BH - Biglari Holdings

[cobafdek]

. . . I think those things are more than offset by Sardar Biglari wrapping his investing life and career up in the company and continuing to build his personal ownership stake in Biglari Holdings over time.  Does that address your question?[/font][/size]

 

Yup, and thanks again for your detailed thoughts and clarity.

 

Another point for further clarification, but first a Scriptural quote (Graham, 1934, p. 36):  "The most convincing proof of capable management lies in a superior comparative record over a period of time.  But this brings us back to the quantitative data.  There is a strong tendency in the stock market to value the management factor twice in its calculations.  Stock prices reflect the large earnings which the good management has produced, plus a substantial increment for 'good management' considered separately.  This amounts to 'counting the same trick twice' and it proves a frequent cause of overvaluation."

 

Taking off from this, I think it is also true that analysts and investors may have this tendency when they calculate an intrinsic value figure,  and in the case of BH, it works the other way, so that their IV calculations include a substantial negative increment for its management considered separately.  To be fair to Mr. Biglari, we should also say there is a Biglari Premium, which is what I think you allude to above when you say the negative stuff is more than offset by his business skills and investing judgment. 

 

So I think of it as a Biglari Factor = Biglari Premium - Biglari Discount, and that this stock is controversial because BP and BD are both very large, making it hard to figure out whether the Biglari Factor is > 0, = 0, or < 0.  Graham's quote suggests to me that in most cases this equation should equal "0."  In the presence of a skilled/flawed jockey, maybe he might make an exception.  At the risk of feeling like I'm trying to straitjacket you into a semi-quantitative stance:

 

1. Do you think there is some separate management factor (Biglari Factor) that can be added/subtracted to IV?  And is it net positive, net negative, or zero?

 

2. Or, if you prefer to leave it as the Biglari Factor is a slight negative because of the Biglari Toll, then is it fair to say that you do not think the Biglari Premium is large enough to offset the Biglari Toll?

 

 

[Max Alpha]

Thank you for the highly detailed write up NBL, I like the pragmatic approach.

 

One thing i can't get my head around though is the valuation of the restaurant businesses. I understand that they were able to upstream $300m with the help of debt, but $50m Levered FCF seems a stretch based on the current figures.

 

I plugged the numbers from their restaurant breakouts in the latest annual report into a spreadsheet quickly and could see the following:

 

http://lapload.com/image.uploads/16-03-2015/original-0ec7f231e5353979f873de3ac6aa5869.png

 

Your valuation assumes Levered $50m FCF from the core business alone (which it appears the whole restaurant business was capable of in the investment starved results of 2012).

 

At an equity value of 500m + 200m+ 25m = $725m:

725 / 51.7 (2012 (A) Levered FCF) = 14x

725 / 15.5 (2014 (A) Levered FCF) = 46x

725 / 46.7 (2014 Normalised) = 15.5x

 

Or at an enterprise value of 725m + 220m debt = $945m:

945 / 61.7 (2012 (A) Unlevered FCF) = 15.3x

945 / 25.2 (2014 (A) Unlevered FCF) = 37.5x

945 / 56.4 (2014 Normalised) = 16.7x

 

The 2014 results normalised to pre-franchise investment SGA and Capex levels looks like a fair multiple but that doesn't really price in continued investment in the franchise business, which will likely occur.

 

What am i missing here, am i thinking too short term in terms of franchise royalties vs. front loaded investment?

 

Edit* I see your last post provides some colour around the restaurant valuation.

 

[vinod1]

NBL0303,

 

Thanks for the detailed writeup.

 

Vinod

[shalab]

NBL, thanks for adding color and the detailed explanation. Obviously, you have thought through this situation very well and thanks also for sharing the same.

 

The major assumption here is the below which is central to the BH thesis - made by several people including Ragu/Gio etc. ( but never by Biglari in any forum ) I don't see a reason or need for Biglari to stop at 30% control if he can get there.

There may be future licensing agreement/poison pill mechanisms put in place, until Sardar Biglari owns 30% of the company or so.  If someone just cannot swallow these incentive agreements and control mechanisms, then I respect that, it is a clear choice for that investor that this is not a company for them

 

In addition, there are these other actions that can give him even more control. (if control is as important as Gio says) This is the reason I believe the board should have Groveland representation.

 

    - he is already transferring cash flows to lion fund, leaving debt in subsidiaries

    - transfers profitable operating businesses to lion fund ( just like he did with lion fund ) with the puppet board

    - does future profitable acquisitions through lion fund using SnS funds

 

As Buffett mentioned many times (paraphrasing), when you are hiring a person, you are looking for intelligence, energy and integrity. If the person has the first two qualities but lacks the third, that person can kill you.

   

   

 

 

 

Very good write-up NBL, thanks for sharing.

 

On the valuation front, did you include debt added by Biglari for SnS? Also, can you clarify the misc assets as well as the franchise value?

 

thanks!

 

Thank you.  I address those points in various places in the write-up but since those posts were so long and tedious they were easy to miss.

 

To address your questions:  Misc assets are non Cracker Barrel stocks, the real estate for development, and a few other nominal things like that.  If you just add up the non-CBRL stocks, I think those alone are a little more than $20 million (CCA, Unico, Air T, Insignia - though some portion of those are likely in the column of the non-BH Lion Fund partners - but the BH portion is probably around $20 million), so you could argue that this number is higher than $20 million.  As I describe in the detailed post, this number does not contain any value for Maxim, if that is what you are thinking.  While I think Maxim will likely be value accretive, for margin of safety and lack of predictability purposes I do not include any value for it in that post.

 

Again, I addressed the franchise value at some length in the post but to summarize.  The franchise value will likely be more than the amount I listed.  There are still only 4 international stores and about 60 "new franchises" to be distinguished from their legacy franchises.  The 415 company-operated Steak n Shakes are consistently profitable on a unit level and have been for 80 years (despite the problems based more on financial management of the company than restaurant competitive dynamics).  Thus, if there are 415 profitable company-owned stores concentrated in a very few states (Florida, Missouri, Ohio, Indiana), there are very likely to be 500 or more domestic Steak n Shake franchises one day.  Think about how many international Burger King franchises there are, 1,200 opened last year, and the average unit economics of a Steak n Shake are superior to that of a BK it seems clear to me that there is a market for at a bare minimum hundreds but more likely thousands of international Steak n Shakes.  The pace of new franchise openings, say, four years ago I would have hoped was a little higher by now - last year was 21, I probably would have thought it could have been more like 40 by now - but the pace of openings is much less important than the profitability of the new units.  While there have been a few very angry new franchisees, that has clouded the fact that the new franchises are on average killing it.  Averaging over $2 million per store.  Substantially higher than the company-owned stores AUV - which means most of the new stores and the franchisees are profitable.  This is more important then the pace of openings.  Steak n Shake franchise revenue has been growing at over 30% per year - this year franchise revenue will approach $20 million (based on the numbers in the 10-KT 3/13 filing and the amount of planned spring and early summer openings of new franchised SNS units) - not a huge number but a huge growth rate, and since the pace of store openings will likely accelerate in the next few years - there is a very good chance the value I ascribe to the franchising business will prove to be low.  If you owned all of Steak n Shake and someone offered you $200 million for the franchising business, I wouldn't take it and I don't think you would.  Once they have opened 200 "new franchises" - the revenue will approach $50 million and the the margins on that revenue are high - so the value of the business would clearly be higher than the value I listed in my valuation post - and potentially much higher as the number of new franchises grows past 200.  That may seem far off but by the end of this year the company will have opened nearly 100 new franchises and mostly just in the last few years.

 

As to the debt - yes it is included in the valuation in the core SNS section.  The little over $200 million debt runs through 2021 and has an after-tax interest rate of 2.7%. The debt is already being serviced out of Steak n Shake's earnings, is a relatively minor annual expense, was taken out when borrowing was historically cheap, is not backed by the parent company, and has better coverage ratios than even Berkshire's debt at MidAmerican (er, Berkshire Energy) and BNSF.  I think BH's approach to debt is excellent; they borrowed this now when it was historically cheap, rather than a few years from now when it may not be.  Berkshire has done this over the years - in 1988 he took out debt just because it was cheap and Buffett said even though he didn't have anything to do with it - he would just put it in his pocket until he did.  Anyway, some people seem to want to just subtract the debt from the cash or something like that, I do not think that is the right approach at all (and I didn't think this was even a thought among value investors).  If this were the right approach, then Valeant would be bankrupt - because they have $20 billion in debt with like $8 billion in revenue.  If the Salix deal goes through they'll have like $30 billion or more in debt and like $12 billion in revenue.  Buffett doesn't subtract the debt from companies when valuing them, like BNSF, provided that the debt is at a reasonable interest rate, is easily serviced by the company, and the company is making productive use of the capital.  In that scenario, the debt is properly thought of as more of an expense and that is exactly the situation with SNS' $200 m in long-term debt.

[Max Alpha]

Thank you for the detailed reasoning NBL.

 

Your reasoning is compelling and this deserves a much deeper look than the cursory numbers I put up.

[giofranchi]

Thank you NBL0303 for the very exhaustive write up! Now I will print it and read it carefully… It is too long to be read on my i-phone!! ;D ;D

 

Cheers,

 

Gio

 

[frugalchief]

NBL, thank you for the thesis.  Your insight on items I hadn't included in mine are very useful.  I appreciate you sharing this!

 

Quick question, simply, because I do not know....

 

This portion of the Toll is the much more potentially lucrative part of it as evidenced by the $34 million reallocation he received on 12/31/14.  This is obviously going to cost Biglari Holdings a significant amount over time...

 

Regarding "control" and the reallocation's he can earn....

 

In The Lion Fund, is Sardar/Biglari Capital able to capture the reallocation by means of transferring shares of CBRL or even BH over to Sardar/Biglari Capital, instead of taking the fee in cash?  (I don't know the process of private investment partnerships/their agreements in relation to this process).

 

If that is the case, Sardar could, more quickly than we think, start transferring BH shares from TLF to his personal holdings, thus increasing his personal ownership more quickly than buying in the open market.

 

Thanks,

FrugalChief

[peridotcapital]

NBL,

 

In valuing SNS's owned unit business at $500M and the franchise business at $200M, you are assigning a value of ~$1.2 million per owned unit and ~$1.6 million per franchised unit. I understand the growth rates are very different for each business, and therefore the multiple of cash flow would not be anywhere near the same, but how can you justify that kind of valuation for a franchised unit given its unit-level cash flow potential? If you are looking out 5 years (in terms of how many units will be open) to justify a $200M value, why did you not apply a time value discount to the projected out year cash flow? Could you provide more color on your process here?

 

Thanks!

 

Chad

[peridotcapital]

NBL,

 

In valuing SNS's owned unit business at $500M and the franchise business at $200M, you are assigning a value of ~$1.2 million per owned unit and ~$1.6 million per franchised unit. I understand the growth rates are very different for each business, and therefore the multiple of cash flow would not be anywhere near the same, but how can you justify that kind of valuation for a franchised unit given its unit-level cash flow potential? If you are looking out 5 years (in terms of how many units will be open) to justify a $200M value, why did you not apply a time value discount to the projected out year cash flow? Could you provide more color on your process here?

 

Thanks!

 

Chad

 

Chad -- first off, I think I've read something you're written before (though I could be wrong or mistaking you for someone else) and you are obviously a smart and thoughtful investor - so maybe your thoughts on this are better than mine.  My first response would be to read the valuation posts and the subsequent posts.  I realize they are long and boring but I would still read them if you're interested in the company.

 

To address your specific questions though - I didn't value SNS at $1.6 million per franchise unit at all.  I don't approach in that way.  I realize if you take the $200 million I ascribed to the value of Steak n Shake franchising and divided that by the 124 franchises in the annual report, you get $1.6 million - but that is the best way to think about this.  That reminds me of people's sort of rote use of Book Value, without understanding the nuances that sometimes make book value important to investment considerations and other times make it basically useless.

 

So anyway you get $1.6 million per franchise unit by spreading the $200 million valuation out over the 124 Steak n Shake franchises.  How I think about it though is by ignoring the first 71 franchises.  I do not value the "legacy" franchises at all.  Basically zero.  Those were yielding practically no value to the company at the time Biglari began running Steak n Shake.  Most of those legacy franchises are still up and running, the company didn't shut them down, but they are not really financially accretive to Biglari Holdings in a significant way.  So I essentially ignore whatever value they have.

 

But the new 53 Steak n Shake franchises (as of the end of '14 FY, close to 60 now), are what I am taking into consideration.  If you've read the book about the history of Steak n Shake called "Selling Steakburgers" you'll recall how those legacy franchises came about; friends of Gus Belt, weird business transactions with future operators of Steak n Shake, other weird arrangements.  Thus, at the time Biglari began running it - there had essentially never been a real Steak n Shake franchising initiative.  This is why Biglari had to spend money to build up the infrastructure that could support franchising, change the design of the store a bit, and take some of the

 

The "new" franchised units are doing better than any other subset of Steak n Shakes.  The new designs, location selections, and operators of the new franchises are working out very well on average.  A few of them are underperforming and a few of the operators are pissed off, but that is probably inevitable.  The AVERAGE for the new franchises is excellent.  (You can get this information in the franchise disclosure documents and other sources.)

 

Since they have, to date, about 60 new franchises and by the end of the year will be approaching 100 new franchise units and the revenue to parent company from these will approach $20 million this year - it seems clear to me that five years from now there will be at least 200 new Steak n Shake franchises.  This is where the value is derived from - not the legacy franchises.

 

 

I understand that you didn't value the entire franchise business on a "dollar value per existing unit" method (which would assign an irrational zero value to all future development), but why not to value the existing units that way, since their cash flow is pretty easy to estimate? Then add to that a value for future units to be opened, using your own growth and discount rate assumptions. Then simply add the two figures together.

 

Also, you say that you expect 100 of the "new" franchised units to be open by YE 2015, and that those units will contribute roughly $20 million in revenue to BH this year, or roughly $200,000 per unit. At the $2 million average unit volume you previously wrote about, that comes to a 10% royalty rate. I'm baffled as to how you arrived at that figure. And that answer might help me understand how you got to $200 million, which seemed very high.

 

Thanks!

 

Chad

[mcmaaaaath]

I think NBL meant that the TOTAL franchise revenue will approach $20m in 2017. Not just for the ones they are adding. Also I think the $2m low, and the royalty rate is 5.5% according to this article:

 

http://www.bizjournals.com/stlouis/blog/2013/08/local-owners-of-steak-n-shake-wage.html?page=all

 

By my math, SNS franchises have generated royalty revenues of $190k, $157k, and $157k per new (average) franchised SNS location in 2012, '13, and '12 respectively. This would indicate new franchise locations are doing about $2.9m at the 5.5% rate.

 

This math assumes that the legacy locations have not increased their sales at all of that time period, so the incremental revs and thus the implied franchise location sales would be a little lower if that were factored in.

 

For reference I pulled the numbers on BKW's franchises-- they do about $1.2m in sales, have a similar 5-6% royalty rate, and thus give back about $70k per location back to the franchisor. So it is true these franchises that SNS is putting up appear to be performing very well.

 

[peridotcapital]

These are good points Chad and mcmaaaath.  I think any search for mathematical precision for these calculations is going to give a false impression more than clarify.  Mcmaaaaath is right that I wasn't clear enough that the $20 m will be for total franchise revenue and that is a less relevant number because it includes (a) legacy Steak n Shake franchise royalties and (b) Western Sizzlin royalties.  Additionally, we can't just simply take the change in SNS franchise revenue year over year and the change in units because there are two significant complicating factors with that: (a) a small portion of that revenue is from the initial franchise fee and thus is not a recurring royalty and (b) the new Steak n Shake franchise units are opening throughout the year - so none of them were open the entire year and each of them are paying their royalties in those first years for differing amounts of time depending on when they opened.  In other words, this is so far from a steady state that the traditional calculations we could perform lack utility.

 

I have done all of the calculations as I know you both have regarding based on the AUV what the new franchises are bringing in to the parent company in royalties and what they are worth to the company discounting their future cash flows to the present and applying an appropriate long-term margin to that/etc.  These calculations are interesting and help flesh out the picture, but, again, this is so far from a steady state - that all of these calculations are far from determinative.

 

I use $200 million because I think that is the minimum realistic value based on the number of new franchise units I feel are nearly certain to open in the coming years, what the new franchises will likely be worth to the parent, the costs associated with franchising, and adding a discount for the uncertainty of it all.

 

I think the key determinations to make in one's own mind for valuation purposes are: (a) a rough idea of what the cash flows from new franchises are worth to the company, (b) the likely number of new franchises will be opened in the coming years, and © the probability of success for this initiative.  Deeply thinking through these points starts to give you a valuation - but once you begin to apply any mathematical precision to it, there are so many variables, you realize any precision in this regard is false precision.  You can easily assume a much higher value based on the potential market for Steak n Shakes and how little of it has been tapped, or you can just choose assume that they'll have trouble opening new units for some reason.  An easy answer then to this is to just give either no or a nominal value to the franchising business.  While I'm always a fan of being pessimistic when valuing a company, I think just zeroing this out is over-doing margin-of-safety principles because the early results tell us that the Steak n Shake franchising initiative is very likely to yield at least a moderate level of success (which I define as at least hundred of new franchises opening in the next decade or so).  As with Buffett when he talks about insurance underwriting principles at Berkshire, they determine the probability of a loss with as much data as they can, they then assume that whatever loss is in question could be worse than the data tells them and build in a margin-of-safety by assuming a higher loss.  But they don't assume the world will fall apart or take their pessimism in predicting insurance losses too far, because if they did they would never write any business.  I feel this is a little bit the same way, because the franchise business is growing so fast, we have to project out into the future a little bit and we should do so with some pessimism but we can accept the high probabilities of a certain number of openings with some degree of confidence.

 

Fair enough. Just to throw out some nice round numbers for illustrative purposes only, consider the following:

 

At a 5% royalty rate and a system-wide $2 million AUV, annual royalty revenue would be $100,000 per unit. At a 50% margin, we are talking about $50,000 of pre-tax profit per franchised unit. At a 10 multiple, each franchised unit would be worth $500,000. You have to open a lot of units to get a present value of $200 million for a business that only has about 50 of these units currently open.

 

If you assume 50 new openings per year for each of the next 5 years, there will be 300 existing units by the end of 2019, generating roughly $35 million in revenue (including modest SSS growth). Franchise costs are already running north of $20 million per year today, so the profit margin on that revenue is not going to be high for many years. Your $200 million figure for today's value represents roughly 6 times 2019 sales in that example.

 

I'm not saying you can't get there if you are very bullish on unit growth, AUV, and margins, etc. I just would not characterize the $200 million figure as conservative.

 

[frugalchief]

Investor Presentation to go along with Proxy Statement:

 

http://www.sec.gov/Archives/edgar/data/93859/000092189515000629/defa14a07428036_03162015.pdf

[giofranchi]

You have to open a lot of units to get a present value of $200 million for a business that only has about 50 of these units currently open.

 

Why 50? The number of franchise units was 124 in 2014. And franchise revenues were $12 million in 2014, not $5 million ($100.000 x 50).

 

I'm not saying you can't get there if you are very bullish on unit growth, AUV, and margins, etc. I just would not characterize the $200 million figure as conservative.

 

I think your number for existing units 5 years from now is conservative: 124 already existing + 239 already signed agreements = 363 units. Even if no new contracts were signed during the next 5 years… Seems conservative enough to me!

 

Gio

[giofranchi]

Investor Presentation to go along with Proxy Statement:

 

http://www.sec.gov/Archives/edgar/data/93859/000092189515000629/defa14a07428036_03162015.pdf

 

Thank you! Great presentation! :)

 

Cheers,

 

Gio

[frugalchief]

Investor Presentation to go along with Proxy Statement:

 

http://www.sec.gov/Archives/edgar/data/93859/000092189515000629/defa14a07428036_03162015.pdf

 

Thank you! Great presentation! :)

 

Cheers,

 

Gio

 

Maxim ad revenue in March 2015 was $2.1 million.  Nice jump from March 2014 when it was $666,300.  Will be interesting to see the results for the remainder of 2015 if an increase like that remains stable.

[giofranchi]

Having fielded numerous inquiries over the years about

selling First Guard Insurance Company, the only pitch

that ever resonated was Sardar Biglari’s. The framework

for our deal came together during our first meeting and

basically boiled down to ‘keep doing what you’re doing.’

– Ed Campbell, Founder & CEO of First Guard Insurance Company

 

To me Biglari seems intelligent enough to recognize the best tools in Buffett’s arsenal and the best tools in Icahn’s arsenal, and to make use of the former or the latter as circumstances dictate.

 

Gio

 

[giofranchi]

I find page 51 of the presentation OVERVIEW OF COMPENSATION to be very clear. And sincerely I don’t see why I should judge it to be excessive.

 

Furthermore, Biglari now must buy BH stocks on the open market with 50% of the incentive received as CEO, instead of 30% before.

 

Also look at page 54 BIGLARI CAPITAL’S FEES and page 55 and 56. Clearly, BH is no BRK nor FFH, but compares favorably to almost any other publicly traded company.

 

Gio

 

[mateo999]

has anyone received hard copies of proxy materials yet?

[mcmaaaaath]

That really was a good presentation. Page 80/81 are hilarious.

 

Re: the franchises-- if you include the $40k per store opening fees, it still looks like the new stores are doing >$3m per new store.

 

[peridotcapital]

You have to open a lot of units to get a present value of $200 million for a business that only has about 50 of these units currently open.

 

Why 50? The number of franchise units was 124 in 2014. And franchise revenues were $12 million in 2014, not $5 million ($100.000 x 50).

 

I'm not saying you can't get there if you are very bullish on unit growth, AUV, and margins, etc. I just would not characterize the $200 million figure as conservative.

 

I think your number for existing units 5 years from now is conservative: 124 already existing + 239 already signed agreements = 363 units. Even if no new contracts were signed during the next 5 years… Seems conservative enough to me!

 

Gio

 

The discussion with NBL excluded the ~70 legacy franchise units, so the starting point was ~50 not ~120.

 

Assuming that every single allowable new unit will be open within 5 years is unrealistic. Those long-term agreements generally do not have firm timetables included in them. Both last year and the year before there were ~20 openings.

[giofranchi]

The discussion with NBL excluded the ~70 legacy franchise units, so the starting point was ~50 not ~120.

Ok… but what’s the point of excluding the 70 legacy franchise units?

 

Assuming that every single allowable new unit will be open within 5 years is unrealistic. Those long-term agreements generally do not have firm timetables included in them.

What do you mean by “allowable”? Agreed openings imo mean there are people who want to open those stores and have agreed to do so… If people want to do something, they generally don’t wait for 5 years…

 

Both last year and the year before there were ~20 openings.

I don’t think this is very significant… The investments made in 2011 and 2012 cannot immediately bear fruit in 2013 and 2014… And new investments are still being made... Therefore, imo we must wait and see if Biglari was right in his decision of investing in franchising initiatives or otherwise he was wrong. (By the way, I think he was right! ;))

 

Gio

[peridotcapital]

The discussion with NBL excluded the ~70 legacy franchise units, so the starting point was ~50 not ~120.

 

Ok… but what’s the point of excluding the 70 legacy franchise units?

 

Assuming that every single allowable new unit will be open within 5 years is unrealistic. Those long-term agreements generally do not have firm timetables included in them. Both last year and the year before there were ~20 openings.

 

 

What do you mean by “allowable”? Agreed openings imo mean there are people who want to open those stores and have agreed to do so… If people want to do something, they generally don’t wait for 5 years…

 

Gio

 

You can read the entire franchise valuation discussion over the last few days for the details.

 

As for the franchise agreements, most times one franchisee signs an agreement for multiple units. They generally will do one at a time over many years and might eventually reach the total outlined in the agreement, provided everything goes well. BH's own history shows this. They signed their 1st international deal in 2012 for 40 units in UAE. It took 2 years for the first unit to open. By early 2015 they had only opened 2 locations out of the 40 (and since then both have closed and BH is looking for a new partner). That is how it works. The 40 figure sounds nice, but in reality: a) the 40 number is not a firm commitment, b) it could a decade or two to get there even with a willing partner, and c) sometimes things just don't work out as planned as with the UAE deal.

 

 

[peridotcapital]

 

 

Both last year and the year before there were ~20 openings.

I don’t think this is very significant… The investments made in 2011 and 2012 cannot immediately bear fruit in 2013 and 2014… And new investments are still being made... Therefore, imo we must wait and see if Biglari was right in his decision of investing in franchising initiatives or otherwise he was wrong. (By the way, I think he was right! ;))

 

Gio

 

Exactly, they need time to ramp up. Maybe they open 30 in 2015, 40 in 2016, 50 in 2017, 60 in 2018, 70 in 2019, etc. In that case the next 5 years will see a total of 250 new openings, which is 50 per year on average... exactly the number I used in my example!

[peridotcapital]

 

The discussion with NBL excluded the ~70 legacy franchise units, so the starting point was ~50 not ~120.

 

Assuming that every single allowable new unit will be open within 5 years is unrealistic. Those long-term agreements generally do not have firm timetables included in them. Both last year and the year before there were ~20 openings.

 

Chad -- you make really good points about all of this.  If the minimum realistic outcome occurs and store openings continue at 20 a year and aren't scaled up to 40 or 50 per year in the next three years or so - and the new store average comes down to $2 million (which would still be high, but significantly lower than the current pace) then it is possible that the $200 million number may be a little high.  (The $20 million in continuing costs related to the franchising platform that you mentioned though are partly eaten up by the $4 or $5 million in revenue from the legacy franchisees and they are already running through Steak n Shake's core business expenses; I realize there is a little bit of entanglement here and my sort of "clarity device" of separating the core business and franchising business gets foggy here because we have expenses on one side - and revenues on another.  But nevertheless if you're taking the $20 million expenses (or $15 million net of the legacy franchise royalties) off of this side of the ledger, than Steak n Shake's core business cash flow would have been $60 million or something, even with the $20k store upgrades and the purchase of the Indianapolis headquarters).

 

I would ask you to consider, Chad, one overarching thought about the point we are discussing here, relating to the margin-of-safety for this Biglari Holdings at its current market price.  Even if franchise openings never pick up, and revenue from the new units comes down to more like the $100 k you theorized, and not quite the worst case, but this less-than-positive development of the Steak n Shake franchising business is what we're looking at, maybe you take of off $50 million or $75 million from my $200 million valuation.  (I wouldn't think you would take off that much more, because if there doesn't turn out to be 500 Steak n Shake franchise units - then the costs of the franchising initiative will likely come down because that means there aren't significant international units/etc. and some of those meatier expenses associated with franchising would fall away or be reduced).  So say you take $75 million off of this channel, which again I think would lead to a value that is substantially too low for this part of this business, but let's say you took $75 million off of the $200 million for the franchise value.  That would still represent only 10% of the intrinsic value gap between the current market price of Biglari Holdings and its value and 5% of the current intrinsic value of the company.  This is why I think it is a compelling investment.  You could quibble with the $200 million number, and yet even if you take it down significantly, there is still a massive margin-of-safety at the current price - and that assumes zero value for Maxim and little growth for the core SNS business and that Sardar Biglari never makes another really good investment for the company and that there are no solid future acquisitions.

 

I don't disagree (the stock is one of my largest holdings). I am in the general ballpark with regards to the rest of your valuation. I just chimed in about the franchising piece because that number is so far above what I am modeling and I don't think my assumptions are ridiculously low. It's just really hard to get a $200M present value on a business that will probably be losing money for at least the next 3 years and even 5 years from now will likely be earning less than $10M annually pre-tax.

 

Nonetheless, it will be interesting to see the growth trajectory from here. Hopefully Sardar continues to be transparent about the costs of the franchising effort. I found it disturbing that he omitted 2014 franchise costs from his letter this year, after providing the 2011-2013 figures the year before.

[giofranchi]

You can read the entire franchise valuation discussion over the last few days for the details.

 

Well, of course I could… But I was asking for something that could be summed up in just a few words… ;)

 

Anyway, don’t worry! It doesn’t matter.

 

What matters imo is the following: during the last 4 years franchising revenues have compounded at 30% annual. If they go on increasing at the same rate for the next 5 years, they will generate $44 million in revenues. If new stores make $3 million, BH will have to open 213 new stores… less than your number!

 

That’s very fine with me, whatever multiple you put on the earnings generated from those franchising contracts. Multiple that clearly depends on how long BH can go on opening new stores and at which rate… Who knows? Surely, if people like S n S, the potential for new stores is huge! :)

 

Gio