Steak N Shake - Another 'Friendly' Deal?

by Phillip Ristau

Steak N Shake (SNS) has 28,469,808 shares outstanding. The shares trade near a 52-week and multi-year (April 2003) low . On the most recent conference call, management acknowledged, “we have not been field focused for several years.”

Why would anyone invest in SNS? There may be a catalyst. There is a proxy fight to gain two board seats by tenacious value investor Sardar Biglari. A sale of Friendly Ice Cream was announced about 9 months after he disclosed his initial 13D filing in 2006 for about twice his average cost.

SNS owns about 155 of its properties. In 2001, it averaged about $1.1 million for 14 sale/leaseback transactions. Assuming $1.1 million x 155 properties equals $170 million or about $5.97 a share. In addition to selling the real estate at its company-owned stores, SNS could sell the stores themselves to franchisees to generate even more cash – this move is an important objective of Biglari. One goal (of many) of Biglari’s is for the company to refranchise its company-operated restaurants. Applebee’s and Denny’s received about $1 million per refranchised unit. SNS operates 435 restaurants, so if each restaurant is worth $1million, that is another $435 million ($15 a share) .

For 2006, SNS had 48 franchised restaurants and earned $3.88 million, or $80,854 per franchised-unit. SNS plans to open 9 company restaurants and 6 franchised restaurants in 2008. It will probably take 2-3 years to refranchise all 435 restaurants. Assuming franchise units grow 15 per year, that is a total of 536 franchised-units at the end of 2010. 536 units @ $81,000 is about $43 million in revenues. A pure franchise model should yield at least 15% operating margins. Operating income should approximate $6.5 million pre-tax. A pre-tax multiple of 12 (reasonable for a business with relatively high operating margins and very little in capex) gives us $78 million or $2.73 a share.

Putting it all together, SNS’s earnings are worth $78 million in three years, discounted at 10% equals $59 million or $2.06 present value per share for the pure-franchise model. In addition, a sale/leaseback plan for the real estate would generate $5.97 a share for the 155 properties it owns. Finally, refranchising 435 units might generate $435 million, or $15 per share. Since this operation would take time, I use a 10% discount rate and a three year time frame. I derive a present value of refranchising of $327 million, or $11.47 per share.

Thus, intrinsic value is $2.06 future earnings + $5.97 sale/leaseback proceeds + $11.47 refranchising cash for a total intrinsic value of $19.50 per share. SNS is currently trading around $11.

Disclosure: Author has a position in SNS.

Mr. Ristau is a value investor in Texas.

Comments

[DanielJacome]

terrific math, good job! we have also been looking @ SNS

[BrianGriffin]

How does the math change now that the company has posted terrible sss for months? Do franchisees still show interest in the chain? It seems to me that the restructuring process becomes much more difficult in a bad consumer environment for a few reasons - 1. Sales per unit are dropping precipitously 2. real estate values are dropping 3. credit available to franchisees will be more restrictive 4. unit operating metrics continue to worsen -- Would love to hear your thoughts. Thanks for the nice writeup.