Apr 9, 2009
What’s Sizzlin at WEST?
Western Sizzlin (NASDAQ:) is an interesting company for investors to study. Many of us would love the opportunity to invest in the next Berkshire Hathaway. There will never be another Berkshire, but it does not mean that there won’t be companies that come to embody a similar philosophy. Some seem to think that Western Sizzlin, run by Sardar Biglari, is shaping up to be just that. I don’t currently own WEST, but I think that it’s certainly worth looking at.
Sardar Biglari’s took control of Western Sizzlin a couple years back and so far has tried to implement the same kinds of value practices at the company. Western Sizzlin really started as simply a restaurant operation; currently the company owns 5 restaurants, 104 franchise restaurants, and a joint venture in a buffet-concept. Under Biglari the company has expanded quite by acquiring significant stakes in public companies, operating a real estate investment partnership, and picking up an investment advisory business.
To value a business like WEST, which contains a number of different parts and moving elements, you should try to break the business down into pieces and figure out a value for each. The best approach is to value as much as possible using net asset values and then applying other methods for the restaurant and investment advisory operations.
Public Investments
Common stock investments in ITEX Corporation (OTC:) and the Steak N Shake Company (NYSE:) are probably the two biggest drivers in WEST stock. What you want to do is figure out how much of each company does 1 share of WEST control. Here’s how to do this:
Company stock owned / Shares of WEST outstanding
SNS: 1,322,222.15*/2,822,785 = 0.47 shares of SNS per share of WEST.
(*Western Investments owns 85.11% of Western Acquisitions, which owns underlying shares in SNS)
ITEX: 1,704,201/2,822,785 =0.60 shares of ITEX per share of WEST.
Now you can start doing the math of figuring out how much a price movement in ITEX or SNS affects your WEST stock.
Simply take (.6*Current Price of ITEX)+(.47*Current Price of SNS) or, using today’s numbers:
((.47*8.93)+(.6*.57))= $4.54 per share
Real Estate
In 2007, Biglari established a new subsidiary called Western Real Estate LP, to serve as a vehicle for investing in real estate. In December of 2007, the company purchased 23 acres of land in Bexar County (San Antonio – where Biglari is from). With the inclusion of Kenneth R. Cooper (a lawyer who specializes in real estate transactions) on Western Sizzlin’s board of directors its likely that Western Real Estate will see more transactions in the near future.
I tried to do some due diligence work on the land transaction. Going onto the Bexar County clerk’s page, I was able to obtain the public records for the purchase (PDF:Land Transaction). Unfortunately, the descriptions inside these documents will only give a person indirect information of the parcel’s actual location. You’re not given absolute coordinates, so I was unsure about how to plot this out. But, if you look at the report here, it seems as if real estate prices in San Antonio are rather stable, meaning that it may be valid to record the real estate transaction’s impact on net asset value based on its cost.
WEST assigns the land owned by Western Real Estate LP a value based on the cost of $3.75 million. $3.75 million / 2,822,785 = $1.33 per share
Net Cash
I’m simply taking cash & cash equivalents – (total liabilities)
330,998-6,651,590 = -2,584,771/2,822,785 = -2.24 per share
Business Operations
1. Restaurant
WEST owns 5 company-operated restaurants, a joint venture in the Wood Grill Buffet concept, and finally a franchising operation for 104 restaurants. To figure out its per-share commitments, we have to deviate a bit from the previous methods. I believe that figuring out this segment’s free cash flow and then assigning a multiple to it will be an adequate means of obtaining its value.
Free cash flow from restaurant operations is about $2.2 million. To get this number you have to take the company’s meager reported net income for 2008 ($175K) and add back a series of one time charges while also deducting (-$34K) for maintenance capex. You’ll peg this number at $2.2 million of FCF for 2008. At this point, I think a multiple of 8X is quite fair. The number of restaurants franchised by WEST has declined over time from 123 (2006) to the current 104, it might be a stretch to project any growth to come out of this area. I’m using a multiple of 8X as opposed to 10X because of the decline in franchised restaurants over the past 2 years. The restaurant operation’s contribution to WEST common stock comes out to $6.30 per share.
2. Mustang Capital
The fees generated from Mustang Capital’s advisory fees come out to approximately $240.5K. With a business of this nature, I think that net income actually approximates free cash flow, as typical with most financial businesses. Mustang Capital operates as an advisory firm where fees are derived from a percentage of assets managed. Since this was during 2008, I would say that its certainly not a peak number, so assigning a 9X multiple works. This contributes $0.77 cents per share.
You might argue for a higher multiple, but I think that because there are so many uncertainties about the asset management business, we should err to the side of caution. We don’t quite know what the composition of assets are (if they’re mostly one person, evenly divided, and so on) so 9X should be fair.
Sum of the parts valuation
6.30 (Restaurant ops) + 0.77 (Mustang Capital) + 1.33 (Real Estate) + 4.54 (Equity Investments) – 2.24 (net cash) = $10.7 estimated value
Current trading price: $11
This implies that WEST is actually slightly overvalued, nota screaming bargain. But if you go ahead and take a look at the per share impact of ITEX and SNS, you’ll see that a $1 increase in either’s stock price would add $0.60 and $0.47 to the company’s estimated NAV. This means that estimated NAV will be moving up and down every day. As a result, one should think like an owner when investing in WEST. I consider it to be blind investing if you simply look at the investments in aggregate and assign growth rate multiple and assume that is what their contributions will be to the company’s valuation. That is what I would consider to be too much faith put in Biglari’s hands. Not that his hands aren’t good at investing, but the sheer fact that there is so much concentration in two securities makes it essential for you to go out and calculate the intrinsic values of Steak N Shake and ITEX.
Western Sizzlin has the potential to be a really attractive investment, and a few days ago when I was working on this write up the valuation spread was wider, at 22%. Still, for me personally, I see little reason for investing in WEST while owning shares of SNS. For others, especially those who believe that ITEX shares are undervalued, Western Sizzlin could be a way to play both while having one portfolio position. I also see the company as a jockey stock. I know a few investors who will only invest in “Buffett”-like managers, such as Prem Watsa, the partners and Leucadia, the Tisch family at Loews, and so on. From what I understand, its a strategy that works pretty well.
For me though, I would rather stick with just SNS, where I see there being less moving parts and a simpler situation to value — than wading through Western Sizzlin with its various subsidiaries and operations.