I put my order in for what I thought got me close to a 50% discount on intrinsic value. The order was in for several days before it was executed. I anticipated that WSZL would dip in price shortly after the end of the rights offering, since that what I observed happen last time Western Sizzlin conducted a rights offering.

Thanks everyone for all the feedback on my valuation. I learned a lot from your points. Be sure to remind me in a year to see how close my growth forecasts came to reality. I know I was rather aggressive in my estimates, but I’m comfortable sticking with them for a bit longer.

Good job, and I agree that George’s valuation is a bit aggressive. You might want to calculate a downside scenario just to see what it looks like George. In any case, WSZL isn’t expensive, just maybe not quite as cheap as you thought originally.

Also, regarding valuation, I due respectfully agree with the poster who said you were a tad aggressive. I don’t know what his reasoning was, but I think you apply to high a multiple to the operating segment’s free cash flow. By starting with a 10% discount rate and subtracting the assumed 5% growth rate, you end up using a 20 multiple. Historically, the S&P’s multiple to trailing earnings is more like 15 (the range is like 14-17) and the historic growth rate, if memory serves me correctly, is ~6%.

Plus, even though WSZL grew free cash flow recently, some of that was by cutting CAPEX (I don’t think they can really cut much more) and they have been losing franchisees.

In any event, if we assumed 6% growth, then I think a 15 multiple is fair (and, yes, I realize that I’m ignoring interest rate adjustments); if we assume zero growth, then I think something like an 8 multiple is warranted; assuming growth somewhere in between gives us a range of 8-15. If we could pay 8X or less, it’s a steal; if we pay 15X or more, it starts to get pricey.

And, as a matter of fact, if we back out the excess cash, than we’re paying a multiple of 11-12 trailing free cash flow. If we assume that’s a fair price, then Biglari’s capital allocation acumen is our “free option.”

In other words, at the current stock price, our downside protection is the operating business; our upside is capital allocation business.

Jon – I suggest you use a limit order for sure and “good til canceled” will probably save you from having to enter an order every day.

Jason – I did not consider the reinvestment of cash from the operating businesses. Thanks for sharing your estimate of this value with me. Did you also think the 5% growth in FCF from the restaurant franchise business to be too aggressive?

Thanks for the feedback everyone.

JSK.

Great analysis. What’s your suggested order execution method for this stock (i.e., did you put in a “good til canceled” at the most recent price, bid, ask — somewhere in between — etc)? I am not asking for advice, of course, but I tried to purchase some shares late today with a limit order and didn’t get filled.

Good analysis, I think that the “2-part” analysis is correct for this business, as it is for any company that is investing in its core assets(in this case restaurants) and differently in marketable securities or businesses. It is difficult to come up with a precise estimate for an investment vehicle like WSZL. Your math seems sound, just a quick question: any reason for the 10% discount rate in particular? Curious as to how you chose it.
-Jeff

The one thing I don’t like is that outside partners to this fund are shielded from the first 30% of losses. I guess that is the advantage that investors in The Lion Fund (and other outside investors) might be potentially getting from this arrangement. I’m dissapointed that Biglari is putting shareholders more at risk in order to “attract” these investors. At least I don’t have to pay management fees as a WSZL shareholder.