Value Investing Congress Blog

At the 3rd Annual New York Value Investing Congress on Wednesday, Bill Ackman announced that he expects the holding companies of MBIA and Ambac Financial to fail as soon as next year. Further more, he stated that he will donate the hundreds of millions which he expects to earn from those short positions to charity.  You can view Bill Ackman’s presentation at pershingsquare.valueinvestingcongress.com .

The Value Investing Congress was a huge success. Many of you have told us that it was our best Congress yet. We would like to thank all of you who attended the Congress and invite you to share your thoughts with us by posting your comments to this blog entry.

Another “Friendly” Deal?

by Phillip Ristau

Steak N Shake (SNS) has 28,469,808 shares outstanding. The shares trade near a 52-week and multi-year (April 2003) low . On the most recent conference call, management acknowledged, “we have not been field focused for several years.”

Why would anyone invest in SNS? There may be a catalyst. There is a proxy fight to gain two board seats by tenacious value investor Sardar Biglari. A sale of Friendly Ice Cream was announced about 9 months after he disclosed his initial 13D filing in 2006 for about twice his average cost.

SNS owns about 155 of its properties. In 2001, it averaged about $1.1 million for 14 sale/leaseback transactions. Assuming $1.1 million x 155 properties equals $170 million or about $5.97 a share. In addition to selling the real estate at its company-owned stores, SNS could sell the stores themselves to franchisees to generate even more cash – this move is an important objective of Biglari. One goal (of many) of Biglari’s is for the company to refranchise its company-operated restaurants. Applebee’s and Denny’s received about $1 million per refranchised unit. SNS operates 435 restaurants, so if each restaurant is worth $1million, that is another $435 million ($15 a share) .

For 2006, SNS had 48 franchised restaurants and earned $3.88 million, or $80,854 per franchised-unit. SNS plans to open 9 company restaurants and 6 franchised restaurants in 2008. It will probably take 2-3 years to refranchise all 435 restaurants. Assuming franchise units grow 15 per year, that is a total of 536 franchised-units at the end of 2010. 536 units @ $81,000 is about $43 million in revenues. A pure franchise model should yield at least 15% operating margins. Operating income should approximate $6.5 million pre-tax. A pre-tax multiple of 12 (reasonable for a business with relatively high operating margins and very little in capex) gives us $78 million or $2.73 a share.

Putting it all together, SNS’s earnings are worth $78 million in three years, discounted at 10% equals $59 million or $2.06 present value per share for the pure-franchise model. In addition, a sale/leaseback plan for the real estate would generate $5.97 a share for the 155 properties it owns. Finally, refranchising 435 units might generate $435 million, or $15 per share. Since this operation would take time, I use a 10% discount rate and a three year time frame. I derive a present value of refranchising of $327 million, or $11.47 per share.

Thus, intrinsic value is $2.06 future earnings + $5.97 sale/leaseback proceeds + $11.47 refranchising cash for a total intrinsic value of $19.50 per share. SNS is currently trading around $11.

Full disclosure–the author has a position in SNS.

Mr. Ristau is a value investor in Texas.

On Seeking Professional Help

By Dan Ferris

There’s much documentation to show that most investors – individual and professional alike – fail to adequately appreciate how difficult, and therefore rare, is the production of outsized investment returns.   I don’t want to suggest that you’re crazy to pursue such a goal, but I think most of us – again, individual and professional alike – ought to have no qualms about seeking, as it were, “professional help.”    

Seeking professional help means that, when the public equity markets offer you easy access to a great capital allocator, you should exploit the opportunity.   The names I’m talking about include the folks in Omaha, Loews, Sears Holdings, Leucadia National, Markel, Fairfax Financial Holdings and the one I own, for which I shall advocate forthwith, Alleghany Corporation (NYSE: Y).    

Aside from its well-covered large, successful bets on Burlington Northern and perhaps a dozen big cap energy stocks, Alleghany most recently found a sweet spot in its principal operating business, property and casualty insurance.   Unlike the rest of the property/casualty market right now, pricing in the California workers comp insurance is firming up.  Premiums soared earlier in the decade.   Employers screamed bloody murder.  The state passed sweeping reforms, and premiums fell 60% from 2003 – 2007.    

Today, it’s hard to get a rate cut without a stellar claims record.  One employer that saw a 46% reduction on its 2006 renewal, reports a 9% increase in 2007.   The California Workers’ Compensation Insurance Rating Bureau, a non-profit that tracks claims data, which recommended a double-digit cut last year, recommends a 4.2% increase in workers comp premiums this year.   

Right on cue, in July, Alleghany bought Employers Direct Corporation, one of the top 20 workers comp insurers in California, for $192.5 million.   Capital allocation certainly isn’t about calling insurance market bottoms.  Then again, happy accidents tend to happen to good professional helpers.    

Alleghany can be had today by paying $1 for each $1 of net assets, and 35 cents for all the future earnings and investment gains of chairman John Burns, CEO Weston Hicks, and their future successors.   The price doesn’t discount much certainty that Alleghany will find conservative enough investments that will achieve high enough returns over the long term.   I’m betting it will find them.  It is arguably the cheapest, and not likely the riskiest, of the professional helpers: 

Professional help on sale (multiples of book value)
 

Alleghany’s $4.7 billion of investments (and $3.2 billion market cap) doesn’t have the “bigness” problem they have in Omaha.   And Alleghany will certainly approach its larger pool of choices with its time-honored conservative, risk-averse posture.  The odds are squarely against similar treatment of our capital by most fund managers, whose results look like quackery next to those of our professional helper list.  

Yet, too many people persist in the conviction that they’ll make big returns (which is necessarily born of something other than experience).   This is expensive lunacy, however common a form.  I contend that easy access to good professional help tends to be undervalued at any given moment.  Consider the trillions in mutual and hedge funds doomed never to outperform.  If those investors ever got even a little bit wise, the above list, at a total market cap of $269 billion, is such a tiny drop in the bucket that the list could find itself trading at lofty multiples as lousy returns persist, which they will for the vast majority of market participants.  

 I suspect many stock market participants who felt sane last year feel crazy right now.   Next year and beyond, then, quality professional help might well command a premium price. 

 -Dan Ferris

Ferris Capital Management, LLC is an Oregon registered investment adviser www.ferriscapital.com

FULL DISCLOSURE:  I own or have trading authority over shares of Alleghany.   This should not be construed as an offer to buy or sell securities. 

Bill Ackman, one of America’s best-known activist investors, will be speaking at our Value Investing Congress at Time Warner Center in New York on Wednesday, November 28. Bill’s done a great service to the investing public while making outsized returns for his investors by pushing corporate managers to behave in ways that build shareholder value. For several years, Bill has been studying financial guarantors such as MBIA and Ambac, who insure municipal bonds, mortgages and other financial instruments. Though he is keeping a tight lid on his remarks before the upcoming Congress, his presentation earlier this year at the Ira Sohn Investing Conference, “Who’s Holding the Bag?” could very well be a small taste of what’s to come.

At the first New York Value Investing Congress, his presentation on McDonald’s impacted the market significantly, and many investors profited from his intervention (I certainly did!). Bill has told us that his upcoming presentation at the 2007 Value Investing Congress next week will be one of the boldest public statements he’s ever made and will have significant market-moving implications. There are still a few seats left so if you would like to register please visit www.ValueInvestingCongress.com.

Bill has been kind enough to share his presentation from the Ira Sohn Investing Conference with us. To read it now, click here. I hope you find this as worthwhile as I did. I’d love to hear your thoughts.

John L. Schwartz, MD
CEO
Schwartz Tilson Information, Inc.
www.ValueInvestingCongress.com