at Biglari’s most recent letter, you see that SNS was only profitable because capex fell off a cliff. This might be alight for just a year, but Biglari maintains this level of capex, I can only predict dire results for the business. As a sidenote, I know someone who recently visited a Steak ‘N Shake restaurant for lunch and asked about new management. The response was interesting, as one of the bad things about new management was that company-owned restaurants were required to be open on Thanksgiving Day. There was only light traffic that day and I guarantee that 99% of SNS restaurants lost money that day. What’s up with that Biglari?
Thirdly, Biglari seems to be extremely narcissistic. Read his letters. Most of the sentences are in the first person, citing his actions and accomplishments. I’m fairly certain he doesn’t mention any SNS employee by name. True, Biglari has accomplished a lot of things and he is right to be proud, but he comes off as very full of himself.
Fourthly, Biglari wrote on page three of the 2009 letter that “there is no better barometer of value creation over the very long haul than stock price.” If you call yourself a value investor and this statement does not completely shock you, then I must question your credentials and beliefs. Stock price is absolutely meaningless when it comes to measuring the value of a company. There is intrinsic value and then there is the price that others would pay. If the owner runs the business successfully, invests in projects that yield returns, then price should follow intrinsic value, but price is certainly not a true measure of a company’s value.
Fifth, its interesting that there was a reverse-split of the stock to attract long-term investors, but I really question whether this created any value. I believe any type of split is a useless transaction that takes value away from the company. You can rationalize a stock split all you want, at the end of the day shareholders get nothing in return. If Biglari wants to attract long-term shareholders, then he should focus on running the business and start proving to everyone that he is not just blowing smoke or dressing up his company to look like another Berkshire with the insidious goal of attracting easy money and attention.
Finally, SNS’s recent hostile bid for FMMH was just insulting to the owners of FMMH. The premium was minuscule and was rightfully rejected. This action to me is more evidence that Biglari believes he is hot shit.
Summary
I do not disagree that Biglari has some impressive accomplishments, but for all of the reasons above, I would advise a wait-and-see approach to Biglari and SNS. For now, I think it’s more likely that Biglari is just doing and saying all the right things in order to appear like the next Buffett. And if Biglari is really a Buffett type of guy, then it won’t hurt to wait several years to see how things play out with Biglari and SNS.
I think you have sound reasoning to skip sns & its ceo too. Im too quite full of all that cheering.
I agree your points and would add two minor argument more.
1. There is no margin of safety at these levels, only blind faith to Biglari.
2. This is more anecdotal point, from latest letter from CEO, where he took full credit about turning company around by himself, but he forget to mention that turnaround happened about same time, when economy was starting to recovery phase.
In fear of retaliation, I will remain anonymous. I will also say, keep following your intuition. Every point made is reality. Specifically on the capex issue, not only does it break down morale but breaks down the facility in which PAYING customers utilize. The effect? Closed doors; no customers; no money; no value. As a former associate, I respectfully request that you keep on your path. It’s the truth!
Thanks for the comments. I was hoping to create a little controversy with this post, especially with some in the online value investing community, but so far I’ve got two comments that agree with me more or less. Also, I’m not saying that SNS was not in need of reform (it did need reform), but is Biglari the right guy to reform it? Odds are he is not.
I’ll bite! Let me address your points.
1.) I agree he is young. But you are wrong about no value investor investing with Big Larry, as Gabelli keeps buying, he’s up to 8% or so of the company now. Maybe you don’t respect Gabelli, but he does have a pretty strong record. It wouldn’t surprise me if he mentions SNS in the Barron’s Round Table when it comes out in a few weeks…
2.) It was profitable because sales went up. It generated a bunch of cash because capex fell off a cliff. The lack of capex has no affect on current earnings, but it does on cash flow. I think $5m is not enough to spend, but most of the capex spent under prior management was going to new stores, so if you’re not opening new stores, you won’t be using as much capex. The key to SNS is profitable capex spending, not unprofitable growth capex.
3.) I couldn’t agree more here. Which is why I own more WEST than SNS, as I want to lock in what I thin is an 11% return for 5 years, as I think he’s too full of himself to redeem the debt early.
4.) You are correct in the short term, but in the long term, he is correct. Go back to the Graham quote that Buffett repeats – “In the short term, the market is a voting machine. In the long term, it is a weighing machine.” Hence why Biglari says “over the very long haul”
5.) Don’t disagree with this, the reverse split doesn’t add any benefit. But it did result in some sort of share buyback, so that’s potentially good.
6.) I don’t comprehend how it was insulting to FMMH owners (of which he is one). He offered more than the current price. It was at $18.82 when he started buying, his buying drove it up over $20. So that’s a 20% premium. It traded up in anticipation of him making an offer, as it was no secret he wanted to buy an insurance company, and he’d already bought 9.9% of the stock by the time he filed his 13-D when the stock was at $20.
Look, I don’t know if Biglari is the second coming of Buffett. What I do know is he’s done a pretty good job turning SNS around, more than you can credit the economy for. They had years of negative same store sales under the prior management, even in boom years like 2007. He’s managed to change that.
So yes, I own a small bit of SNS which was spun out of my WEST holdings; it’s trading higher than where I purchased it. I’m not running out to buy more right now, but if he’s half as good as Buffett, I’m sure in 5 years I’ll have wished that I had.
Thanks for providing these counterpoints. As for Gabelli, I feel he is more concerned with building an investing empire rather than preserving and growing the wealth of his clients.
In regards to point four, can you really say that “over the very long haul” that price is always reflective of intrinsic value? The truth of what Graham has said has nothing to do with the matter. The fact is that “over the very long haul” a company’s stock can be priced at $100 when the intrinsic value of the company is only $25. Is stock price really a true measure of value creation? Not necessarily.
One previous commenter has suggested that Biglari may have been lucky with his timing. How much of the turnaround was really Biglari’s efforts and how much was it just the economic cycle.
In regards to the hostile bid for FMMH, the size of the premium should not be measured when he first started buying, it should be measured on the day of the announcement. On the day of the announcement, the premium was 11.3%, and yes, that is insultingly low. If I offered to buy you out of a business you had created and worked hard at for the majority of your working life, and I only gave you an 11% premium to the stock price, would you be insulted? But even a 20% premium is still low. Do I need to mention that the offer of 24.50 was below FMMH’s book value per share of 25.50? If you were the one who had been running the business for a long time, would you be happy and proud you got this low-ball offer or might you feel a little insulted?
Doug,
Enjoyed reading your carefully considered criticism. The third point, however, I see as misguided. I have witnessed first-hand the rise and destruction of many truly narcissistic individuals over my long career in finance. These people are easily to spot by applying a simple test: Do they claim credit for other peoples work, or do they acknowledge the success of others around them? These people rise quickly on the backs of others, but are eventually ruined with the eager assistance from those who have been slighted in the past.
A careful reading of Sardar’s 2008 and 2009 shareholder letters gives plenty of credit to others, both explicitly and implicitly. (See as an example page 4 of the 2008 letter). A non-scientific test is to count the number of references of “I” compared to the number of references of “we”. A true narcissist will write letters overloaded with references to “I”. A word count shows for 2008: “I”=10, “we”=120; 2009: “I”=35, “we”=75. This is not a sign of a person looking to claim credit from others.
My many interactions with Sardar (in person and on the phone) has never once left me with that ugly feeling we all get when dealing with an “It’s-all-about-me!”, self-centered, bore. Sardar is youthful, confident and decisive, and this combination often rubs people the wrong way. But to label him a narcissist is inaccurate and unfair.
Well, I think it is very fair given that I do not know him and have not met him in person like you have. Perhaps if I did, I would change my mind. This is why SNS might be a great investment for you while it is a risky investment for me.
Yeah, I think that over the long run stock prices approximate intrinsic value. If they don’t, why bother investing?
As for the economic cycle, Look at 2005, 2006, and 2007. Unless you’re telling me the economy was in a recession then, then I don’t buy the turn is just lucky timing.
And where does it say you have to offer a premium when you offer to acquire a company. The bigger the premium, the more likely they’ll accept the offer. But I actually give him credit, trying to buy a company at a price that he thinks offers him a good return.
Again, I’m not a Biglari Fanboy, but I think he’s doing the right things so far…
In terms of your concerns with the CapEx spending, it may be prudent to wait and see the quality of the franchising prototype as described in the Chairman’s letter. I’d be willing to bet the CapEx spending will not grow by a whole lot within the new franchising model. Biglari loves cash flow, and especially the ability to manipulate the cash flow. With a concentrated effort on becoming a real estate owner/franchiser, that cash will flow predictably. I am not investing in a restaurant chain, but what will eventually become a rent/royalty collecting business (/insurance company).
Jacob pretty much summed-up the reason why I bought SNS. I’m betting on Sardar, not on a restaurant chain.
There is one big difference about buying SNS now, vs buying BRK in it’s early years. VERY FEW people knew about BRK in the early years. Information flow is so rapid and prevelant today that the timeframe of an opportunity is now either greatly reduced, or non-existant.
Sardar is comfortable enough with the price to add to add position this year. What is perhaps more telling is that board member William Regan also added to his position this year at the $320 price level.
I think that Biglari made a fair “starting” offer for Fremont. Fremont’s shareholders owe Sardar a big thank you for at least generating a more realistic value to their shares.
Sardar’s bid for Fremont also encourages me that he is determined to add value to SNS, and So far Sardar has done everything he has said he would do since the inception of Lion Fund.
I wish he had more capital available. There seems to be a number of larger P&C companies available at reasonable prices.
I agree that SNS is a risky investment here. I am by no means a Biglari fan. I don’t understand how he got his hot-shot reputation.
Look back at his record at WEST…book value decreased during his time as CEO. He overpaid for the vacant land in San Antonio. WEST lost about 1/3 of its franchises.
His rationale for his SNS investment makes him look stupid. He claims he initially had no desire to become actively involved in SNS. He bought SNS @ $15-17 per share based on the underlying fundamentals (which included management, since he didn’t want to become involved). However, if you read his most recent letter, he claims that SNS would have gone bankrupt if HE hadn’t miraculously saved it by becoming CEO.
Let’s assume that Biglari is a miracle-worker and that he saved the company. The logical question then becomes, why did he pay $17 per share for a company that was on the road to bankruptcy? What does that say about his investing acumen? How does a value-investing legend (at least in his own mind) put almost 100% of his portfolio in a stock that would likely have gone bankrupt in 2 years without his active involvement? (And even with his involvement, it’s still not at the price at which he began buying)
Or, let’s assume that SNS would have been just fine without Biglari becoming CEO (and therefore, it was a relatively sound investment at $17). What does that say about him that he’s now claiming HE was the one that saved it?
Finally, if you look at his initial purchases of SNS, he started buying in bulk the day after HBK investments filed a Form 13-D. That filing caused the share price to jump from $15 to $17 in a single day. Instead of waiting for it to settle down, or admitting that he missed out and moving on to something else, Biglari chased the stock. His biggest purchases were made when SNS was at its highest. Does that sound like a value investor to you?
If I were an SNS shareholder, I’d be terrified of what Biglari is going to do with the cash that is generated.
Perhaps I’ll mention the purchase of WEST by SNS in another post. All I’ll say now is that I find it “interesting” that SNS is paying 14% notes for WEST when it has cash sitting on its balance sheet. That 14% is going directly into Biglari & pal’s pockets. I wonder what kind of rate SNS could have received from a bank…
And Buffett worked for Graham’s fund before he started his partnership. That’d be like an analyst breaking off from a major hedge fund now to start his own partnership. On the other hand, Biglari has never worked for another investment fund.
The market continues to support SNS and Sardar Biglari.
What people are missing here is the tremendous operating leverage that SNS posessses. If the positive sales momentum only continues in a mild form, SNS’s profits will almost explode. That is fairly typical for a company that is operating right around break-even, but more so true when the marginal contribution of the next sales dollar is considerable. As Sardar has pointed out additional sales largely flow to the bottom line.
All the negative arguments do not seem related to the intrinsic value of the business here.