Steak n Shake Sizzles

Although investors have lost their appetite for most stocks, they're feasting on Steak n Shake (SNS ). From 7.50 in mid-March, shares climbed to 13.50 in late January, before easing to 12.95 on Feb. 20. Despite the rise, the stock has 50% more upside potential to it, says Dave Sowerby of investment firm Loomis Sayles, which has accumulated 400,000 shares. With its 388 restaurants in 17 Midwestern and Southern states, Steak n Shake occupies a niche position between the popular fast-food outlets and pricier chains, such as Cracker Barrel, says Sowerby. Steak n Shake's casual-dining restaurants, whose core menu includes steakburgers made from T-bone, chicken, fries, and milkshakes, suffered a sharp drop in business right after September 11. But now, Steak n Shake--open 24 hours a day, seven days a week--has, like many other restaurants, benefited from families driving, rather than flying, on vacations.

Equally important, the stock is a bargain compared with its peers, says Sowerby--based on price-earnings and price-to-book ratios, operating cash flow, and balance-sheet strength. Over the past nine years, SNS has sold at about 3.5 times its book value; currently, it's at 2 times. At 3.5 times, the stock would be 21, which is Sowerby's 12-month price target. And the stock is selling at 15.5 times estimated earnings of 84 cents a share for the year ending Sept. 30, 2002, compared with its peers' average p-e of 20. He expects SNS to earn 92 cents in 2003. In 2001, it made 76 cents. In three years, revenues should grow 6.5% to 7% annually, figures Sowerby. He sees sales rising to $485 million in 2002, vs. 2001's $448 million. "As a mid-cap value play, SNS is very palatable," he says.

By Gene G. Marcial

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