BH - Biglari Holdings

[BTShine]

At risk of my speaking out of turn...

 

I think people are angry about his compensation because he took cash of the company (one which he owns a small % of) and put it into his own fund.  So, some shareholders might feel like they didn't sign up for him to charge a fee.  They assumed he'd perform this work for free, like Buffett did.  Personally I'm not mad about it, but I just came onto this company recently, so I wasn't there for the 'bait and switch' or whatever the frustrated shareholders would call it.

 

Also, you said "Note that these franchisee training expenses are NOT capitalized into the book value. Therefore these investments have no effect on book value increase, and Biglari won't get any incentive payments on this."  I totally agree.  An additional franchise revenue stream of $5 million might be worth $75 million to the company (assuming there's little ongoing costs associated with the annual $5 million)

 

I get it now, and I can see how the "Buffet premium" turns into "Biglari discount" due to this.

 

It's interesting.  If Biglari truly is a superior investor (to the point where his returns after fees are better than market) then there should be a Biglari Premium, not a discount.  The premium probably shouldn't be as big as the Buffett Premium, but it should exist.  Currently this Biglari Discount seems to bring the stock's price well below a sum of the parts analysis. 

[muscleman]

At risk of my speaking out of turn...

 

I think people are angry about his compensation because he took cash of the company (one which he owns a small % of) and put it into his own fund.  So, some shareholders might feel like they didn't sign up for him to charge a fee.  They assumed he'd perform this work for free, like Buffett did.  Personally I'm not mad about it, but I just came onto this company recently, so I wasn't there for the 'bait and switch' or whatever the frustrated shareholders would call it.

 

Also, you said "Note that these franchisee training expenses are NOT capitalized into the book value. Therefore these investments have no effect on book value increase, and Biglari won't get any incentive payments on this."  I totally agree.  An additional franchise revenue stream of $5 million might be worth $75 million to the company (assuming there's little ongoing costs associated with the annual $5 million)

 

I get it now, and I can see how the "Buffet premium" turns into "Biglari discount" due to this.

 

It's interesting.  If Biglari truly is a superior investor (to the point where his returns after fees are better than market) then there should be a Biglari Premium, not a discount.  The premium probably shouldn't be as big as the Buffett Premium, but it should exist.  Currently this Biglari Discount seems to bring the stock's price well below a sum of the parts analysis.

 

If you look at the past 92 pages of this thread, and look online, BH is clearly not a momentum stock, and many value investors hate it. Thus you get the Biglari discount. Premiums and discounts are created by shareholder's emotional runs. Perhaps the best time to buy is when the hate against Biglari peaks.  :)

[Saidal]

Change is coming to BH. This is a no-brainer. Groveland are hands down better capital allocators and shareholder friendly vis-a-vis the incumbent.

 

http://www.sec.gov/Archives/edgar/data/93859/000089706914000475/cg460.htm

 

[AzCactus]

I have read this board for a long time but have not posted until now as I am the quiet type.  Like someone else said on this board a while back, I cannot believe one of my first two posts is going to be about friggin Sardar Biglari, but que sera sera.  All things being equal, I would much rather not invest in Biglari’s company so that I would never have to think about him because I agree with so much of what has been written about him in the skeptical sense on this board (i.e. persona of arrogance bordering on disdain, calling CBRL’s management Chihuahuas, at a minimum not being attentive to the perception of going back on his word or at worse going back on his word in some cases, etc.).  I believe that his perception will slow down his empire building (you “catch more flies with honey”/general reputational costs/etc.).  All of that said, however, I have recently made significant investments in Biglari Holdings – because all things are not equal in this case.  For value investors, there are always two sides of the equation – price and value.  And in this case the components are relatively easy to value and the price is dramatically too low.

 

I actually agree that there should be a Biglari discount, but in no universe of value should the Biglari discount be anything like what it currently seems to be ($500 or $600 million discount?) as I attempt to outline below.

 

As I write this, the market cap is about $660 million (1.9 million shares X $350 per share – this includes all the newly issued post-rights offering shares but subtracts all of the treasury shares).  Without getting into Maxim, First Guard, real estate, Western Sizzlin, $6 million of Unico, some other very small investments, and other component parts that definitely have value, there are three major channels of value: 1) 20% of Cracker Barrel, 2) Steak n Shake, and 3) Cash.

 

The current market value of BH’s CBRL stake is over $550 million.  I realize people could reasonably adjust this up or down based on various beliefs about that company/etc.  I adjust it down to about $450 million based on the associated tax burden with the gain and a liquidity discount.

 

The cash I just take at a dollar for dollar at face value – so $200 million (this includes the $86 million post-rights offering).

 

That means before we even get to Steak n Shake – the value of the components has already reached the market cap of Biglari Holdings. 

 

I look at the cash flows of Steak n Shake more than its operating earnings.  Looking at its cash flows, Steak n Shake has generated essentially over $50 million per year over each of the last three or four years I believe.  If you look at what other restaurant companies are fetching on the open market, (BW3s, Cracker Barrel itself, others – not that SNS units are comparable restaurants to BW3 units – both company owned and franchised BW3s are clearly more valuable than a typical Steak n Shake unit – but these at least create a frame of reference)  - you get the impression that Steak n Shake would be worth well over $500 million if this exact version of Steak n Shake existed as a stand alone company without the Biglari discount.  If you don’t think Steak n Shake would be worth at least this much (but really probably significantly more) than you must think that most or all public restaurant chains are significantly overvalued.

 

Anyway, Steak n Shake and its significant cash flow and those other components of Biglari Holdings are essentially free at this price for Biglari Holdings.  I’m truly surprised more value investors are not interested in this.  Though a Biglari discount (for his persona and the incentive agreement) is warranted – that discount certainly should not be approaching $500 million or more in market value.  The thing that I find the wildest about this is that all of the reasons for the Biglari discount were present in 2012 and since then the most significant investment Biglari has ever made – Cracker Barrel - has nearly tripled, yet the price of Biglari Holdings has barely moved (even when adjusted for the two rights offerings).  If Biglari Holdings is worth no more now that its 20% of Cracker Barrel has gone way up, then either Biglari Holdings was like four times more expensive than it should have been a few years ago or you should probably buy puts on or short Cracker Barrel.

 

Well said NBL.  Based on your analysis above (which I thought was very well worded) I was wondering if there are any other companies you are looking at the present time?

 

[writser]

Change is coming to BH. This is a no-brainer. Groveland are hands down better capital allocators and shareholder friendly vis-a-vis the incumbent.

 

http://www.sec.gov/Archives/edgar/data/93859/000089706914000475/cg460.htm

 

lol, I assume you are being sarcastic? Though I appreciate what they are doing.

 

This notice is being provided to you pursuant to Section 9 of Article IV of the Company’s Restated Bylaws, as amended to date (the “Bylaws”).  Groveland owns of record 100 shares of the Company’s common stock, stated value $.50 per share (the “Common Stock”), and beneficially owns an additional 2,900 shares of the Common Stock, which represents less than 1% of the outstanding Common Stock.

 

@NBL0303: at least your first post was a great one. Finally a try to actually tag a value on BH after countless pages. I might actually have to look at this due to your back-of-the-envelope calculation.

[muscleman]

Change is coming to BH. This is a no-brainer. Groveland are hands down better capital allocators and shareholder friendly vis-a-vis the incumbent.

 

http://www.sec.gov/Archives/edgar/data/93859/000089706914000475/cg460.htm

 

They only have 3000 shares and they want to elect 6 directors? I have more shares than Seth G. Barkett!

[muscleman]

@NBL well said.

For people who deeply hates Biglari, would you rather invest in Pabrai or Sanjeev's hedge fund at no discount, or invest in Biglari with 50% discount? They have the same incentive structure, but BH's incentive is based on book value increase, which uses very conservative accounting instead of market to market value.

[Kuhndan]

Someone asked him at the annual meeting last year if there was a "high watermarK" and he said yes.

 

He definitely has a high watermark and he gets paid once he exceeds it by 6%, but I do not see any where that it says he has to grow 6% per year. I could be wrong, but my understanding is if he has returns of 0% in year 1, 0% year 2 and 10% in year 3, Sardar would be paid incentive comp in year three.

 

The language in Biglari's incentive compensation agreement  I think is relevant is below. As I understand it, the original agreement provided for an annual increase of 6%. When the agreement was modified with the cap of $10MM and hurdle rate increased from 5% to 6%, they "corrected" the agreement to 6% above the high water mark and clarified that the hurdle rate was not cumulative on an annual basis. Curious if anyone sees this differently. If I'm correct, this was a huge change that was slipped in the final agreement

 

"High Water Mark. Under the Incentive Agreement, Mr. Biglari will not receive incentive compensation under the Incentive Agreement unless the Corporation’s book value exceeds the previous highest level in book value, or the “high water mark,” plus a 6% growth in book value, i.e., the hurdle rate (which has been corrected in the Incentive Agreement attached as Annex A to this proxy statement to clarify that the hurdle rate is not cumulative) As such, in a fiscal year in which book value declines, the marker for subsequent fiscal years will require the complete recovery of the deficit from the last high water mark plus attaining the stated 6% hurdle rate before Mr. Biglari is eligible for a bonus."

[Vish_ram]

Great first post NBL0303.

 

I was on sidelines for most part and casually read all these comments. I came away disliking Biglari.

 

Few months back, I printed out all his letters to shareholders and after reading, I was truly impressed with what he had accomplished. He is truly an operator and capital allocator. I took a small position a month back for a 20 yr holding position. My logic is give the devil its due.

 

With all the cash, it is a good hedge against the market that is hitting highs.

 

[treasurehunt]

The current market value of BH’s CBRL stake is over $550 million.  I realize people could reasonably adjust this up or down based on various beliefs about that company/etc.  I adjust it down to about $450 million based on the associated tax burden with the gain and a liquidity discount.

 

The cash I just take at a dollar for dollar at face value – so $200 million (this includes the $86 million post-rights offering).

 

That means before we even get to Steak n Shake – the value of the components has already reached the market cap of Biglari Holdings. 

 

Nice post, NBL0303.

 

It is aggressive to assume that all of the $200 million is excess cash that can be distributed to shareholders, isn't it? I'd guess that some part of it is needed for Steak n Shake operations.

 

Also, how did you calculate the tax burden associated with the CBRL stock? I took a quick look at BH filings but couldn't find this number.

 

In any case, it does look like BH is priced as though Biglari will destroy a lot of value for shareholders. Thanks for highlighting this. I may have to get over my emotional dislike of Biglari and buy some BH stock.

 

[peter1234]

Change is coming to BH. This is a no-brainer. Groveland are hands down better capital allocators and shareholder friendly vis-a-vis the incumbent.

 

http://www.sec.gov/Archives/edgar/data/93859/000089706914000475/cg460.htm

 

They only have 3000 shares and they want to elect 6 directors? I have more shares than Seth G. Barkett!

 

+1. LOL

;D

[ragu]

The current market value of BH’s CBRL stake is over $550 million.  I realize people could reasonably adjust this up or down based on various beliefs about that company/etc.  I adjust it down to about $450 million based on the associated tax burden with the gain and a liquidity discount.

 

NBL0303,

 

Alternatively, BH shareholders could simply do as Sardar and Phil say they do in the 2012 letter (top of Pg. 6).

 

Assume that all of CBRL's retained earnings are paid out as dividends and apply a 11% tax rate on those dividends to get BH's share of that year's earnings.

 

I also believe that you cannot consider the shares held by BH, of itself, via the Lion Fund as Treasury stock. It is accounted for as such, but economically, Sardar is on the record stating that you should consider those shares outstanding.

 

Welcome to the board!

 

Best,

Ragu

[giofranchi]

All things being equal, I would much rather not invest in Biglari’s company so that I would never have to think about him because I agree with so much of what has been written about him in the skeptical sense on this board (i.e. persona of arrogance bordering on disdain, calling CBRL’s management Chihuahuas, at a minimum not being attentive to the perception of going back on his word or at worse going back on his word in some cases, etc.).  I believe that his perception will slow down his empire building (you “catch more flies with honey”/general reputational costs/etc.). 

 

Again I must say that I disagree… In my experience business success is all about capital allocation, and has very little to do with the perception of the general public… Or put it differently, if you find a young Malone or a young Icahn, don’t worry too much about the fact they might not be perceived by the general public as young Buffetts… Just invest with them and become rich!

 

This of course doesn’t mean Biglari is a young Malone or a young Icahn… That is the only relevant judgment each of us should make and worry about! ;)

 

Gio

 

[gfp]

put down that thesaurus Biglari

 

remunerative..

 

aggrandize its eventual net worth..

 

why must he do this every year?

[giofranchi]

I have liked the letter very much:

- the numbers are crystal clear, as usual

- the results of Steak n Shake are impressive

- the future prospects of Steak n Shake through franchising, licensing, and further costs reduction are great

- the 79.1% combined ratio of First Guard is very promising, as earnings will grow in coming years

- the turnaround of Maxim is far from a sure thing, but Biglari’s licensing strategy imo makes sense

- the $19 million dividend BH receives each year from Cracker Barrel is lots of money

- $124.3 million in cash are a very useful hedge against any market turmoil that might come our way, and in a correction will surely be put to very good use

 

Next Monday I am buying more. ;)

 

Gio

 

[wescobrk]

Someone mentioned change is coming at BH because someone owns a measly 3000 shares and are trying to get on the board.

No offense but that is ridiculous. Biglari changing is like saying Bezos will change his ways.

I think Biglari is doing a great job. He just isn't a people person and rubs people the wrong way.

His business acumen is off the chart though, in my opinion.

Biglari will resign before he bends to pressure.

[muscleman]

I have liked the letter very much:

- the numbers are crystal clear, as usual

- the results of Steak n Shake are impressive

- the future prospects of Steak n Shake through franchising, licensing, and further costs reduction are great

- the 79.1% combined ratio of First Guard is very promising, as earnings will grow in coming years

- the turnaround of Maxim is far from a sure thing, but Biglari’s licensing strategy imo makes sense

- the $19 million dividend BH receives each year from Cracker Barrel is lots of money

- $124.3 million in cash are a very useful hedge against any market turmoil that might come our way, and in a correction will surely be put to very good use

 

Next Monday I am buying more. ;)

 

Gio

 

Yeah. The return on the franchisee training expense is pretty good. I think it is 20% return or more.

1st Guard may also accelerate growth of its business as BH injects more cash into it.

 

A jockey is only as good as his horse. I think these two horses make S.B.'s job easy. He just needs to keep doing what he is doing and plow cash into these two platforms and he will achieve a 20% return on these investments.

 

I've looked at a number of Jockey stocks in the past few years, including GLRE, TPRE and SHLD. None of them are as easy as BH.

For GLRE and TPRE, returning 20% per year is far from easy.

SHLD's investments into shop your way rewards became a huge cash incinerator.

[valueyoda]

The stock is still very cheap, but I am dismayed to learn the operational losses at Maxim. It is impossible to judge whether he will succeed at turning an operating profit in 2016. Otherwise, it remains quite a drag on total operational profits.

[BTShine]

The stock is still very cheap, but I am dismayed to learn the operational losses at Maxim. It is impossible to judge whether he will succeed at turning an operating profit in 2016. Otherwise, it remains quite a drag on total operational profits.

 

Agree that the stock is still very cheap.  He speaks to the topic of Maxim in the letter today.  He basically said it's uncertain as to if they'll be successful with Maxim and around this time next year he will know.  At that point he'll make a decision as to either continue with a profitable Maxim or close down the operations and cut losses.

 

 

[treasurehunt]

Anyone remember ITEX, a company that Biglari attempted to acquire in late 2007? The offered price was $1.02 I believe, which the CEO of ITEX rejected as way too low. I remember that many shareholders of ITEX agreed with the CEO, practically being up in arms about getting robbed by Biglari. Well, it turns out that ITEX is trading at $2.72 now, but that is after a 5-for-1 reverse split in 2010! Even accounting for the 75 cents or so of dividends per share that ITEX has paid out since 2007, investors choosing to reject Biglari's offer have lost over 30% of their money in the last seven years.

 

I am not sure what all of this means, but I thought it was interesting.

[giofranchi]

For GLRE and TPRE, returning 20% per year is far from easy.

 

GLRE and TPRE are building float, which, if done prudently enough, is a huge advantage imo. BH has not begun yet. I think Biglari understands the importance of float, and will stir the boat that way… but of course there is no way to know for sure if he will be successful. I hope so! We will see. ;)

 

Gio

 

[muscleman]

For GLRE and TPRE, returning 20% per year is far from easy.

 

GLRE and TPRE are building float, which, if done prudently enough, is a huge advantage imo. BH has not begun yet. I think Biglari understands the importance of float, and will stir the boat that way… but of course there is no way to know for sure if he will be successful. I hope so! We will see. ;)

 

Gio

 

That's a separate issue isn't it? The business needs to have two components to be a successful long term compounding machine: 1. Generation of lots of cash. 2. Reinvest the cash at high rate of return.

 

When you said "GLRE and TPRE are building float". That belongs more likely to step 1, not step 2. What I am talking about is step 2.

 

How confident are you that David Einhorn or Dan Leob is able to invest at 20% per year for the next 10 years? That is far from certain given the business they are in and the amount of capital they have  to deploy. Though TPRE's capital base is only $1.5 bn, it has to be invested alongside the master fund, which is over 15 bn, so the return should be similar to the master fund.

I am far more confident that Steak n Shake's investment in the franchisee expansion can return more than 20% per year. It is just a much easier task.

 

 

In addition, regarding TPRE, what I don't like is that management team has option grants and founder options in addition to the 2/20 fee that Dan Leob's hedge fund charges. This is clearly a double charge. To be fair, he should either take the option grants and manage the investments for free. or charge the 2/20 and don't get any option grants from TPRE.

[giofranchi]

That's a separate issue isn't it? The business needs to have two components to be a successful long term compounding machine: 1. Generation of lots of cash. 2. Reinvest the cash at high rate of return.

 

When you said "GLRE and TPRE are building float". That belongs more likely to step 1, not step 2. What I am talking about is step 2.

 

As always in business, things might look separate, but they are actually joined at the hip… With invested assets = 130% of capital, and earned premium = 52% of capital, and a combined ratio of 100%, Einhorn has to return 15% on GLRE portfolio of investments, to increase capital at 20% annual.

Think what would happen if invested assets got closer to 200% of capital (which I think they might), earned premium got closer to 100% of capital, and they began underwriting profitably: to increase capital at 20% annual, a 10-12% return on investments would be enough.

 

Biglari, on the contrary, has to achieve a 20% return on his investments, to increase capital at 20% annual… at least for now…

 

A 10-12% return after fees is surely not easy, but at least conceivable… a 20% return after fees, and sustained for many years, is almost out of this world…

 

This being said, I am not too worried about it, because I think Biglari understands the importance of float very well, and he will do all he can to start growing it for BH as soon as possible. :)

 

As an aside, Buffett has often said that for an insurance company, which is capable of both growing float and underwriting profitably, float is at least as valuable as equity, if not more valuable! Therefore, it is plain to see how growing float profitably adds much value to a business irrespective of investments results.

 

Gio

 

[DCG]

Anyone remember ITEX, a company that Biglari attempted to acquire in late 2007? The offered price was $1.02 I believe, which the CEO of ITEX rejected as way too low. I remember that many shareholders of ITEX agreed with the CEO, practically being up in arms about getting robbed by Biglari. Well, it turns out that ITEX is trading at $2.72 now, but that is after a 5-for-1 reverse split in 2010! Even accounting for the 75 cents or so of dividends per share that ITEX has paid out since 2007, investors choosing to reject Biglari's offer have lost over 30% of their money in the last seven years.

 

I am not sure what all of this means, but I thought it was interesting.

 

 

I looked into ITEX a few years ago (Parsad mentioned that his firm invested in them), but it seems like a pretty terribly run company, so I gladly stayed away.

[BTShine]

Anyone remember ITEX, a company that Biglari attempted to acquire in late 2007? The offered price was $1.02 I believe, which the CEO of ITEX rejected as way too low. I remember that many shareholders of ITEX agreed with the CEO, practically being up in arms about getting robbed by Biglari. Well, it turns out that ITEX is trading at $2.72 now, but that is after a 5-for-1 reverse split in 2010! Even accounting for the 75 cents or so of dividends per share that ITEX has paid out since 2007, investors choosing to reject Biglari's offer have lost over 30% of their money in the last seven years.

 

I am not sure what all of this means, but I thought it was interesting.

 

 

I looked into ITEX a few years ago (Parsad mentioned that his firm invested in them), but it seems like a pretty terribly run company, so I gladly stayed away.

 

ITEX is very cheap on a purely financial basis.  Market Cap. of $7.7 million.  Net cash of $3.7 million.  This gives us an enterprise value of $5 million and the company has brought in over $1 million in FCF the last 4 years.  So, your paying $5 million and getting $1 million every year.  Over a 20% return if it continues.