Circle of Competence

A few days ago, I posted a lengthy analysis of Western Sizzlin’ Corporation, a company that I am a huge fan of, run by Sardar Biglari, a young hedge fund manager.

The company, as I mentioned, is structured as a holding company, with nearly half of its market cap in 3 investments: Steak N Shake common stock, ITEX Corp common stock, and a Real Estate venture.

If you read through Berkshire Hathaway’s annual reports, you’ll notice that he begins to mention a measure called “look through” earnings, to evaluate the true impact on Berkshire Hathaway of the underlying performance of its minority stakes in public companies (stocks).

In accordance with this, my friend Shane from NoiseFreeInvesting and I decided to take that advice in a practical manner, and created our version of the look through income statement and cash flow statement for Western Sizzlin’.    The look through statement rids its user of the investment company accounting WEST must now use, and includes the performance of WEST’s stakes in Steak N Shake Corporation and ITEX Corporation, in addition to its restaurant franchising and operating business, WSFC.

When reading these statements, keep a few things in mind:

1. We chose not to include 3 items: non-recurring legal expense (income statement), deferred taxes (cash flow statement, those taxes will eventually be paid so we did not want to inflate WEST’s current cash flows with them), and lastly, we did not add back stock option expense to the statement of cash flows, because they are a true expense and should stay that way.  We felt the statements more accurately showed Western Sizzlin’s economic performance without these items.

2. This does not include WEST’s real estate venture nor its interest in Mustang Capital Partners, of which it owns 51% of the general partner.  Those stakes you can value and add to its free cash flows to find a true value for Western Sizzlin’, if you like.

3. These statements are “approximately right,” rather than exactly wrong.  While the inputted numbers we believe to be correct, we did make the above adjustments to portray the economic scenario more accurately.

I hope you get as much out of reading and analyzing these look-through statements as Shane and I did producing them.  It was enjoyable for both of us.

Download them here.

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