Biglari takes 6% stake in Sonic Corp

[Ballinvarosig Investors]

http://www.sec.gov/Archives/edgar/data/93859/000092189510001206/sc13g07428007_07282010.htm

 

I must say, I'm a little surprised that Biglari is concentrating so highly in the restaurant sector.

[Guest Bronco]

Maybe his goal in life is to serve every burger Americans eat at a restaurant.

[ragnarisapirate]

Maybe his goal in life is to serve every burger Americans eat at a restaurant.

 

Being the country's staple food, that is a pretty laudable goal... served with fries and a coke.

[Ballinvarosig Investors]

I see that Sonic used debt to buy back $560 million worth of stock in 2006 when the share price was in the $20 region. Four years later, the stock is under $9 and the CEO is still in place and Sonic are loaded with debt. The free cash flow generated by the business is sweet though!

[shalab]

I don't get this entirely. The debt is pretty high. The cash flow is good and many are franchises. The directors/owners own 10% of the company.

 

 

[RRJ]

Maybe his goal in life is to serve every burger Americans eat at a restaurant.

 

Too funny.  And put his picture up in every restaurant too.  Like the Big Brother of Burgers. 

[Guest Bronco]

RRJ - similar to the Advanced Auto Parts deal, maybe he can offer McDonalds $13 a share in some sort of stock for stock deal.

[Myth465]

I think Biglari sees himself (probably rightfully so) as a restaurant expert. I also think most investors tend to focus on a few industries. I like hard manufacturing, commodity businesses, and insurance companies. I also like service companies, with low capex requirements, and business run by Owner Managers. I would have a hard time owning a restaurant; I don’t really eat fast food and find most of them to be fades. I also think the American public will be broke for a while and would hate to own a business directly dependent on them. I have seen others who mainly do banks, or insurance companies, or consumer staples.  I am sure he knows what to look for after turning around 2, and having invested in 3 -5. He can also add value by given advice to operators.

 

I don’t know why he doesn’t focus his capital though on trying to take over / fix 1 vs. investing in 2 or 3. I also would have assumed he would have wanted to diversify his revenue stream. If we have a slow down / fast food scare or black swan, he will get hit on the investment side, and the operation side.

[tiddman]

I think that part of the strategy must be to issue stock for these purchases.  Even after recent declines, BH stock is trading at around 1.4x book.  If BH issues new stock to make these buys, it is accretive to BH's book value.

 

I suspect that the funds and entities within BH are making the purchases with cash, and then tendering the stock to BH in a tender offer.  So the underlying investment might not be all that important to the overall strategy, as long as the stock doesn't move around a lot between when they buy and tender.  They may also hedge their position by shorting the stock when they buy it.

 

This is all just a guess... but it does help to explain why they repeatedly make these minority purchases followed by tender offers.

[Guest dealraker]

I'm a 16 year owner of Sonic stock.  At times in the past I've been kind of shocked at the profit margins and such.  I have a friend who owns a drive in restaurant like Sonic (his private restaurant in the foothills of the NC mountains) and he's made himself filthy rich.  Basically he says, "It is kind of like having 50 drive-thru's- there little physical property in comparison thus cost structures are relatively small all the way across the spectrum."  And so forth.

 

We'll see I guess.  Not a large holding for me but I'll not sell it in my lifetime now that I'm older.

[bargainman]

I'm a 16 year owner of Sonic stock.  At times in the past I've been kind of shocked at the profit margins and such.  I have a friend who owns a drive in restaurant like Sonic (his private restaurant in the foothills of the NC mountains) and he's made himself filthy rich.  Basically he says, "It is kind of like having 50 drive-thru's- there little physical property in comparison thus cost structures are relatively small all the way across the spectrum."  And so forth.

 

We'll see I guess.  Not a large holding for me but I'll not sell it in my lifetime now that I'm older.

 

Ok, for those of us who are kind of ignorant of American restaurant culture... what is the difference between a drive thru and a drive in?  why would a drive in be like having 50 drive thrus?  Drive thrus seem like they take up very little space, I'm not sure how something could take up less...

[UhuruPeak]

Ok, for those of us who are kind of ignorant of American restaurant culture... what is the difference between a drive thru and a drive in?  why would a drive in be like having 50 drive thrus?  Drive thrus seem like they take up very little space, I'm not sure how something could take up less...

 

Let me try to explain; bear with me if I am just confusing you even more - and any one feel free to correct me if you think I err.

 

Drive-thru you have not in Europe, you typically drive around the restaurant (or coffee shop), order at one station, pay at a second and get the food at a 3rd one, all to reduce the time spent at each station and allow a long line of cars to move forward.  Takes little space since you are going behind the back of the restaurant, but you can only have one drive thru per restaurant (banks can have a battery of them, but that's a different story).

Drive-in, you park the car, order/pay/get the food all in the same place.  The difference is that you can have 20 or 50 cars parked at the same time and all getting served.  The "restaurant" often doesn't even allow the customers to get inside, and any place would need a parking so you are looking at the same area that a normal burger joint would take, but the actual building is tiny (just the kitchen basically) and customers usually don't stay around to eat in their car.  Picture the scantily clad waitresses on rollers that you must have seen tons of times.  In the US, Sonic is the big dog in this area, there aren't too many big chains doing this.

 

Do I make sense? Ask away if still confused.

 

Best,

UhuruPeak

[ExpectedValue]

Ok, for those of us who are kind of ignorant of American restaurant culture... what is the difference between a drive thru and a drive in?  why would a drive in be like having 50 drive thrus?  Drive thrus seem like they take up very little space, I'm not sure how something could take up less...

 

I live near a Sonic and visit there pretty frequently. A drive in, like Sonic, benefits from not having a place to sit and eat inside. Even though we refer to other restaurants as drive thrus, almost all of them have dine in areas. The Sonic located near my house has competition from McDonalds, Jack in the Box, KFC, Taco Bell, and Burger King. So there definitely is potential for a drive in to have higher margins than a drive thru, just on the basis of not having the expenses required to have a dine in area.

 

The way Sonic works is, there is a small box of a restaurant and on the left and right sides are parking spaces. About 8-10 per side. You pull into the parking space and on your left will be a menu board. When you wish to order, you press a button on the menu board and give your order. Someone comes out with your food, you pay them, and usually leave - some people stay and eat in their cars.

[shalab]

The way Sonic works is, there is a small box of a restaurant and on the left and right sides are parking spaces. About 8-10 per side. You pull into the parking space and on your left will be a menu board. When you wish to order, you press a button on the menu board and give your order. Someone comes out with your food, you pay them, and usually leave - some people stay and eat in their cars.

 

Can some one decipher why is this a good investment?

[ExpectedValue]

Can some one decipher why is this a good investment?

 

the potential for higher margins

[Guest dealraker]

I brought Sonic up to my investment group once back 16 years ago or so and it basically was a flop.  They are a well-off bunch and not the ones to frequent the restaurant- it just does not, and I mean DOES NOT, appeal to them.

 

That sounds like a good investment to me given the dismissal of it by so many with the funds to buy the stock because it is below their status.  But after the meeting and still today a couple of those in the group say, "I stop by Sonic on nights when we have these meetings as I like..."

 

 

[rmitz]

I live near a Sonic and visit there pretty frequently. A drive in, like Sonic, benefits from not having a place to sit and eat inside. Even though we refer to other restaurants as drive thrus, almost all of them have dine in areas. The Sonic located near my house has competition from McDonalds, Jack in the Box, KFC, Taco Bell, and Burger King. So there definitely is potential for a drive in to have higher margins than a drive thru, just on the basis of not having the expenses required to have a dine in area.

 

The way Sonic works is, there is a small box of a restaurant and on the left and right sides are parking spaces. About 8-10 per side. You pull into the parking space and on your left will be a menu board. When you wish to order, you press a button on the menu board and give your order. Someone comes out with your food, you pay them, and usually leave - some people stay and eat in their cars.

 

Just for the record, I HATE these kinds of places.  I'm the guy that always parks the car and gets out to eat inside a fast food joint, because I can't stand to have food in my car...also, it's just so much more convenient and comfortable to be sitting at a *table* and relaxing somewhat.

[hyten1]

hmmm, i guess i don't quite understand the appeal of sonc as an investment

 

i understand people mention the cost advantage, if its there, it hasn't shown up in the performance of the company (maybe the management if not doing what it should be, maybe that is part of the appeal, someone come in and clean house)

 

with large amount of debt what is the appeal?

 

i just don't see the appeal when you have some many other in the industry that just seem to have a lot more going for it

[tiddman]

hmmm, i guess i don't quite understand the appeal of sonc as an investment

 

i understand people mention the cost advantage, if its there, it hasn't shown up in the performance of the company

 

In essence, the drive-through business model has much higher margins than the sit-down and eat model.  Imagine you had a restaurant with 5 employees and every guest came in to sit down and eat, they might spend 30-60 minutes eating so with a staff of 5 you could serve maybe 5-10 groups per hour.  Now imagine your business was 100% drive-through.  Those 5 employees would just be preparing and bagging food, collecting money, etc. so you could serve dozens of guests per hour.  Your cost per guest is much lower so the margins are much higher.

 

For example this is from the Sonic web site:

 

In 1953 in Shawnee, Oklahoma, Smith and his partner were operating the Top Hat root beer stand and the Log House Restaurant.  For five years, they ran both restaurants.  However, the two concepts had very different economics.  Smith learned that high-end restaurants might earn more gross revenue, but profits were limited.  In 1955, Smith ended his partnership and got out of the Log House Restaurant.  The Top Hat had been the cash cow for the Log House because profit margins were four times greater than those of the steakhouse. Smith eventually put all of his efforts into the root beer stand while discovering a better way to make money in the restaurant business.  It was called a drive-in.

 

SONC's net margins are around 16% (i.e. net operating income divided by revenues).  By comparison, Steak'n Shake is primarily a sit-down restaurant, and their net margins were 1% in 2009, and their owned restaurants historically run net margins of around 4% max.

 

SONC carries higher debt but this debt is supported by the margins and cash flows from the business.  I haven't really evaluated it as an investment, I would look at the price paid vs. the cash flows and what potential they have for growing those cash flows.  The fast food / drive-through business is very competitive in the US and while they have a strong brand, there are a lot of competitors.

[ShahKhezri]

I don't think the description of the exterior does any justice to what Sonic's main strength is.  

 

They do really well with refreshments/drinks.  In seasonally warm areas of the country, this is the DQ of refreshments/drinks.  The exterior works well for what they do, as I'm not a big fan of their burgers.  

 

Haven't looked at the % of rev's and what drinks represent.  But I imagine margins are high because of their strength.

 

I don't own SONC.

[Ballinvarosig Investors]

Position sold out. Interesting!