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Commentary: I'm getting a taste for this stock

July 14, 2008

With supreme overconfidence garnered as a result of the Finish Line investment return discussed in my March 24 column, I instructed my retirement plan to purchase shares of Steak n Shake at $6 and change.

Steak n Shake owns and operates full-service restaurants with counter and dining room seating. It also has drive-through and carryout service. I have enjoyed Steak n Shake for years, particularly the double steak burger platter and genuine chili. The place is always clean, the food is consistently tasty, and I like the fact that my lunch is cooked in full view. It is probably irrelevant to an investment decision, but it's comforting to like the products of companies in whose stock you invest.

I did not relish my last experience at the Steak n Shake in Carmel. Service was slower than the ooze out of a new ketchup bottle. One of the patrons was so upset in the cash register line that he threw his money on the counter and stormed out. Undoubtedly, he will not return. If there was any manager at all, he was probably in the back eating his french fries (they're good). When it comes to attention to customers, new market entries Red Robin and Five Guys are eating Steak n Shake's lunch.

I'm not the only one who has noticed. Same-store revenue, an accurate gauge of restaurant trends, has nose-dived. The company is losing money and the stock is trading around its 52-week low in spite of massive purchases by insiders. Short-sellers are all over this stock, making up almost 25 percent of the float. It may go lower yet.

Lackluster management, cheap stock, falling revenue and negative earnings-I see opportunity and so does Sardar Biglari from San Antonio. Through his Lion Fund, he has purchased a large minority interest in the company and has been elected chairman of the board. Moreover, other large personal acquisitions of Steak n Shake stock carry a distinct Texas flavor. Biglari and his cronies are clearly in control.

Biglari has a track record. His forays have included successes at Friendly Ice Cream Corp. and Western Sizzlin Corp. Maybe he can do it again and let us ride along. He stated in his Feb. 21 letter to Steak n Shake shareholders, "... we would not obtain a return on investment different from that of any other shareholder. We seek to make money with you, not off you."

Steak n Shake has challenges, but key fundamentals-including interest coverage, gross revenue and operating cash flow-demonstrate that the company has not deteriorated to the point that it is too late to make course corrections.

Steak n Shake is a compact Midwest operation that should be able to react nimbly to management decisions. The basic concept is unique and has been proved. Its steak burger could be enjoyed on a broader national level, perhaps through franchising. But Biglari needs to hire a CEO-stat. It also wouldn't hurt for him to flirt with institutional and mutual fund ownership, which amounts to a whopping 80 percent of the outstanding stock. One of these institutions is MSD Capital LP, an entity controlled by Texas billionaire Michael Dell. I suspect he is already in the fold.

Established in 1934, Steak n Shake has heritage. Just a few years ago, it was probably Steak n Shake stock appreciation that financed the gift of $23 million made by E.W. Kelley to the Indiana University School of Business, which now bears his name. This is another opportunity to support an Indiana-headquartered enterprise. We are down to precious few.

The restaurant business is highly competitive. It is a lot easier to open a hamburger stand than, say, a tennis shoe store. This is not an investment for the faint of heart but perfectly suitable for my retirement plan. I don't plan to retire.



Maurer is a shareholder in IBJ Media Corp., which owns Indianapolis Business Journal. His column appears every other week. To comment on this column, send e-mail to mmaurer@ibj.com.
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