Steak n Shake Company Quietly Shifting to Berkshire Hathaway Business Model

The Steak n Shake Company (SNS), an operator of 485 burger and shake focused casual dining restaurants in 21 states, has recently been quietly transformed by a new management team into a small Berkshire Hathaway type holding company. The move is very Warren Buffett-esque, with a 1-for-20 reverse stock split aimed at boosting the share price to well above normal levels (above $300 currently) and a bid to buy an insurance company among the noteworthy actions taken thus far.

What I find almost as interesting as the moves made by new CEO Sardar Biglari (a former hedge fund manager who has gained control of the firm and inserted himself into the top management slot) is the fact that this move has largely gone unnoticed by the financial media. Granted, Steak n Shake is a small cap regional restaurant chain ($450 million equity value) but the exact same strategy undertaken by Sears Holdings chairman Eddie Lampert garnered huge amounts of press.

Clearly Sears and Kmart are larger, more well known U.S. brands, but there seems to be a lot of interest from investors for any company trying to mimic the holding company business model that Buffett has perfected for decades. As a result, I would have thought Steak n Shake would have gotten some more attention.

Essentially, Biglari is using similar methods Lampert used when he took control of Kmart and later purchased Sears. Steak n Shake has dramatically cut costs, reduced capital expenditures, and will add to its store base going forward solely via franchising new locations, rather than building them with shareholder capital. The results have been impressive so far. During 2009, the first full year under new management, Steak n Shake’s free cash flow soared from negative $20 million to positive $31 million.

Biglari has made it clear that he plans to deploy the company’s capital into the best investment opportunities going forward, and that likely does not include heavy investments into the core Steak n Shake business. He has announced plans to rename the company Biglari Holdings (an odd choice if you ask me) and recently offered to acquire a property and casualty insurance company (the Warren Buffett comparison is worth noting here) but was rebuffed by Fremont Michigan InsuraCorp.

In the short term, Biglari and his fellow shareholders have reaped the benefits of his shift from a capital intensive negative free cash flow restaurant business to a more lean and efficient holding company. The stock has more than doubled from the $144 price ($7.20 pre-split) it fetched on the day Biglari took over.

The larger question remains how well this young former hedge fund manager can further deploy Steak n Shake’s operating profits in the future. At more than $300 per share, the stock trades for 1.6 times tangible book value of around $196, versus about 1.9 times for Berkshire Hathaway.

In my view, any price over 1.5 times tangible book value for an unproven concept and management team is too much to pay. However, given the results thus far it should come as no surprise that investors are willing to shell out more for the stock than they were previously, despite a lot of uncertainty over Steak n Shake’s future. Count me as one who will be interested in monitoring the situation going forward but would only take a flier on Biglari if the price to do so got cheaper.

Full Disclosure: No position in Steak n Shake at the time of writing, but positions may change at any time

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10 Thoughts on “Steak n Shake Company Quietly Shifting to Berkshire Hathaway Business Model

  1. I was a bit surprised myself when I found it he would be renaming the company Biglari Holdings (reserving BH on the NYSE) as I found it a little self-serving…But the ticker he reserved is oddly the initials of the company he models steak n shake after…berkshire hathaway…
    could just be a coincidence but its something to consider :p

  2. Chad, the name changes does bother me, too, because it is unnecessary and potentially alienating to many people. Large egos do often go before a fall, but not always. I’m wondering how the very sharp capex cuts at SNS will affect the business going forward – could it really be sustainable? what do you think?

  3. Chad Brand on February 3, 2010 at 9:12 AM said:

    @dave: Good spot… I would not have put that together. Who knows what he is thinking about.

    @john: I do not think the cuts are sustainable (sustainable meaning they can cut further from here). The key is how well he can invest the $30M or so in annual free cash flow (which should be fairly stable) he now has the business generating. Given that we have no idea what directions he will take with that, it is just very hard to make the case either way at this point.

  4. David Smith on February 3, 2010 at 9:44 AM said:

    I suppose there’s not the media interest because there’s no novelty anymore. Oh, another hedge fund manager wants to assemble a baby Berkshire? Yawn.

    Then there’s what Chad says about the investment concerns. Oh, our wannabee Buffett is young, unproven, and egotistical? Next.

    But I thank you for highlighting it to me. It’s on my watch list now.

  5. Chad – thanks for the response. From what I can tell, he was cutting capex; to the extent this is real estate based, given plans only to franchise from here it could be sustainable. But to the extent it is things like cookers, necessary building maintenance, etc. it probably isn’t. Many bears on Sears noted the flat-out crumbling stores in many locations, especially K-mart locations, which does alienate many customers. But SNS’s cuts look even more draconian as a % of prior spend. So unless the old management was incredibly wasteful (and they were wasteful, but were they that wasteful?) some of the spending may need to come back in coming years.

  6. Chad Brand on February 4, 2010 at 7:21 AM said:

    It could be sustainable if he actually goes ahead and franchises out some company-owned locations, but aside from that I am not sure how much more he can cut. For the fourth quarter (year over year) operating expenses were reduce from 55% of sales to 50% of sales. A meaningful cut, yes. Enough to result in noticeable differences for the customer, probably not. The fact that traffic is increasing nicely also lends credence to that conclusion, but we will have to see the effects longer term.

  7. Carl Hyde on February 4, 2010 at 11:12 AM said:

    In April of 2007 Sears Holding was trading at almost $200 a share. Its been downhill ever since having lost half of its value since. I’m not sure a model based on SHLD is necessarily a good thing. With the economy like it is today Macdonalds is still the best food play in town. We have a Steak & Shake near us that was doing fairly well until a Five Guys Hamburgers opened nearby. The S & S has half the cars in the parking lot each night while the Five Guys is jammed. Maybe he should add a railroad to his holdings and a jewelry chain.

  8. Chad, at the risk of asking a dumb question – maybe I don’t really understand what falls into capex at restaurant chains. I assumed it was renovations and new equipment – how does that interact with operating expenses? I assumed it was expensed over time for accounting but that cash flow is an immediate boost? thoughts?

  9. Chad Brand on February 4, 2010 at 5:17 PM said:

    You’re right… some of it flows through as an expense in the period it was spent, and the rest is charged as D&A over subsequent periods.

    I am not sure how many new locations they were opening before, so I cannot tell you what % of the capex cuts are from stopping the expansion.

    Was the previous management team that inept in terms of wildly spending money on things that did little to boost sales? I believe so. Look at these numbers:

    Cash Earnings/CapEx/Free Cash Flow By Year:

    2000: $39m/$76m/($37m)
    2001: $42m/$40m/$2m
    2002: $46m/$41m/$5m
    2003: $45m/$31m/$14m
    2004: $53m/$46m/$7m
    2005: $57m/$64m/($7m)
    2006: $57m/$81m/($24m)
    2007: $44m/$69m/($25m)
    2008: $11m/$31m/($20m)
    2009: $37m/$6m/$31m

    If you compare all the money they spent with the change in earnings during the subsequent years, their ROI record was horrible in terms of allocating capital. So maybe they really were spending money for no good reason. Time will tell, however, if $6m annually is enough to keep nearly 500 locations humming along.

  10. Chad, thanks for the thoughts, I know it took you some time. My WAG would be taht $6m is quite low, but that they can only get away with it for a year or two before rising back to the $15 – $20 range. just a guess, though. I’d need to do a lot more work to get a grounded estimate.

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