This is his one chance for the next 52 weeks to 'tell his story.' I'm interested in seeing how he addresses Maxim and how he positions the valuation.
Not sure I agree with you. If he sold and paid taxes on the gains, he'd have to reinvest the money and earn an approx 20% return just to make up for the taxes paid. He's better off just letting it ride and collecting the dividends and building out his company around owning 100% of SNS and 20% of CBRL. Those are two nice assets.
I agree with your point, smaycs4. However, he's done 2 rights offerings since he has bought CBRL. The rights offerings are weighing heavily on the stock. They are good only for those investors with a very long time horizon and those that want to invest more in the company. His capital allocation has been good. I also don't mind him raising money because he makes good decisions with the capital. In the end, I think he produces above average returns with BH. But, I'm not sure because he does continue to do the rights offerings, talk about A and B shares, and also puts BH money into the hedge fund structure paying high returns to SB, himself.
I guess, I want to believe in him. But, not sure that's the right move long term.
Hate on SB all you want. I understand the criticism and disagree with some of his corporate governance policies.
However, can anyone identify a major capital allocation mistake in the last 5 years? I can't.
CAW is as close as you're going to get. And really, who cares. It's a small investment that he made before he changed his strategy and went big into CBRL.
The last 5 years has been very challenging given all the cross-currents after the melt down. SB has made relatively few major investment decisions, which I view as a positive. And those that he has made have been very good.
Hate him all you want. His corporate governance decisions has pushed the stock to levels that make it compelling. He now has cash again.
I'm betting that he'll make another solid decision with the capital he has.
So, can any of you SB haters come up with a poor capital allocation decision?
Any thoughts on this valuation?
$635 million Portfolio Value as of September 2013
$35 million CBRL gain since Sept 2013
$10 million Value of First Guard and Maxim combined
$75 million Cash raised in recent Rights Offering
$125 million Value of Steak n Shake net of debt
$880 million Total Value
20 million Current shares outstanding
$440 per share in value
Just a casual observation- looking back at the first rights offering, the stock performed in a similar manner when compared to today.
SB buy a cash-using company like Maxim was a curious move, along with another rights offering isn't doing any favors for the stock. But, in the grand scheme, I like the company he is building and the valuation is good now. I still have concerns with his compensation and weak Board.
Add up the value of the stock holdings and SNS and you get a compelling risk/reward, imo.
From the 10-Q:
Given our negative cash flows from operations and in order to meet our expected cash needs for the very near term and over the longer term, we will be required to obtain additional liquidity sources, consolidate our store base and possibly restructure our debt and other obligations. We are exploring alternatives and anticipate engaging in discussions with third parties as well as our key financial stakeholders, including our existing lenders, stockholders and landlords, in an effort to create a long-term solution. Alternatives include the issuance and sale of debt or equity, the sale of our inventory or assets, as well as both in and out-of-court restructuring. We are evaluating all of our alternatives to restructure existing debt terms and other arrangements to provide additional liquidity. There can be no assurance that we will be able to successfully implement a long-term solution.
If acceptable terms of an out-of court transaction cannot be accomplished, we may not have enough cash and working capital to fund our operations beyond the very near term, which raises substantial doubt about our ability to continue as a going concern. As a result, we may be required to seek to implement an in-court proceeding under the United States Bankruptcy Code (“Bankruptcy Code”). If we commence a voluntary reorganization under the Bankruptcy Code, we will attempt to arrange a “pre-packaged” or “pre-arranged” bankruptcy filing. In a “pre-packaged bankruptcy”, we would make arrangements with new and existing creditors for additional liquidity facilities and the restructuring of our existing debt terms, before presenting these arrangements to the bankruptcy court for approval. In the absence of a “pre-packaged” bankruptcy, we would consider a “pre-arranged” bankruptcy filing, in which we would reach agreement on the material terms of a plan of reorganization with key creditors prior to the commencement of the bankruptcy case. An in-court restructuring proceeding would cause a default on our debt with our current lenders. Our fiscal year ends on the Sunday nearest to January 31. Fiscal years 2015 and 2014 consist of 52 weeks, further consisting of four thirteen week periods, with each period referred to as a quarter. The thirteen week periods ended August 3, 2014 and August 4, 2013 are referred to herein as the second quarter of fiscal 2015 and 2014, respectively.
I read up on the recent 8-K's. In the bottom of the one where they announced the CEO changes, they also announced that they have hired Houlihan Lokey. This is a big time bankruptcy/restructuring specialist.
IMO, that would explain the price drop more than anything else. You only bring in Houlihan if you're preparing for a major restructuring. Existing equity rarely survives. There seems to be value here so maybe this time will be different.
Houlihan Lokey advised major parties-in-interest in 12 of the 15 largest corporate bankruptcies in the U.S. in the past decade.
Advisor in 12 of the 15 Largest Bankruptcies
Company Assets ($b)
Lehman Brothers Holdings Inc. 691.1
Washington Mutual Inc.1 327.9
WorldCom Inc. 103.9
General Motors Corporation 91.0
CIT Group Inc. 80.4
Enron Corp. 63.5
Conseco Inc. 61.4
MF Global Holdings Ltd. 40.5
Chrysler LLC 39.3
Thornburg Mortgage Inc. 36.5
Pacific Gas & Electric2 36.2
Refco Inc. 33.3
IndyMac Bancorp 32.7
Global Crossing Ltd.3 30.2
General Growth Properties Inc. 29.6
I've followed this company off and on for a while. I don't own any shares.
The last few weeks are bizarre. You put in a new CEO and say all kinds of good stuff. Then, a couple weeks later, you report bad earnings and talk of overhauling the balance sheet? You can't normally overhaul a balance sheet without wiping out the existing equity.
It sure feels like they are going to do a prepackaged bankruptcy. In which case, the value of the common is probably zero. But maybe the CEO is inexperienced at running public companies and didn't realize what he said. If he said what he meant, then they need to recapitalize and start again. That would explain the stock price collapse. Cause it would probably be going close to zero soon. Just my opinion and I haven't followed it that closely in recent months.
Any other thoughts on this?
smaycs: I remember hearing older, experienced investors talking about the importance of good corporate governance. Only in recent years has it become clear to me what it is and why it's important.
I like SB and what he's doing. However, his corporate governance is about the worst I've seen and I believe BH stock will trade at a discount to underlying value for a long long time as a result.
The good news is that the discount is now in. I think the stock is worth somewhere in the 450 range. So, we have the 30% discount, or so. Now the stock should trade with BH results but keep the discount. If he ever becomes more shareholder friendly, stops being so opportunistic with his own pay, stops doing these rights offerings, gives up on creating a new class of stock, or gets a more diversified Board then we'll see the gap close.
Now we have to be concerned with the next time he tries to create a new class of stock so that he can better control the company.
Your point is valid in that SB has an incentive to make money.
I'd like to see the average compensation for a CEO for other companies with a similar market cap. I'm guessing it's around $1 million a year. So, in a good year he makes 25x the average. In a bad year he makes the average. Long term, I'm not sure a common shareholder can make above average returns when giving up such a percentage of the returns. I guess the reality is that BH is primarily a hedge fund with similar fees. And, a hedge fund with 80%+ percentage of its assets in one stock where the big upside move has already occurred.
I sold all my BH after he announced the rights offering so I can't participate. I like SB and how he thinks about business and investing. I also like how he takes concentrated positions.
However, I feel like BH is a stock you can only trade rather than buy and hold. He seems too willing to do things that cause a lot of downside (rights offerings and creating 2 classes of shares) for me to live with the volatility. The offering memorandum tells you that he's going to try again to create 2 classes of shares again. And if he can't, he's going to do a rights offering again next year. All fine if you're a long term investor who wants to add to your position. But not so shareholder friendly if your holding period is 1-2 years.
I'm very concerned about how he gets paid on both BH gains in book value and also hedge fund compensation on the BH portfolio. Seems like he is double dipping excessively.
So, in the end I'm afraid I'll not make this a large core holding because of poor corporate governance.
Here's my back of the envelope:
Investment portfolio: $675 million (my estimate; haven't taken the time to verify from recent 10Q)
restaurants: let's assume normalized EBITDA of $40 million; an 8 multiple (you can argue that's high or low) gets you to $320 million. Back out the $200 million of debt for a net value of $120 million.
First Guard/Maxim: guessing at $10 million total.
new cash from rights offering: $80 million
add 300k new shares from rights offering.
Total value of around ~$885 million ($442/share based on 2 million shares OS)
That's a 28% discount to today's price of $344. I'm buying.
I agree with you smaycs4. Surprising. There must be some arb trade funds are doing that bring the selling. I gotta believe this will bottom around here. But, SB doesn't help with his recent purchases of the magazine and insurance company that didn't fit with his stated strategy of either buying cash flowing companies or insurance companies with floats. Those were slight negatives, but nothing to cause this selloff. It has to be the rights offering and this should prove to be a good buying opportunity. It is annoying how much self dealing SB seems to do.
The stock is very cheap now. Sardar has done a nice job overall. He doesn't miss an opportunity to take advantage of his power/control. That's the drawback. However, he is talented and has made overall good decisions since he took over SNS. Other than paying himself a very high amount, it's hard to be too critical with what he has done. In time, I think he will do well.