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SNS valuation


beerbaron
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What am I missing here SNS has a market cap of 320M and last quarter profits were 3.8M, that gives a PE of 84. Even if Sardar would get 15% total return (with 5% discount model) for the next 10 years I would still be out on the money with the last year showing a return on investment of 2.8%.

 

BeerBaron

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What am I missing here SNS has a market cap of 320M and last quarter profits were 3.8M, that gives a PE of 84.

 

I think what you're missing is that depreciation expense (much of it related to prior years' capital spending to fund unprofitable growth) is much higher than go-forward capex.  While there is some debate about how much capex is really necessary to maintain current restaurant unit volumes, they key here is free cash flow generation vs reported EPS.

 

But really BB, you've got some catch-up on the SNS story to do....

 

wabuffo

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I agree beerbaron. The company has a good story, or high expectations. I'm not convinced either. It seems anyone who rights a Buffettesque letter to shareholders gets noted as the next berkshire these days. I'm sure the manager is talented, but they have a lot to prove in my opinion.

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Um.. well yes 320/3.8 = 84.. but that's quarterly profits.  P/E's are calculated on annual income not quarterly income.  So assuming 3.8 as a run rate going forward it's 21.  Still a bit rich but definitely no 84!  Now it also looks like depreciation last quarter was around 6.9 million and capex was around .5 million.  So then your free cash flow is a lot higher than your E.

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Yeah you are right, I made a mistake with my PE valuation, 21 is the number to go, I went a bit fast on this one...84 did not make any sense no matter how awesome the management.

 

Allright, I'll do my research, there is enough grounds for me to investigate a few hours.

 

BeerBaron

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I think you should expect $5-6M a quarter for the next fiscal year in earnings, and I would not at all be surprised to see $5M in earnings this year-end quarter.  Add in the earnings from Western Sizzlin, and you've got about $27-28M in net profit each year.  Give it a 15 times multiple, like most well-capitalized burger chains, and you get $405-420M.  I expect SNS to finish this year at $14-15 per share.  Cheers! 

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I think you should expect $5-6M a quarter for the next fiscal year in earnings, and I would not at all be surprised to see $5M in earnings this year-end quarter.  Add in the earnings from Western Sizzlin, and you've got about $27-28M in net profit each year.  Give it a 15 times multiple, like most well-capitalized burger chains, and you get $405-420M.  I expect SNS to finish this year at $14-15 per share.  Cheers!  

 

If you just get back to 2006 earnings - cap ex (with a 5 mil buffer for repairs), and give it a 10x multiple, you are looking at ~$750 million in market capitalization... While there may be debate over that number, I have trouble understanding how anyone could ever make an argument that SNS is not undervalued.

 

-jeff

 

 

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If you just get back to 2006 earnings - cap ex (with a 5 mil buffer for repairs), and give it a 10x multiple, you are looking at ~$750 million in market capitalization... While there may be debate over that number, I have trouble understanding how anyone could ever make an argument that SNS is not undervalued.

 

I don't think you'll see that for several years.  Why?  I think Sardar's chosen the path of high volume value pricing, thus net profit margins won't be as robust as the higher-priced menus of previous management.  He's sneaking in higher price point items and that will bolster earnings, but you have to develop very strong brand loyalty first.  He's working that part hard, which will assist with increasing franchisee interest, but we will probably see earnings increase organically through higher volume going forward, rather than just higher margins due to higher pricing or new company-owned stores...more comparable to McDonalds.  But you are correct, SNS remains undervalued and he should be able to grow it 15-20% a year.  Cheers!   

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If you just get back to 2006 earnings - cap ex (with a 5 mil buffer for repairs), and give it a 10x multiple, you are looking at ~$750 million in market capitalization... While there may be debate over that number, I have trouble understanding how anyone could ever make an argument that SNS is not undervalued.

 

I don't think you'll see that for several years.  Why?  I think Sardar's chosen the path of high volume value pricing, thus net profit margins won't be as robust as the higher-priced menus of previous management.  He's sneaking in higher price point items and that will bolster earnings, but you have to develop very strong brand loyalty first.  He's working that part hard, which will assist with increasing franchisee interest, but we will probably see earnings increase organically through higher volume going forward, rather than just higher margins due to higher pricing or new company-owned stores...more comparable to McDonalds.  But you are correct, SNS remains undervalued and he should be able to grow it 15-20% a year.  Cheers!   

 

There is no doubt that there will be higher volume and lower margin items... Sardar has said that at meetings! :)

 

While I agree that owner earnings won't be ~$75 million for a while, I always found it an interesting way of looking at the company.

 

There is still work for him to do in the turnaround, but, we should be confident that it will happen. Personally, I am looking forward to him deploying capital into something else than SNS/WEST.

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Another aspect not captured in the earnings is the value of the real estate.  In addition the free cash flow is a better metric than earnings for both SNS and WEST

 

Packer

 

I don't really like factoring in real estate holdings into valuation, as people usually tend to greatly overvalue the worth of real estate. People tend to sometimes overlook the simple fact that real estate only has value if you are able to sell it. Real estate of course can be a very valuable asset, but its far from guaranteed. There are a lot of companies that own bad buildings in bad locations and are unable to sell them when they want to. Real estate $ should be realized when properties are actually sold.

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