Street Capitalist: Event Driven Value Investments

It looks like one analyst seem to think so:

Analyst Steve West said in a note to investors that the company’s “long-awaited” strategic plan is due to be released in the next few months - a move that likely will improve sentiment in the stock and make for the beginnings of a turnaround.

West said he does not see traffic at the chain improving until at least 2009 “as the strategic plan will take time to implement and the consumer remains strained.”

But he said the company’s management is “taking the right steps for a fiscal year 2009 rebound.”

Although he said he does not know details of the plan, he expects it to include closing underperforming stores, cost-cutting, selling real estate, refranchising company-owned stores and repurchasing shares.

Steak n Shake shares rise on analyst report (IBJ)

I believe that one of the right steps was the sale-leaseback transaction Biglari executed recently. The move elicited a pretty negative response from some investors, but when faced with the possibility of bankruptcy since the company was/came close to violating debt covenants, it seemed like the right move.

Biglari’s withdrawal of the tax abatement plan appears to be the right move as well. Receiving that kind of support from the local government could have added to the costs of Steak N Shake (NYSE: SNS). These tax abatement plans are there typically for a business that is supporting and employing members of the community. They would discourage or possibly prohibit the closing of underperforming restaurants and firing of employees, which is just the sort of cost-cutting we might need right now.

Right now, controlling costs is at the forefront for most fast food and casual dining chains. It’s evident from the reports coming out that describe McDonald’s (NYSE:MCD) retooling of the double cheeseburger to make it less of a loss-leader and Burger King’s (NYSE:BK) hope of reducing the size of the Whopper Jr. to control costs. With most commodities going up, all of these companies are in a tough position. It’s an intensely competitive business, with your enemies usually operating next door. If you raise your prices to push your increasing costs to the consumer, you risk losing sales.

I’m still holding my shares, and believe that my previous estimate for the company’s valuation of $20 per share is still in tact, but I’m not entirely sure of how long it will take to play out. We’ve already seen the bankruptcies of Bennigans, Steak & Ale, and creditor pressure on Uno’s.

It’s likely that we’ll see more distress in this sector, just as some of the highly leveraged chains find themselves strangled by a perfect storm of debt, higher costs, and lower customer traffic. Shrewd capital allocation skills are going to be needed as the industry passes through this rough period, luckily our new CEO seems to have them.