UPDATE: Steak n Shake plan makes 'perfect sense' to investment pro

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The Steak n Shake Co.’s unusual plan to initiate a reverse stock split has the support of at least one local investment officer, if in fact the company’s CEO is attempting to model it after Warren Buffett’s holding company, Berkshire Hathaway.

The Indianapolis-based restaurant chain announced the 1-for-20 reverse split Monday afternoon in a shareholder letter from Sardar Biglari, the 32-year-old CEO who models his moves after the legendary Buffett.

“That makes perfect sense to do, if that’s the game plan, to become a mini Berkshire Hathaway,” said Mark Foster, chief investment officer at Columbus, Ind.-based investment advisory firm Kirr Marbach & Co.

Biglari has transformed Steak n Shake into a holding company, ala Buffett's Berkshire Hathaway, and has announced plans to use the chain's free cash flow to make acquisitions as he pleases. Steak n Shake agreed in August to acquire the steak chain Western Sizzlin, another Biglari holding, and has acquired a roughly 10-percent stake in a small insurer.

Steak n Shake’s reverse stock split would reduce its number of shares outstanding from almost 29 million to just 1.4 million and boost its per-share price from roughly $12 to $240.

Reverse splits traditionally are used by struggling companies, often with share prices under $1, so they can maintain stock listings and stay within the investment range allowed by mutual funds.

Steak n Shake investors who own 20 shares now will own one. A reverse split, in this instance, will limit the amount of trading while enabling the company to maintain its market value, Foster said.

Given that Steak n Shake shares are trading well above the $1 threshold, Foster portrayed the move as “unprecedented.”

“Retail investors aren’t going to spend $240 a share,” Foster said, “so it’s a move that will eliminate a lot of the retail investors [in favor of] a lot of institutional investors.”

Biglari alluded to as much in his letter to shareholders.

“We are seeking to assemble and align ourselves with long-term investors whose purpose is to prosper in concert with the company,” Biglari wrote. “The change, we hope, will dissuade speculators from participating in our stock.”

Wall Street is reacting favorably to the move. Company shares were up nearly 6 percent, to $12.50, in late morning trading.

Biglari’s letter accompanied the chain's annual and quarterly earnings reports. The company reported a quarterly profit of $3.4 million, or 12 cents per diluted share, for the period ended Sept. 30. That compares to a loss of $9.2 million, or 32 cents per diluted share, during the same period last year. Fourth-quarter revenue rose to $158.6 million from $138.9 million a year ago.

The company said quarterly customer traffic rose 20 percent and same-store sales were up 10 percent.

For the year, Steak n Shake earned $6 million on revenue of $627 million, a major improvement over the $23-million loss the company reported for fiscal 2008.



  • Correction to Reply to links?
    Make that the left hand column, not right.
  • Reply to links?
    Go to wsj.com, type SNS for the Steak'N'Shake market data, go to institutional holdings in the right hand column and you'll find it there. WSJ.com gets its data from Thompson Financial.

    Someone else made the point that Berkshire was once a shirtmaker. He's correct on that point. The difference is that the shirtmaker wasn't viable when Buffett took it over, while Steak'N'Shake is.

    • As usual Joel LIES
      Just as he has been doing since $3 per share.

      Biglari hasnt sold a single share.
    • Joel
      Joel - read my book - "Building the Next Berkshire Hathaway" - and judge if it can be done. Don't know if it will happen with SNS, but this is still the first inning.
    • Joel gets it wrong
      Joel, you talk about how it is wrong to compare what he is doing to emulating Warren Buffett, but you are getting it wrong.

      Berkshire Hathaway started out as a textile mill, not an insurance company. My guess is that Biglari will indeed take control of an insurance company when the possibility arises, he has already started building a stake in one.
    • Finally
      @ Joel - Finally someone who speaks the truth. Thank you for your insight.
    • links?
      Do you have a link to the thompson page that says he was selling. I can't find it. All I see on insidercow.com is that he has personally bought and so has Biglari capital bought SNS in recent months.
      • Does It Really Make Sense?
        This may make sense to at least one investment pro, but it makes no sense to me. And I think the comparison to Berkshire is serious stretched.

        1. The key to Berkshire's ability to make long-term investments is its use of reserves developed primarily from its reinsurance business. Those reserves aren't needed for years -- if ever. Those reserves aren't taxed, either. Steak'N'Shake doesn't have the sort of ability to generate significant reserves that Berkshire has.

        2. SNS is a company that was on the ropes just a couple of years ago. It's true that the latest results show a profit, which is a good thing. But 60% of the $52 million cash flow from operations is a result of depreciation and amortization. Sooner or later -- and probably sooner -- kitchen equipment will need to be replaced, tables and chairs refurbished, etc. This is likely within the next five years. That's far different than Berkshire, which is able to sock its reserves away for a very, very long time.

        3. One of the reasons to be a public company is to get your customers even more committed to you as owners. The investment guy is probably right that the move will diminish public investment because a lot of small investors would rather own 100 shares of a $12 stock than 5 shares of a $240 stock -- even though the total value of both holdings is identical.

        4. Biglari has been dumping SNS shares. According to Thompson Financial, his investment vehicle, Biglari Capital Corp., sold 584,794 shares on Nov. 8. During all of 2009, Biglari himself has bought 230,000 shares. If Biglari doesn't have confidence in his vision, why should we?

        5. He's been talking about emulating Warren Buffett since at least 2007. But he doesn't run an reinsurance company with the tax advantages that go with it. He runs a restaurant company. In that respect, he's more akin to Sears Holdings, whose CEO, another smart financier, also has sought to develop a holding company approach. People who bought Sears Holdings on Jan. 3, 2005, at $93.71 today own a stock worth $75.32.

        After the crash smart financiers have put us through, you'd think that even investment pros would put aside the Kool-Aid abd realize that it's the ability to operate a company, not the ability to manipulate a balance sheet, that is the best indicator of a company's future prospects.

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