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!