Tuesday, December 23, 2008

Dryclean USA

Tuesday, December 23rd, at 9:01 PM, it came across the Business Wire that the Steiner family tried to get an early Christmas gift when they offered $0.85/share for all remaining common stock in the company. Fortunately, the offer was withdrawn. The process regarding the offer is subject as follows:

"The proposal is subject, among other things, to (i) entering into a definitive agreement with respect to the transaction, (ii) approval of the transaction by a special committee of the Company’s Board of Directors and the full Board of Directors, (iii) receipt of satisfactory financing for the transaction and (iv) receipt of a fairness opinion from a financial advisor to the special committee of the Board stating that the proposed transaction is fair, from a financial point of view, to the public stockholders."

Dryclean USA (DCU) is a debt free, cash rich, nano-cap company that I have a small investment in. The company, as has been indicated by my friend John, at shadowstock is crazily undervalued. Since John's article, revenues have shot up, and the business is doing quite well. While I feel that the Steiners are very capable of managing the company, and are actually doing a superb job of it, they were trying to screw the other shareholders.

Here are a few brief stats on the company:

Market Cap: $5.27 Million
Cash: $4.225 Million in "... highly liquid investments with original maturities of three months or less." Which I am guessing have shot up in value due to the t-note bubble.
Debt: 0
Revenue: $24.72 Million
ROE: 10.82%
Quarterly Earnings Growth: 84.9%
Insider Ownership: 68.15% (which, ironically, is the problem)

The company has 7 directors, 2 of which, are members of the Steiner family, who are making the tender offer. Michael Steiner is a Board Member, President, and CEO. While William Steiner is Chairman of the board. 2 other Board Members have been involved with the company for over 30 years, with the remaining 3 being involved for roughly a decade.

After an approval by the Board, there will be a proxy shareholders (keep in mind that the Steiner family alone owns 57% of the stock) in which the offer will either be accepted or rejected. While the transaction is supposed to be approved by the Board, a committee appointed by the Board, and a financial adviser, I have my doubts as to the fairness of this process. After all, 2 of the acquiring parties are on the board, and when a persons paycheck has been coming from a the acquiring family for over 3 decades, why would you go against them? This being the case, there are 4 votes on the board to approve the transaction!

By my reading, there could be an argument made that members of the Steiner family are in violation of the company's Code of Ethics and the Code of Ethics for Principal Executive Officer and Senior Financial Officers. Especially since there is virtually no way that they can be on one side of a transaction, while telling the people on the other side that it is "fair"; which is only exacerbated by the growth prospects and cash horde the company is sitting on. Not only this, but there are a whole host of other issues, such as insider knowledge, and voting rights. In addition, there are fewer than 75,000 shares that have been purchased at a price less than the offer-I don't see how in the world anyone could construe this to be "fair" or even "prudent" for anyone other than the Steiners.

Regardless, it seems pretty apparent that the Steiner family wants to own the whole company, and is unable to purchase it all in the market place, due to the partnership that they share with long term owners (people like myself). The company is worth well over 1.50/share, so who can blame them for wanting to buy the company on the cheap? It will be interesting to see how the stock preforms, or if there will be another offer to purchase shares. I will note that I am still waiting on a call back from the company in regards to the offers.

Disclosure: Long DCU

Friday, December 19, 2008

We Are Barely Surviving...

I just read a good article on how the recession/depression that we keep hearing about is effecting our fellow countrymen (and women). I was shocked as to a few things:

1)We are looking at a holiday season in which consumer spending will be down (year over year) for the first time in around 40 years. I was pretty shocked at this, especially with how bad journalists make the S&L crisis and the dot com bubble sound.

2)Finlay Fine Jewelry, which I had at one point (right before they made a retarded acquisition) thought was a value play, is now probably not going to be able to make payroll. Which is interesting... Bailey, Banks, and Biddle is a really nice store that sells incredibly nice, yet overpriced jewelry... While I have not read anything on them in the past year, I am guessing that a bankruptcy would do them a ton of good. I am willing to bet that they are carrying a crap ton of gold on their balance sheet at prices of yesteryear, which in the event of liquidation, would bring in a bunch of cash flow.

3)There is a guy that is "cutting back" spending to $2,000 on presents, from last year's $3,000... I am shocked that people actually spend this much on others for the holidays. I suppose it is apparent that I either come from a cheap family, one that doesn't really love each other, or we are one that does not buy gifts for too many people. I would be shocked if anyone in my family typically spends more than a grand on presents (and that is probably a high figure, which is only applicable to the members with kids). I guess that this is in good relation to the paradox of thrift. While being smart for my family to be frugal during the holidays, it would cause the economy to crumple if everyone would be like us... The very people being frugal would be out of work quite quickly.

Regardless, this is a very interesting time to live in... quite frankly, I am happy to be a value investor in this environment. While I have no idea or regard for what the markets will be doing in the short run, I have a hard time believing that earnings and cash flow have been so inflated by the leverage of the housing bubble that it would justify companies trading at levels that are close to cash less debt. After all, with the T-Bill bubble that is occurring as I type, it shows that there is a ton of money that is waiting to be deployed in the next bubble, and the bubble after that.

My bet is on alternative energy-though, I would never invest in an industry that relies on government regulation and cronyism to stay profitable.

Wednesday, December 3, 2008

So let me get this straight: they are trying to artificially inflate home prices... AGAIN!?

Here are 2 articles for you to check out from the AP and the WSJ. In summary, the Treasury-via Fannie and Freddie-are planning to buy up/issue mortgages at an interest rate that less than banks are currently willing to lend at, and less than people are willing to pay. In addition, this is at a rate that is a mere 1% above the inflation that we have experienced in the last year-at the rate we are printing money, it will probably be less than inflation in the coming years.

It seems to me that mortgage originators are going to make out like bandits with all of this new business, while the community banks, which keep mortgages on their books-being the most honest form of banking-are the ones getting screwed since they can't compete with a segment of the banking industry that is essentially being subsidized by the government. You have to love artificial monopolies that use our taxes and destroy the value of our money!

What I don't understand, is why we are trying to play God by manipulating markets in such a way that is only going to screw them up more. After all, the Federal Reserve, Fannie, Freddie, and government lending laws created this whole problem. So really, it seems pretty dumb to not let the Treasury try their hand at 'fixing' things... Right?

I figure that the over all plan that the government is hatching is to make inflation such an issue that it will raise the price of everything. In turn, real estate prices stay as they are-being a real dollar loss, but a nominal stagnation-which feels better to lenders and homeowners a like.

As I tend to rant about, all of this comes at a cost, which David at the Bluegrass Policy Blog posted a link to. This bailout, as a whole is damned expensive. Check it out.

Wednesday, November 19, 2008

Inflation-through the eyes of a kid.

I stumbled onto this great video a few minutes ago... As I reminisced to the days when I was but a wee lad, I fondly remembered one of my favorite shows: Duck Tales. After watching this video, I was shocked that only a few years ago, inflation was the subject of a cartoon. It is crazy that after 30 minutes, a 5 year old would of had a better understanding of the money supply than most adults with a college education.

Wednesday, November 12, 2008

Slaughtering Sacred Cows and Grinding Them Into Steakburgers

After getting back from the Investor's Day held by Steak n' Shake on Tuesday; I have had a few nights to sleep on the developments, curb my enthusiasm, and use the entire balance of the $15 gift card that was handed out to all of the attendees (my dividend for the year!). The bottom line is that I fundamentally don't understand Mr. Market's estimation of worth for the company- it is a valuation where the underlying assumption must be that this company, which was started in middle the Great Depression (which currently, has next to no debt on the books) can not weather this credit storm; has underlying real estate that must be worthless; and new management is inept... I don't buy in to that.

Management's Presentation: A power point presentation illustrated just how the company was going about turning itself around. With a new board member (Bill Regan), and former executives from Krystal, Burger King, Wendy's, and Friendly's coming on board, my confidence in the company is only bolstered. It seems evident that fixing operational and customer satisfaction problems are being/have been addressed. It was noted that 80% of all customer complaints come from the bottom 25% of stores... To fix this, a culture of accountability is being created, with promotions and pay raises based on performance, mystery shoppers, and management being visible on the floor of every unit. The company is also recruiting outstanding employees from other companies to not only higher level positions, but also in the individual stores.

Customer Satisfaction: To improve customer satisfaction and excite people about the brand (while minimizing cap-ex), the company is having Musak installed in all locations (an idea that came from the franchisees) and painting many of the store's white walls red-which really make the restaurants look more welcoming and less dirty (see picture on the left). New commercials will be rolled out that feature actual customers-departing form the smart mouthed employees featured by the recently dropped advertising agency, DJs will be endorsing the company on their radio shows, and merchandising is quite likely to occur-in the vein of TGIFriday's! In store promotions will involve "super fans", Steak n' Shake kids toys, and the upcoming 75th anniversary of the company. Also, there are 4 meals that are 4 dollars (See the first picture)-the first part of streamlining the menu to the company's core products.

Cost Cutting: Of all the questions posed, there was one about cost cutting which helped Biglari extrapolate on just how much the company is refocusing it's bearings towards cost cutting. Numerous suggestions have come from suppliers, who apparently were happy to share their knowledge. This was despite that they "had never been asked on how to cut expenditures". The company will be using thinner mailing promotional papers, non-branded ketchup, and my personal favorite-taking the red ink off of Styrofoam cups... Apparently, the red boxes on the cup pictured to the right, that take up under 1 square inch of space, will save a "ton of money" since the company will no longer have to pay for 2 screens of color in printing. While these cost saving measures may seem minuscule, if the company can save a meager $1,000 a month in every store-that would be equate to well over $5 million in cold hard cash per year. The company will also focus on not forcing customers to wait for coupons before they come in to the store. Reducing coupon mailings, improving the experience in the store (thus, increasing perceived value), and cutting costs to help reduce prices should work wonders-kind of like at Chipotle.

Future Growth: The company foresees itself growing to as many as 2,000 units, or roughly 4 times it's current size. This will largely be achieved through being in the real estate business (with the depreciation that comes along with it), and franchising like crazy. It was estimated that EBIDTA margins on franchisees could be as hearty as 50%.

Stock Buybacks: Once the company has enough cash on hand to run the business in ANY kind of economic environment, there will be either a buy back of shares or investment in some other restaurant company, depending on what security is cheaper at the time. This was the one item of the day that bothered me, mainly due to taxation issues concerning buying another company's common stock... Though, I have an immense amount of confidence in the capital allocation abilities of Sardar Biglari, and since the company is making all efforts to maximize intrinsic value on a per share basis, I am quite hopeful that these issues will be taken into consideration.

Debt: The companies credit lines will be left open-as is indicated in the most recent 8K, debt will be paid down by at least $10 million, and neither of the credit lines will have to be collateralize with real estate. Also, there was a great question asked about long term debt on the balance sheet, where it was discussed that the long term debt is related to lease obligations, not debt owed against the company's real estate. Biglari explained the accounting checklist that was gone through to determine how the obligations are carried on the books. In light of this, it really makes one wonder about the collateralized debt loads that are carried by not only Ruby Tuesday, but also Jack in the Box (which Western Sizzlin' is in the process of making a tender offer for some shares of) and O'Charlies.

Website: The company is currently working on updating and improving the website to make it into more of "an online community for fans".

Gift Cards: On a closing note, the company is now offering a $5 dollar off reward coupon when you buy a $20 dollar gift card before Christmas. I will be getting them for my friends and family; after all, it would be stupid not too! You may have to go to the store for this, as the company has yet to update their website with the offer.

Overall, I am quite happy with the progress that seems to have been made (as has also been highlighted in my previous writing on the Letter to Shareholders). From now on, the annual shareholder's meeting will take on an open tone, as this meeting had. While I hope that the stock price exceeds my estimates of intrinsic value before I get the chance to attend to many, I would certainly not mind being an owner in such a great company with such talented management for years/decades to come. While this writing did not contain many hard numbers that help with your calculation of intrinsic value, I am trying to shed light on the fact that Biglari and Company are delivering on the promises that they have made-which is what makes the company intrinsically worth so much more than before.

Disclosure: Long on SNS...

Friday, November 7, 2008

SNS Investor's Day

If anyone is gonna go to the Steak n' Shake Investor's Day, drop me a line and we can talk stocks before/after the meeting.

Also, I am planning on writing some articles on value traps, so if you know of any good historic examples or current ones, suggestions would be helpful! Obviously, I am gonna be looking at some Buffett blunders as well as some of my own and others; USair, Pier One, Express Jet, and a few of the banks that have gone belly up.

Sunday, November 2, 2008

This Election Day

Instead of giving you some sort of article on investment ideas, I am going to write a somewhat backhanded post on the upcoming election.

My take on recent developments: it seems rather evident that Barack, and his brand of Obamunism are going to take the executive branch of government, there is also a strong chance that the Democrats will have a filibuster proof majority in the legislative branch. Heck, here in my home state of Kentucky, there is a "conservative" like Mitch McConnell that is facing a race that is too close for comfort; and this is a guy that is not only the minority leader, but one that has openly bragged about bring home $500 million in pork.

While this is innately bad for all things that are government and fiscally sound, does anyone think that the Republicans don't deserve to be kicked out of office for stabbing their principles in the back? Sure, the Democrats will go on a Keynesian spending spree and socialize medicine, but I seriously doubt that they will be able to hang on to power for long. Not to say that everything that they do will be bad-I certainly hope that they get rid of the Patriot Act...

Regardless, here are my plans for election day:
10:30 AM- Wake up/eat breakfast/shower/read web articles
1:30 PM- Throw away my very principled vote on Bob Barr
2:00 PM- Start drinking to lessen the sting of defeat
7:00 PM- Pizza and beer at my brothers/watch election returns
10:00 PM- Accept the defeat of Bob Barr, and go to the bars.

The day after:
8:00 AM- Go to jury duty with virtually no sleep, a hangover, and a mindset that is ready for socialized medicine.

Tuesday, October 21, 2008

Steak n' Shake is preparing for tasty cash flows...

In light of the just released Chairman's Letter from Sardar Biglari of Steak n' Shake, I figured that I would take some time to sing some praises of my favorite milkshake supplier. I'm going to go out on a limb here, and say that this letter will help move the price of the company closer to it's intrinsic value by a nice bit.

First and foremost, it is expected that the company will reduce G&A by nearly $20 million in 2009, which will put the total in the neighborhood of $37 million. This is pretty awesome, and will alone triple the earnings of the year ended in September of 2007, it also represents roughly 12% of the market cap of the company. They have also reduced unnecessary insurance programs and outside service costs by $8 million.

Obviously, working on decreasing distribution costs is music to the ears. In addition, with inflation and commodity costs going down (most notably transportation costs associated with gasoline) these efforts will only have better results in the financial improvement of the company.

The company is also working on a new menu, which made my stomach the happiest of all the new initiatives. I never really minded the lack of music, the lighting that made your dinning partner look like a corpse, or how the albino white walls showed dirt too easily-which are all problems that are being addressed. I was however, bothered by the menu not making much sense. In addition to the menu being assembled in a piss-poor manner (which I actually moaned about last Friday while eating there with a friend), I have always wanted a meal that wasn't on the menu... apparently a Double Steak burger, cheese fries, and a Root Beer (with vanilla, of course!) is to much to ask for in a convenient meal form. Hopefully, this will change-certainly having a menu based on price variances will be a revenue helper and sanity keeper.

I found it interesting that Sardar and company recruited a guy from Friendly's, which they took over and forced the sale of a few years back (talked about here, at Noise Free Investing).

In addition, there will be $1 million in savings just from reducing the hours at 75 stores. Closing under preforming and untested/un-constructed units will be good for preserving cash, and will also focus the company on fixing it's internal problems. With a total of 24 pieces of property for sale, we can guesstimate the value at a super low fire sale price will be more than $10 million. There was also mention of $16 million in taxes that will be reclaimed from 2006, with an additional $6 million in future taxes, that included a $400K study that will help increase near term cash flows from the gift of accelerated depreciation.

The one thing that I don't like is the board now being compensated with stock, this is due to the stock being so ridiculously undervalued. The board members are getting a great price on the company (or a dollar of intrinsic value for significantly less in their fees). However, since they are being the catalyst in a company that so desperately needed them, so I suppose that I can overlook that.

Between the cost cutting and cash inflows previously mentioned, we are sitting on well over $60 million in the near term-over a 1/3 of the present market price of the company... WOW...

I guess that I should disclose that I own shares of SNS-I also own a call option for a triple bypass in 20 years due to all of the Steak burgers, fries, and shakes that I have eaten to try to bolster company earnings.

Tuesday, October 14, 2008

Preserving the market with the "Uncle Sam Hedge Fund"

President Bush announced sweeping plans, that in his words are "not intended to take over the free market but to preserve it."

I am astonished that the idea that the government taking an ownership in banks, buying up what we are supposed to believe are undervalued CDOs, and otherwise acting like a hedge fund, is in the interest of saving the free market. Really, this seems like something along the lines of what the Chinese do with their businesses; or despite the bad cliche', being sort of pregnant. Which should really disturb everyone, especially since, due to the explanation provided by the iron triangle, the government will most likely never give up the power that it gained at the desperation of the people.

It seems that the desperation came from people that are quite short sited-after all, these are the same people that as of right now have sent the DJIA up over 1,000 points since it's low on Friday. A low that was reached without any regard for true value of many of it's components. A perfect example being the price fall of DRAM, SNS and SHLD. These, especially the last 2 have very known, vocal, and above all-effective management teams-I would be willing to bet that Eddie Lampert is buying back shares of SHLD as we speak-after all, it wouldn't be the first time that he has done so with a price drop. Actually, with him at the helm of such a great cash flow machine, he'd be pretty stupid to not do so.

Back to the short and sweet point of the article. Are we as a society really ready to deal with the inflation that will occur from massive government spending? Why do we want the people that created most of the problems that we currently have to fix it? How can the same people that have given us over 53 TRILLION dollars in unfunded liabilities (put another way, everyone currently in the US can work for free for the next 4 years to fund them) fix the problem that we have? And above all, do we really want the government to function as a hedge fund?

I shouldn't be complaining though... Inflation will be great for me. The debt that I have against my rental properties will look like nothing when compared to the rents that I will get.

Sunday, October 12, 2008

Please save us from the WPA.

I found this little nugget of info via "Can Turtles Fly?". Comparing the point losses of the S&P 500 to that of previous market declines is really interesting, and while shouldn't be used as a guide to how long it will take us to get out of this funk, is still really cool.

There is also this write up from the guys at FWallStreet on the state of the credit crisis and what got us to this point in the business cycle. While raising many good points, claiming that "The only economic savior in that environment (a recession) is government spending" is pretty baseless. Government intervention in the market is generally a bad thing, simply doling out the money of the people, with the middlemen in DC taking their cut, won't help out the long term economic outlook.

I remember in one of my economics classes hearing a great story that highlighted the fallacy of the government employing people to stimulate the economy:

There was once a Texas contractor that went to China to take a look at a land dam that was being constructed-a land dam, that was being constructed, using government employed laborers. While standing with the public works mananger, he was shocked to find out that there were 10,000 Chinese workers using shovels to move such a massive ammount of earth. Since he was there to offer advice, he asked the manager in his surly Texan tone, "Why is it that you have 10,000 workers to build this dam? If we were doing this in the US, we would simply get a few large earth movers, use about 100 workers around the clock, and have this thing done in a fraction of the time that it will take you, using this manual labor."

The project manager, feeling quite confident in his response retorted "If we did that, then we would have close to 10,000 people that would not have jobs, and if they don't have jobs, then that is bad for our economy."

The Texan, at this point feeling the urge to be rather blunt simply retorted "If you are wanting to create jobs, then why don't you quadruple your workforce and have them move this earth with spoons!"

The point being, having full employment provided by the government is not the way to get any meaningful long term economic growth. Plus, I certainly have more faith in people to figure out a way that they can make a better stapler or something; about anything is more efficient than moving dirt with a shovel at the whims of some bureaucrat. God help us if we go back to the alphabet soup of work projects in the 1930s.

Another interesting thing to point out (which I don't think has been talked about enough) is that the de-levering and lack of expansion that is occurring right now is not inherently bad. It isn't as if a business sitting on a pile of cash isn't going to do anything with it-after all, the cash will be in a bank account or in public spending via treasury notes, when banks "buy" a ton of deposits, they have to loan it out to produce cash flow. Failure to do so will put the bank out of business quite fast- as we have seen with WaMu.

When the banks seize up, their lending standards and get more stringent with their loans so that they can protect their investment-which again, there is nothing wrong with-it is simply survival. When it comes to survival, loaning money to the most worthy of companies and people seems like a smart thing to do... yet this hasn't been done for a while. It is ironic that the companies that are most suited to be lent to are the ones that didn't use much, if any leverage to get to the point where they were deserving of credit. These are the companies that will be able to expand, and ultimately save us from the crisis that we are in. Any companies that are bad stewards of capital will be absorbed, consolidated and merged into other companies making us better off... Westinghouse anyone?

While the de-leveraging will be painful, it will ultimately be a good thing for the economy.

Last night, one of my slightly left of center friends jokingly took a poke at me and said "Jeff, here's the thing, capitalism isn't fairing to well right now..." which, yeah, he is totally right. We just have to hold out for better days.

Monday, October 6, 2008

Getting a dollar for 71 cents and dispelling Efficient Market Theory...

Today, I awoke late, as I tend to do on too regular of a basis-and as usual, checked my email and how the markets were fairing... it was about 10:30, I saw that the Dow had lost a few hundred points; my gut reaction was "good, maybe some companies will be cheaper." Little did I know just how cheap one would get.

As I looked through my folder that contains stocks that have some compelling values, I saw that Dataram (DRAM) was down around 30%. It seemed rather strange that this would happen all of a sudden since the company has no debt, next to no liabilities, and a ton of cash on hand... I was finding the company relatively attractive at 2.15/share, coupled with the fact I only buy things when when they on sale, I figured that I should become a fractional owner of the memory maker. Since it would take the company not selling any chips for about 9 months, while still spending current levels on R&D AND G&A to get below the cash levels that I purchased at, this is a nice quantitative bet.

In order to get a hold of it, I actually moved the market up a little with my minuscule purchase, and essentially bought 17 million dollars worth of cash for about 12 million. The great thing is that after my purchase, the stock only went up. I am still in awe that people were able to buy over 70K in stock that is, by definition, the most classic of net-nets. I never really thought that I would see something so painfully obvious happen in my life.

Take that efficient market theory!