Fresh Value

David Einhorn (WealthTrack -- Video Interview)

2010-11-25T04:30:00.000-05:00

CONSUELO MACK: In a recent letter to Greenlight Partners, which, for those of us who don’t own hedge funds, means investors, you wrote-- you were very critical of the Federal Reserve, and the most recent round of quantitative easing. And not only do you doubt it is going to be successful, but you also think that it could actually be harmful. Why?

DAVID EINHORN: Well, I think it’ll be harmful for growth, right away, if the purpose of the quantitative easing is to ease financial conditions, thereby, according to the Fed Chairman’s op-ed, make the stock market go up, make some people feel wealthy, and then go out into the stores and buy things. That’s offset by the fact that they’re trying to create inflation. And the may not get the inflation where they want. They’d love the inflation to be in house prices. But they might get it instead in oil prices. Or cotton prices. Or food prices. And there’s already a lot of evidence of this. The problem is that those prices affect a large number of people who have to buy these sort of necessities of life.

CONSUELO MACK: Food and shelter.

DAVID EINHORN: Food and shelter, and …

CONSUELO MACK: Right. Energy.

DAVID EINHORN: … clothing, and energy. And if the prices of those things go up, they’re not going to have as much money to buy other things. And so you may actually not get any increase in demand. You may actually slow down economic growth. And that is separate and apart from the longer-term ramifications of going through a process of effectively money printing, buying, creating electronic money to buy Treasury securities, which is what the so-called quantitative easing ultimately amounts to.

Pabrai Investment Funds Annual Meeting Notes 2010

2010-09-30T15:47:00.000-04:00

Pabrai Investment Funds Annual Meeting Notes 2010

Bruce Berkowitz - August 2010

2010-08-30T11:35:00.003-04:00

2010 Semi-Annual Report

Over one-half of The Fairholme Fund’s assets are invested in securities of mostly hated financial services and real estate related companies. After all, “there is no job growth without economic growth; no economic growth without access to credit; no access to credit without a stable, functioning financial system.” Financials tend to lead markets into and then out of recessions followed by asset deflation and then inflation. Never being 100% certain as to events and timing, approximately 20% of the Fund’s assets are in relatively, short-maturity corporate debt and cash equivalents.

Bruce Berkowitz on Consuelo Mack Wealthtrack

CONSUELO MACK: Let me ask you about a recent Wall Street Journal article about you. It talked about how you were breaking Wall Street's rules and making other mutual fund managers look bad, by doing all the things they say can't be done. And this is your style. Can't time the market- do you time the market?

BRUCE BERKOWITZ: No. We don't predict. We price. So if timing the market means we buy stressed securities when their prices are way down, then yes. Guilty as charged. But, again, we're trying to compare what we're paying for something, versus what we think, over time, we're going to get for the cash we're paying. And, we try not to have too many predetermined notions about what it's going to be. And then we go, once we come up with a thesis about an idea, we then try and find as many knowledgeable professionals in that industry, and pay them to destroy our idea, and tell us--

*The author has a position in The Fairholme Fund (FAIRX). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Longleaf Partners Q1 2010 Letter

2010-04-21T14:32:00.004-04:00

The investment case for the Longleaf Funds overpowers macro concerns for several reasons:

• These macro predictions appear adequately discounted. We submit that they are baked into prices because so many investors share the same concerns. The magnitude of 2008 stock market declines was extremely anomalous, especially compared to previous bear markets associated with severe economic downturns, wars, or double-digit inflation. Prices reacted far more negatively than the recession’s meaningful impact on companies.

• We are not oblivious, however, to potential negative macro scenarios as evidenced by our investments. Core holdings such as DIRECTV, tw telecom, Yum, Fairfax, and Genting were “battle tested” in the first leg of the recession and demonstrated their ability to hold up if recession recurs. The majority of our companies have pricing power which would protect them in an inflationary scenario, and many would be net beneficiaries of inflation.

• The dread scenarios could actually help some of our holdings. For example, if governments continue to intervene heavily with infrastructure spending, Cemex, Texas Industries, ACS, and Hochtief will benefit. If the U.S. government gets serious about energy policy and its relationship to national security, Chesapeake’s natural gas and Pioneer’s domestic oil will gain additional advantage.

Leucadia National Corporation 2009 Letter to Shareholders

2010-04-12T17:57:00.002-04:00

"Out of prudence we take a pessimistic view as to when this recession will end. To think otherwise would be a gamble that we are unwilling to make."

"America has had fifteen plus mostly fat years. Hopefully we will have less than seven lean years. We believe we are doing the correct things to protect shareholders’ capital and to begin cautiously expanding it. When this economic malaise will retreat, as the fog to the rising sun, we know not. Core and caution are the order of the times!!"

IVA Funds

2010-04-01T17:26:00.005-04:00

We like the flexibility to invest in small, medium, and large companies, depending on where we see value.

We are willing to hold cash when we cannot find enough cheap securities that we like or when we find some, yet the broader market (Mr. Market) seems fully priced. We will seek to use that cash as ammunition for future bargains.

In this environment, we try not to forecast but focus on valuation as well as risks. We are fond of Peter Bernstein's statement, "Risk is the only thing you can manage. You can't make your returns happen, but you can manage the degree to which your portfolio is exposed to to damage if things go wrong."

Being optimistic or pessimistic all depends on the price.

The bursting of a credit-induced bubble is deflationary by nature, but may ultimately lead to inflation, depending on the policy makers’ response. We believe short term,that the deflationary forces are stronger than commonly perceived but remain agnostic longer term. The Funds’ portfolios, whilst built to a large extent from the bottom up, currently reflect that view, Both Funds have a high cash component which we believe is good under both short and long-term scenarios: a deflationary period means that cash has more purchasing power while an inflationary period would ultimately allow us to buy equities that could dc-rate (as they did in the 1970’s). The Funds both hold some gold, which did so well during the inflationary 1970’s but also during the deflationary 1930’s, The Funds both hold some high yield bonds, which we believe are of high quality (important if deflation spreads) yet not too long (important if inflation came back in a few years). Finally, both Funds have a moderate allocation to equities, with an emphasis on strong balance sheets, good competitive positions, decent pricing power (a huge advantage either during deflation or inflation) and not overly capital intensive business models (good under inflation)*.

*Understands the consequences of a macro-economic outcome on an investment.

We are particularly intrigued when credit markets, or segments of it, become disconnected from equity markets. Credit markets, filled with investors that worry about what can go wrong, do a better job at assessing risk than the equity market—filled with investors (or speculators) that, at times, fantasize mostly about the upside potential. During the spring and summer of 2008, we were intrigued by the credit markets, which were deteriorating faster than the U.S. equity market. The Lehman bankruptcy came along and the U.S. equity market finally capitulated. lnterestingly enough, the credit markets held up rather well in February 2009 while bank stocks were under severe attack. The huge rally since March appears to indicate that the credit markets were right again to be stabilizing while the broad equity indices were still declining lower. Over the past few months, however, we believe there may be a disconnect between the U.S. Treasury market—signaling slow economic growth and modest inflation for years to come—and both the high yield market (with lower spreads) and global equity markets — signaling a long-lasting V-shaped recovery.

Bruce Berkowitz -- Salient Quotes

2010-03-22T18:43:00.005-04:00

“Cash is like a financial valium, that you can keep your cool during very difficult times.”

“It’s like the longer we can hold an investment, the better we feel that all the time and effort we put into studying a company- it’s kind of when we sell a position, I feel as if it’s divorce.”

“We start with this basis: The only thing you can spend is cash. We want companies that generate significant cash in most times. That is how we start. We don't care much about what they make, but we have to understand it. The balance sheet has to be strong; we want to make sure there are no tricks in the accounting. Then we try and kill the company. We think of all the ways the company can die, whether it's stupid management or overleveraged balance sheets. If we can't figure out a way to kill the company, and its generating good cash even in difficult times, then you have the beginning of a good investment.”

January 2007

Although we own some superb businesses with bright prospects, there is much complacency in the world. Interest rates are up and the last recession is a dim memory. A modest further increase in interest rates or another financial market upset could be exacerbated by uncontrolled growth in derivative contracts. Terrorism remains a wildcard and current weather is upsetting long-standing assumptions. All considered, we and our owner-manager partners should be prepared to profit from bouts of financial indigestion while holding to strategies allowing good performance in more normal times.

With over two decades of experience, we continue to believe that investing requires detailed research, independence of thought, and a willingness to act contrary to the lemming-like behavior of most. Boiled down, we have now captured these sentiments in our new tagline: Ignore the crowd.

April 2007

Recent sub-prime lending pain has led to dozens of U.S. financial failures since year-end. Lax credit standards, very low interest rates, and an explosion in the use of derivatives may have created a toxic, global mixture. If so, the markets’ corrective actions may further depress Mohawk Industries, Mueller Water Products, and USG Corporation. As the Chinese proverb explains, the opposite side of the coin that says danger is opportunity. Given further weakness, expect us to take advantage.

July 2007

We continue to be agnostic about economic conditions; preferring to concentrate on managers with great paper trails, businesses generating lots of cash, and bargain prices necessary to beat returns on index funds and U.S. Treasuries. Nevertheless, we are well aware that extraordinarily low interest rates in recent years helped our cause and may have caused other investors to grow careless. Higher rates pull down on most asset values, as by definition, a dollar earned in the future is worth less today. Given our cautious approach and those of our cash rich companies, economic bumps should create opportunities.

Our goals remain unchanged: don’t lose, get more than we give for new investments, invest alongside our clients, provide top-notch service, and have some fun. The more things change, the more they stay the same.

October 2007

Our focus will remain on patiently finding the best returns consistent with preservation of capital. We are in excellent company as most of our highly successful owner/managers are focused on doing the same.

January 2008

Berkshire Hathaway remains our largest single holding. While Mr. Buffett’s empire is no longer the exceptional bargain of recent years, this unique conglomerate is not overpriced given current market and business stress. In recent weeks, Berkshire has purchased a majority interest in founder Jay Pritzker’s Marmon Group, funded a new municipal bond insurer to replace wounded competitors, and acquired a run-off insurance company with more than half a billion dollars of float – and yet the company still holds about $40 billion of ready cash with more being generated every day. Furthermore, all Berkshire businesses exposed to housing markets generate cash and will be among the few left standing – and the most profitable when the tide turns.

While we cannot predict the future, we can prepare for whatever may come our way by owning companies configured for tough times, holding cash, and building Fairholme for the future.

April 2008

Many have asked why we have yet to buy financial companies – an area of obvious stress where we have a long and profitable history. The answer is simple. For most, we disagree with their funding strategies and don’t understand what they own, who they rely on, and who their counterparties depend on. However, we continue to search and may find one or two worth buying at depressed prices.

Although difficult, the current environment is one of great opportunity. Liquidity remains tight and companies with cash – like many of ours – are in the driver’s seat. Even as the U.S. retrenches (never a permanent condition), the rest of the world continues to grow. In Fairholme’s history, stressful times have led to many, happy returns. This period should prove no different.

October 2008

Without minimizing today’s problems, Fairholme’s managers have been through many crises over the years, from the 1981-1982 interest rate spike, the 1987 stock market crash, the 1990- 1992 Savings & Loan crisis, the 1994 Asian crisis, the 2000 technology meltdown, and the current mortgage initiated credit crunch. Through it all, we have earned above average returns by behaving as sensible business people, focusing on the ability of our companies to generate cash, buying with a margin of safety, and positioning ourselves to react appropriately to the ups and downs of a maniacal market. Although every crash seems extraordinary, and the actors and the stage are different this time, the play seems very much the same.

The highest free cash flow yields are currently appearing in healthcare (Life) and defense (Liberty) – which we expect to lead to investment success (Happiness). In the last several months, we have made significant new investments in pharmaceutical manufacturers (Pfizer, Forest) and health insurance companies (Wellpoint, United HealthCare, WellCare), as well as companies with a significant defense contracting exposure (Boeing, and Northrop Grumman.) Although not immune, both of these areas are far less sensitive to general economic weakness than most. We continue to own some representative vultures skilled at picking bones off of the corporate wounded, dead, and dying (Leucadia and Berkshire Hathaway), and a smattering of undervalued businesses run by talented owner-managers in industries that have been under pressure for some time (Sears, Mohawk, Dish Network).

January 2009

Today, portfolios have never had better risk/reward ratios because of the predominance of essential health care and defense companies. Health care spending is 17% of GDP, 23% of the federal budget, a significant portion of state budgets, and, with an aging population, those expenditures are bound to increase. Defense companies’ largest customer is Uncle Sam, who will spend whatever it takes to defend its citizens – last reported at 7% of GDP and 33% of the federal budget.

February 2009

If you had to put all of your money in one stock right now, what would that stock be?

BB: It would be a holding company with a diversified group of business like Berkshire Hathaway or Leucadia, where you have smart, bright, and talented people who think that not losing is much more important than making a fortune. You know that they have a balanced portfolio of businesses where no one company can kill the portfolio. That doesn’t mean that they have to have dozens. It is like the central limit theorem in math—you don’t need that many to approach diversification. You do need to have a strong assessment of the management with a long, successful paper trail. A trail of not making a lot of bad decisions, especially if the idea is that you can only pick one company and have to live with it for a decade.

April 2009

Since moving our operations to Miami in 2006, we have learned that palm trees are often the last things standing after hurricanes. Deep roots that strengthen from intense stimulation and rubber-like flexibility are the keys to their survival. Such characteristics may also be the keys to financial success.

Fairholme will never be omniscient, but by building a large network of external talent, we can better adapt to adversity and to opportunities. Knowing what you do not know is one of the critical skills of investing. Tapping those who do is another.

*The author has a position in The Fairholme Fund (FAIRX). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Prem Watsa's 2009 Shareholder Letter - Fairfax Financial

2010-03-09T14:09:00.003-05:00

On September 23, 2010, we will be celebrating Fairfax’s 25th anniversary.With lots of good fortune, hard work and an outstanding team culture, at the end of 2009 our book value per share had increased 243 times and our stock price had followed suit, increasing 126 times – with one year yet to go! Talking about the long term, my favourite company from the past is the British East India Company which began in 1600 and lasted the better part of 250 years! The Queen was one of its major shareholders and imagine my shock when I read that its objective was to make 20% on invested capital. The more things change. . . .

A Governor of The Honourable Company (as it was known) was once asked what the reasons for its success were. “Two words”, he said, “Frenetic Inactivity”. 250 years is perhaps too long even for you, our long term shareholders!!

Speaking of the long term and why there is no place for complacency in business, AIG’s history is quite instructive. It took AIG 89 years to accumulate almost $100 billion in shareholders’ capital and one year (2008) to lose it all. Frightening! Recently, with my family, I visited the high school I graduated from some 45 years ago in Hyderabad, India. Through all the nostalgia, I was shocked to see the school’s motto clearly on the main wall. “Be Vigilant”, it said. And I thought I got it from reading Security Analysis by Ben Graham!!

While the stock markets have rebounded significantly from March 9, 2009, we continue to have a cautious view on the U.S. economy. The massive U.S. government stimulus programs (and government programs of other countries) appear to be working in the short term, but the enormous deleveraging by business and individuals continues to counter in varying degrees the positive effects of this stimulus. Our reading of history – the 1930s in the U.S. and Japan since 1990 – shows in both periods nominal GNP remained flat for 10 to 20 years with many bouts of deflation. While good companies with excellent management will continue to do well, this may be a particularly treacherous time period. Of course, being long term value oriented investors, we expect this to be a great environment for us to ply our trade – perhaps not unlike the 1975 to 1996 period.

*The author has a position in Fairfax Financial (FRFHF.PK). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

US Debt Will Keep Growing Even With Recovery

2010-02-15T13:02:00.004-05:00

Carmen Reinhart, an economics professor at the University of Maryland and a former IMF official, suggested the nation's fast-growing indebtedness may not have a visible impact at this point on ordinary Americans. But some day it will pounce.

"One thing we can say with a fair amount of certainty," she said. "We never know when the wolf will be at our door. The wolf is very fickle and markets can turn very quickly. And a high debt level makes us very vulnerable to shifts in sentiment that we cannot predict."

Nuggets of Wisdom from Charlie Munger (circa 2006)

2010-02-01T15:48:00.005-05:00

Envy
"Harvard and Yale concentrated with venture capitalists that got the best calls and brainpower. Very few firms made most of the money, and they made it in just a few periods. Everyone else returned between mediocre and lousy. When returns happened, envy rippled through institutional money management. The amount invested in venture capital went up 10 times post-1999. That later money was lost very quickly. It will happen again. I don't know anyone who successfully resists this stuff. It becomes a new orthodoxy."

Risk
"I know a man named John Arriaga. After he graduated from Stanford, he started to develop properties around Stanford. There was no better time to do it then when he did. Rents have gone up and up. Normal developers would borrow and borrow. What John did was gradually pay off his debt, so when the crash came and 3 million of his 15 million square feet of buildings went vacant, he didn't bat an eyebrow. The man deliberately took risk out of his life, and he was glad not to have leverage. There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table. We might all consider imitating John."

(Note: Made himself less vulnerable to the negative effects of a Black Swan)

Intrinsic Value and Margin of Safety (First Eagle Funds - Abhay Deshpande)

2010-01-28T17:04:00.000-05:00

"Looking at the subject of long term investing, people are a little upset that buy and hold hasn't worked for the last ten years. If you bought in 1999, your annualized return is at approximately minus 2% for ten years. But the buy and hold approach over the long term is wholly dependent on the price that you pay for something. If you bought Cisco at 100 times earnings in 1999, over the long term, you will lose money. If you bought 3M at eight times earnings, with a 4% dividend yield over ten years, there's a high degree of likelihood that you'll make money over the long term. But it all depends on what you pay. Buy and hold is not dead."

Longleaf Partners Annual Letter to Shareholders 2009

2010-01-27T17:24:00.001-05:00

"A macro oriented investor could have logically decided on January 1, 2009 (or in March when stocks were meaningfully lower) that with the horrible global economy, the teetering banking systems across multiple countries, and the extremely weak stock markets, it was a good time to sit on the sidelines until some economic clarity emerged. By contrast, an intrinsic value investor who focused on the free cash flow that certain well-run, competitively advantaged companies generated – even in a severe recession – would have purchased those cash flow streams at incredibly low multiples, i.e. high cash flow yields. Those who chose the macro route and parked in cash missed what was the best purchase point for equities in our lifetime and earned virtually nothing on their liquidity."

"The collective quality and strength of the businesses we own is unprecedented. Our management partners have delivered their companies through the worst of times and positioned them as stronger competitors. P/V’s are near or below the long-term average from which we have compounded successfully. Not only are the Funds quantitatively attractive, but the “V’s”, or appraisals are extremely conservative and probably understated. The returns of 2009 reflected excessively cheap prices moving to more normal discounts. None of the last twelve months’ return was generated by value growth. Going forward our businesses are capable of double-digit value growth given the anemic operating results in 2009 as their base. Any cyclical economic recovery will amplify this growth. The foundation for the next five years is in place to not only protect our partners’ capital, but earn better-than-adequate returns."

Bill Ackman (CNBC --- Video Interview)

2010-01-25T15:28:00.005-05:00

Bill Ackman talks about some of his portfolio activity and his take on the economy.

“We own businesses that are extremely economically resilient…they’ll be affected by the economy and won’t do as well if the economy doesn’t do well…but if you pay the right price you can still be a very successful investor even if the economy is not as strong as people expect…so we’re not macro investors at all, but I’m more bullish than most on the economy.”

David Winters (WealthTrack -- Video Interview)

2010-01-07T18:01:00.004-05:00

"...you know the other thing is that because of this crash that we've been through, you can buy quality. And what we've tried to do is not go for the short-term trade, you know, Buffett's called it the cigar butt. that you pick up the smoked cigar butt off the street but rather let's get something fabulous that we can own for years and will be a compound money machine."

"...we live here and we earn, generally, our money in dollars, and the thing to do is to hedge your bets, and that's the idea of really what the original hedge fund was. It doesn't mean you can always make money but like Nestle, you're making money in streams of income around the world and that's what Schindler is doing. That's what Richemont is doing, that's what Jardine, more or less, is doing. And that's what we think makes a lot of sense for individuals to do today, and to also realize that you've got to be a buyer when people are panicked and you have got to think long-term, and unfortunately, that is not what people are encouraged to do, and that's how you get rich. The richest people in the world, that's what they do."

Bruce Berkowitz -- Top 5 Holdings (Video)

2010-01-07T14:25:00.007-05:00

“There may be frost here and there, but the markets are thawing out and we have some wonderful companies in the portfolio that remain quite cheap in relationship to the cash that they generate for their owners.”

*The author has a position in The Fairholme Fund (FAIRX). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Mark Boyar -- "Deja Vu All Over Again"

2010-01-06T10:12:00.003-05:00

"The markets also look similar to ’stagflation’ markets during his start-up. The indices went nowhere until 1982, but below the surface there were great stock buys. It was a stock-picker’s market, and he thinks we are in for more of the same. Like in 1975, Boyar looks at the uncertainty and confusion in today’s markets, and sees opportunity." (Mark Boyar)

"The past few years have been a different story for us. At the end of 1975 our insurance subsidiaries held common equities with a market value exactly equal to cost of $39.3 million. At the end of 1978 this position had been increased to equities (including a convertible preferred) with a cost of $129.1 million and a market value of $216.5 million. During the intervening three years we also had realized pre-tax gains from common equities of approximately $24.7 million. Therefore, our overall unrealized and realized pre-tax gains in equities for the three year period came to approximately $112 million. During this same interval the Dow-Jones Industrial Average declined from 852 to 805. It was a marvelous period for the value-oriented equity buyer." (Warren Buffet, 1978 Annual Letter)

Charlie Munger Musings (Video Interview)

2010-01-04T16:08:00.000-05:00

Charlie Munger Musings

When an Annual Report Speaks Volumes (Article)

2009-12-22T16:53:00.003-05:00

Want to find a great long-term investment? Look for an annual report that treats you like a human being.

Most don’t. The standard-issue annual report features heroic photos of the CEO, staged snapshots of maniacally grinning workers, and vague assurances that, despite enormous challenges being faced by the stalwart management team, the future looks just fine.

Only a handful of annual reports talk to you like a partner. These reports don’t spend a fortune on glamour shots of smokestacks basking in the sunset. They avoid canned promises to “respect all our stakeholders.” Instead, they deliver a blunt assessment of both the firm’s successes and its failures.

The Steak n Shake Company Proposes to Acquire Fremont Michigan InsuraCorp, Inc. for $24.50 Per Share in Cash and Stock

2009-12-22T09:39:00.000-05:00

The Steak n Shake Company Proposes to Acquire Fremont Michigan InsuraCorp, Inc. for $24.50 Per Share in Cash and Stock

*The author has a position in Steak 'n Shake (SNS). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Sardar Biglari’s Annual Letter to Steak ‘n Shake (SNS) Shareholders

2009-12-15T17:05:00.009-05:00

Sardar Biglari is in the early stages of proving himself to be the next great capital allocator/businessman.

Highlights (Pulled directly from Annual Letter)

Generated approximately $30 MM Owner Earnings in FY 2009.

Q4 2009 Customer Traffic up 20% and Same-Store Sales up 10%. Traded average check for traffic.

Strategically, our intention is to maintain a very strong balance sheet since we find it to be a source of competitive advantage.

We started fiscal year 2009 with cash equivalents of $6.9 million and total debt under credit facilities of $30.7 million. We ended the year with a cash position of $51.4 million (plus $3 million in investments) and total debt under credit facilities of $18.6 million.

Cash returns are currently unremunerative. But they never burn a hole in our pockets.

Same-store sales do not constitute the main, exclusive, or most important metric to evaluate results. If the main objective of management is growth in same-store sales, then hovering over that idea looms the ominous issue that the resultant number could be manipulated, for example, by spending heavily on marketing without achieving an appropriate return on investment.

Disproved the outworn quotation, “You can’t cut your way to success.” This overused adage is hazardous to decision making acuity.

Achieving sustainable cost advantages is the cornerstone of our business model.

Strong value proposition resonated with consumers because they perceived and actually received far more in quality, taste, and service than the price they paid.

While the turnaround has achieved success, I subscribe to the logical thinking of IBM’s late Thomas Watson, Sr. In his words a business “is merely succeeding, going a little farther each year in its endeavor to succeed. Whenever an individual or a business decides that success has been attained, progress stops.” At Steak n Shake, we will never rest on our laurels.

We aim to grow long-term cash flows, not reported earnings

Growing through existing stores is obviously superior to opening new ones. Same-store sales could be kindled through increases in customer traffic, or increases in the average check, or both.

Steak n Shake’s future growth lies in franchising as they provide a non-volatile revenue stream along with high returns on capital.

The strength of the Steak n Shake brand has been substantiated by its successful start-up in the midst of the Great Depression and its successful turnaround in the midst of the Great Recession. We are a company that is sufficiently competent to perform in all economic seasons.

Simply because profits are generated in the restaurant business doesn’t mean the money must be reinvested there. The parent firm has been reorganized as a holding company and thus is now in the business of acquiring other businesses — with the objective of maximizing its intrinsic business value on a per share basis.

Steak n Shake is no longer a static business; we run all our businesses on a cash basis with the conscious decision to redeploy that cash in the greenest, most fruitful pastures. The reinvestment of cash flow will be indispensable to magnifying the growth rate of intrinsic value.

If we don’t know enough about a business, we don’t want someone to teach us on your tab.

Our capital allocation is a matter of discovering where we can generate the highest returns, adjusted for relevant risks. In sum, opportunity will shape our company.

Steak n Shake is in the process of purchasing Western Sizzlin Corp. for $23 million. This is a logical consolidation, which will expedite Steak n Shake’s morphing into a more diversified holding company.

Western now has 94 franchised locations, 5 company-owned, a joint venture, real estate property for development through Western Real Estate L.P., an approximate 9% ownership in publicly traded ITEX, and a 51% interest in Mustang Capital Advisors, an investment advisory company with around $45 million in assets under management.

To attract knowledgeable long-term owners, we will initiate a reverse stock split. A reverse stock split of 1-for-20, effective on December 18, 2009.

Because of my substantial financial interest in the company and my decision to use The Steak n Shake Company as a vehicle for creating value for all shareholders, I am personally committed to the company for the long haul.

*The author has a position in Steak 'n Shake (SNS). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Bruce Berkowitz on WealthTrack

2009-11-19T18:03:00.009-05:00

Whitney Tilson: Market Comments

2009-11-11T17:38:00.014-05:00

Whitney Tilson's Thoughts on the Market and Economy.

Whitney Tilson: Quality on Sale.

Bruce Berkowitz Comments on Berkshire’s Acquisition of BNSF and The Fairholme Fund

2009-11-04T10:56:00.000-05:00

SNS takes 9.9% stake in Fremont Michigan Insuracorp Inc. (FMMH.OB)

2009-10-29T11:15:00.006-04:00

http://www.sec.gov/Archives/edgar/data/93859/000009385909000060/sc13d.htm

Background:

http://valueinvestingworld.blogspot.com/2008/07/find-in-fremont.html

http://buildfremont.com/

*The author has a position in Steak 'n Shake (SNS). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

SNS/WEST Merger

2009-09-16T17:12:00.002-04:00

I have received some questions via email regarding the potential SNS/WEST merger:

The Letter of Intent contemplates that on or prior to closing Western will distribute to its stockholders all of the SNS shares beneficially owned by Western. Further, under the terms of the Letter of Intent, the consideration payable to Western’s stockholders will be based on a net transaction valuation of approximately $22,959,000.00. At closing, each share of Western’s common stock would be converted into the right to receive an amount equal to approximately $8.11 in the principal amount of debentures issued by SNS. It is anticipated that the SNS debentures will have a term of five (5) years, will bear interest at the rate of 14 percent per annum and will be pre-payable without penalty at the option of SNS after one (1) year from the date of issuance.

My thoughts are that this is good for SNS shareholders as they are getting a good amount for the $22.9 million, which includes 9% of ITEX (OTC: ITEX), 51% of an asset management company (Mustang Capital Partners ~10.6 MM AUM), a 23 acre parcel of land in Texas, and a restaurant and franchise business generating $1.5-$2 MM in operating profit per annum. Also, the transaction is essentially an LBO with no equity. The 14% interest on the $22.9 MM may seem high, but it should be thought of as a premium for Western Sizzlin shareholders and I would imagine it would paid off after one year. In addition, Steak 'n Shake is much more liquid than Western --- a plus for WEST shareholders. As a Western Sizzlin shareholder I would have preferred an all stock deal, but Biglari knows that SNS is undervalued and this potential transaction is not dilutive for SNS in any way as Western shareholders are getting the SNS shares that they already own. This also simplifies things for Biglari as now there is one capital allocation vehicle going forward (excluding The Lion Fund) and there are cost savings for Western as it would no longer be a public company.

*The author has positions in Western Sizzlin and Steak 'n Shake. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

The Birth of a Holding Company from the Town of Buffetville --- Steak ‘n Shake (SNS)

2009-09-04T18:29:00.003-04:00

Management Direction (from 3Q09 10Q)

New management, during the fourth quarter of fiscal year 2008, enacted a change in strategic direction under which we began to operate in a manner designed to generate cash. Our long-term objective is to maximize intrinsic business value per share of the Company. (Intrinsic value is computed by taking all future cash flows into and out of the business and then discounting the resultant number at an appropriate interest rate.) Thus, our financial goal is to maximize free cash flow and return on invested capital. We regard capital allocation as immensely important to creating shareholder value. Steak n Shake is transforming into a holding company. Its basic premise is to reinvest cash generated from its operating subsidiaries into any investments with the objective of achieving high risk-adjusted returns. Pursuant to a resolution of the Company’s Board of Directors on June 17, 2009, all investment and other capital allocation decisions are made for the Company by Sardar Biglari, Chairman and Chief Executive Officer.

Steak and Shake is a restaurant chain with system-wide sales of $700 Million and 486 units (413 company owned, 73 franchised), which is on the verge of evolving into a capital allocation vehicle.

Mr. Biglari (age 31) gained control of Steak ‘n Shake last year (after a drawn out proxy fight) and has since turned the company around by reducing expenses, curtailing capital expenditures, focusing on core products, and lowering prices --- which has resulted in positive free cash flow and increased guest traffic.

A few bullet points on SNS’s financial position as July 1st, 2009:

• Cash and cash equivalents are roughly $38MM

• Long term debt has essentially been eliminated, which should save roughly $1-2 MM/yr in interest costs (not considering the potential merger with Western Sizzlin (WEST – see Additional Information), which would add to the debt load and interest expense)

• $13.7 MM outstanding on a revolving credit facility at a rate of One Month LIBOR + 350 bps

• Operating expenses have been dramatically reduced from the prior period (Nine months ending July 1, 2008) by about $12 MM (according to Biglari there could be more reductions to come)

• Generated $41 MM in cash from operations for nine months ending 7/1/2009, $13 MM of that was related to income tax refunds that were received during the period

• Operating Cash Flows could approach $25-$30 MM annually going forward

• Maintenance Cap Ex. is expected to be roughly $5-6 MM annually (according to Biglari) as new company store openings will not be taking place

• SNS Market Cap = approximately $318 MM as of 8/28/2009

On top of the attractive financial metrics you have another layer of conservatism with management as they are value oriented, risk averse, transparent, shareholder friendly, and have the utmost integrity. In addition, “free cash flow coupons” will be redeployed to the greenest pastures rather than systematically into the business. This creates an added bonus as intrinsic value can grow at an above average rate.

In addition, SNS owns a lot of its real estate (Land and Buildings for 149 locations, 12 improved properties, and 16 parcels held for sale, carried at around $315 MM excluding improvements and depreciation, Capital lease obligations stand at $132 MM), which helps create a floor for the valuation and leaves the potential for resource conversion opportunities. Refranchising is also an option to generate cash and free up capital as SNS has many company owned restaurants.

SNS has historically generated strong cash inflows, but outflows were mismanaged and reinvested back into the company in the pursuit of sales growth with complete disregard for ROIC. A few years ago SNS was generating roughly $60 MM in operating cash flows, but it was squandered away by prior management.

Many successful capital allocaters started out in a similar way; however, not many had the type of cash flows and assets that Mr. Biglari has at his disposal. If you’re wondering if SNS is a viable business with a “moat” then I suggest you read this article written by Roger Ebert. Mr. Biglari recently said that he was even surprised by the strength of the brand after he took over.

Mr. Biglari’s record with his Investment Partnership (The Lion Fund – reminiscent of the Buffet Partnership) has been impressive and provides a paper trail for his capital allocation abilities. As of 12/31/2008, The Lion Fund (TLF) had outperformed the S&P 500 by 17% annually since inception (2000). One thing to note is that SNS and Western Sizzlin (WEST) represent over 50% of The Lion Fund. WEST has the bulk of its shareholder’s equity invested in SNS and Biglari has the majority of his net worth invested in TLF --- Interests are aligned.

So here you have a sizeable cash flow stream (relative to current market valuation), valuable assets, and an iconic brand in the hands of a capital allocator from the town of Buffetville --- who knows?...maybe good things can happen…

Additional Information:
Western Sizzlin, which was first entity where Mr. Biglari gained control, recently had their AGM. An intent to merge Steak and Shake and Western Sizzlin (Company Structure) was announced the same day. Here are the best notes I could find of the meeting.

Timeline of Biglari’s control endeavors.

Letter to SNS Shareholders (10/21/2008)

NYSE Opening Bell --- Same day as AGM and NASDAQ Stock Market Closing Bell (8/13/2009)

Western Sizzlin Corporation Rings The NASDAQ Stock Market Closing Bell --- Those are WEST shareholders who were there for the AGM in the back.

Sardar Biglari's Speech at the NASDAQ Stock Market Closing Bell

Corner of Berkshire & Fairfax Investor Message Board (They have a category dedicated to discussion about Sardar Biglari, Western Sizzlin, & Steak ‘n Shake)

*The author has positions in Western Sizzlin and Steak'n Shake. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.