BH - Biglari Holdings

[Jurgis]

CBRL is overvalued here. As is most of the market.

 

My anti-Big question is: is Mr. Big one trick pony? So he rode CBRL purchase up from the bottom of financial crisis. His pre-CBRL results are very so so. Stake and Shake results also benefited from climbing out of 2009, so he's comparing apples to oranges when he compares to pre-BH results.

 

Why does he keep diluting shareholders via rights offers if he thinks BH is such a great company? Remember that even if you exercise the rights and buy the stock, you don't have more of the company. You have the same slice, but you just gave cash for free to Mr. Big. I wish I could be in a racket like this. Heads I win, tails you lose.

[treasurehunt]

All right, so I have joined the club of investors in BH stock. NBL0303's post from last week spurred me to spend much of the past weekend reading Biglari's letters to shareholders and Biglari Holdings' SEC filings. As much as I dislike Biglari's sense of self-importance and his tendency to ratchet up his compensation frequently, I still have to admit that his performance so far looks impressive and he deserves the money he is making. And when it comes to how the company operates, Biglari has been consistent from year to year. His operational decisions seem very rational.

 

Given that the stock is trading close to the value of cash and investments, this seems like a good time to invest.

[muscleman]

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

 

Gio... I think you are talking about return on equity but I am talking about return on assets.

In one of the previous Dan Leob letters in 2008, he said a lot of financial companies are using leverage as the financial alchemy to turn mediocre results into gold. That's how to boost ROE when ROA is mediocre.

 

Yes, if TPRE and GLRE gets more zero cost float, they will be able to boost ROE. But ROA entirely depends on Dan Leob and David Einhorn's investment skills, which I strongly suspect that they can achieve 20% after fees for the next 20 years. Probably 12% is more realistic.

 

BH on the other hand, should be able to do so given the small size and the current results from its Steak n Shake investments in Franchisee training. This is ROA, not ROE.

 

In addition, I don't like GLRE and TPRE's double rip off model. Charging 2/20 on asset management PLUS big stock options for founders.

[muscleman]

CBRL is overvalued here. As is most of the market.

 

My anti-Big question is: is Mr. Big one trick pony? So he rode CBRL purchase up from the bottom of financial crisis. His pre-CBRL results are very so so. Stake and Shake results also benefited from climbing out of 2009, so he's comparing apples to oranges when he compares to pre-BH results.

 

Why does he keep diluting shareholders via rights offers if he thinks BH is such a great company? Remember that even if you exercise the rights and buy the stock, you don't have more of the company. You have the same slice, but you just gave cash for free to Mr. Big. I wish I could be in a racket like this. Heads I win, tails you lose.

 

Regarding the rights offering, I think it is designed to screw small shareholders because:

1. If you sell your rights, the rights are no longer eligible for over allotment.

2. If you are a small holder and you opt for over allotment, you won't get full over allotment due to rounding problems and they won't issue you fractional shares. So the more shares you get, the closer you get to full over allotment. If you only own 5 shares, you can exercise one right, and there will be no over allotment to you at all due to fractional shares.

 

That's why Biglari wanted to do another reverse 20:1 split because that would make most shareholders unable to get any over allotment. :)

[Jurgis]

Stake and Shake results

 

Freudian slip. Mr. Big, Maxim and all that.  8)

[muscleman]

http://www.ibj.com/articles/50594-settlement-reached-in-steak-n-shake-franchisee-suit

 

 

[giofranchi]

In one of the previous Dan Leob letters in 2008, he said a lot of financial companies are using leverage as the financial alchemy to turn mediocre results into gold.

 

Well, of course leverage in the wrong hands can wreak havoc… just as in good hands it can be very valuable! ;)

Safe, free, and abundant leverage in good hands is one of the main reasons I invest in Fairfax.

 

Gio

 

[giofranchi]

His pre-CBRL results are very so so.

 

Why does he keep diluting shareholders via rights offers if he thinks BH is such a great company? Remember that even if you exercise the rights and buy the stock, you don't have more of the company.

 

Well, if you truly believe Biglari’s pre-CBRL results are “very so so”… I guess you simply should devote more time studying his track record…

 

As far as the rights offerings are concerned, I agree with muscleman, but I would also add:

 

1) Shares are offered at a price far below BVPS after the rights offerings have been subscribed, so I think these rights offerings are a very good way to increase my investment in BH at a great price, and thus lowering my entry price;

 

2) It is not true I don’t have more of the company, as long as I exercise also my oversubscription right. Which I have done both times, and each time I received 7-8% more shares through these over allotments;

 

3) Finally, BH has been sucking up lots of cash in the last two years building the necessary network to make Stake and Shake a successful franchiser worldwide. The CBRL investment is a work in progress, and I don’t think Biglari wants to sell it right now. Therefore, it is inevitable that too few cash is left for other stock market opportunities he might see. Hence, the usefulness of the rights offerings.

 

Gio

 

[Jurgis]

BH has been sucking up lots of cash in the last two years building the necessary network to make Stake and Shake a successful franchiser worldwide.

 

More like defending from franchisee lawsuits. (See link above).

[giofranchi]

More like defending from franchisee lawsuits. (See link above).

 

Although Steak n Shake was founded in 1934 in Normal, Illinois, the first franchised

unit opened in 1939. From 1939 to 2010 Steak n Shake grew by an average of one franchised

unit per year. In contrast, the end of 2015 will mark the fifth anniversary since present

management assertively began to pursue franchising. We anticipate that in this five-year interval

we will surpass the 71 units achieved in our preceding 71-year history of franchising. Franchise

revenue has been compounding by an average of 30% per annum over the last four years, a rate

that is almost certain to decline. However, we have signed agreements with domestic and

international franchisees who in the coming years have committed to opening a total of 239

units.

--AL2014

 

When you are devoted to cutting costs relentlessly, you might happen to make a few enemies…  But Biglari is not stupid, and imo he won’t run the risk of marring prematurely 239 contracts already signed! ;)

 

Gio

 

[giofranchi]

$309/share  ( 638 million equity divided by 2.065 million shares outstanding )

 

If you add the value of treasury shares, which are shares held by the Lion Fund on behalf of BH, you get to a BV of $733 million, which equates to a BVPS of $355, instead of $309…

 

Anyway, as I have often repeated, compounded growth in BVPS during the last 5 years is misleading, simply because investments in 2010 and also 2011 were still too small… Restaurant operations give Biglari the resources to shape and close new deals, but no one expect they could grow BVPS at a fast pace by themselves… BVPS will grow fast because of new acquisitions and because of stock market investments: now they are large enough to move the needle, back in 2010 they weren’t!

 

Over the last six years, we believe BH’s gain in per-share intrinsic value has far outstripped that of the S&P.

AL2014

 

Again, I tend to agree with Biglari. ;)

 

Gio

 

[muscleman]

In one of the previous Dan Leob letters in 2008, he said a lot of financial companies are using leverage as the financial alchemy to turn mediocre results into gold.

 

Well, of course leverage in the wrong hands can wreak havoc… just as in good hands it can be very valuable! ;)

Safe, free, and abundant leverage in good hands is one of the main reasons I invest in Fairfax.

 

Gio

 

This is true. However, consider which of the following is better:

1. ROA 12% and very volatile. Use leverage to increase ROE to 20%. (TPRE and GLRE)

2. ROA 20% and very stable. Annuity like return. No leverage. ROE also 20%. (Steak n shake franchisee business)

 

I think the answer is obviously #2. You get the option of leveraging up and increase ROE.

[giofranchi]

I think the answer is obviously #2.

 

Of course! Unfortunately, the problem is sustaining a ROA of 20% annual on average for many years!! ;)

 

Gio

 

[mateo999]

When you are devoted to cutting costs relentlessly, you might happen to make a few enemies…  But Biglari is not stupid, and imo he won’t run the risk of marring prematurely 239 contracts already signed! ;)

 

In speaking with current and prospective franchisees, it is my belief that the 239 contracts will prove meaningfully overstated.

[BTShine]

When looking at book value per share I'd keep in mind that a significant rights offerings at well below current book value will decrease book value per share. 

[dcollon]

Is this new news?

 

http://nrn.com/blog/biglari-holdings-faces-its-own-proxy-contest

 

 

[muscleman]

I think the answer is obviously #2.

 

Of course! Unfortunately, the problem is sustaining a ROA of 20% annual on average for many years!! ;)

 

Gio

 

Please point out where I am wrong. I am new to franchising business.

Steak n Shake puts down money to train franchisees. Then Steak n Shake gets paid for the franchisee fees forever?

As I have shown in previous posts, the return on the franchisee training expense is about 20% or more. Therefore I can consider the ROA to be 20% for indefinite period of time.

Of course, when the asset base growth to be too large to find enough franchisees to sign up, the ROA will start to drop if Biglari does not have other platforms to achieve 20% ROA, but that would be a long time from now.

 

[muscleman]

Is this new news?

 

http://nrn.com/blog/biglari-holdings-faces-its-own-proxy-contest

 

No... And it is pretty funny that Mr. Seth Barkley has 0 shares and wants to be elected as a director. What a truly "independent" director!

I think it is just a cheap PR strategy to get his fund known by people. Otherwise who would have heard of Groveland Fund?

[dcollon]

Thanks muscleman

[jschembs]

Is this new news?

 

http://nrn.com/blog/biglari-holdings-faces-its-own-proxy-contest

 

No... And it is pretty funny that Mr. Seth Barkley has 0 shares and wants to be elected as a director. What a truly "independent" director!

I think it is just a cheap PR strategy to get his fund known by people. Otherwise who would have heard of Groveland Fund?

 

I have no horse in the BH race, but in my experience Seth and Nick are trustworthy and serious in their endeavors. I have run into them on SODI and AIRT and have nothing but respect. IMO they initially bought a token share to throw their hat in the proxy ring, but I wouldn't dismiss their interest in advocating for the OPMI (sorry for the Marty Whitman reference). If anything, as an OPMI I'd be ecstatic to see them involved.

[writser]

Is this new news?

 

http://nrn.com/blog/biglari-holdings-faces-its-own-proxy-contest

 

No... And it is pretty funny that Mr. Seth Barkley has 0 shares and wants to be elected as a director. What a truly "independent" director!

I think it is just a cheap PR strategy to get his fund known by people. Otherwise who would have heard of Groveland Fund?

 

I have no horse in the BH race, but in my experience Seth and Nick are trustworthy and serious in their endeavors. I have run into them on SODI and AIRT and have nothing but respect. IMO they initially bought a token share to throw their hat in the proxy ring, but I wouldn't dismiss their interest in advocating for the OPMI (sorry for the Marty Whitman reference). If anything, as an OPMI I'd be ecstatic to see them involved.

 

+1

[giofranchi]

Please point out where I am wrong. I am new to franchising business.

Steak n Shake puts down money to train franchisees. Then Steak n Shake gets paid for the franchisee fees forever?

As I have shown in previous posts, the return on the franchisee training expense is about 20% or more. Therefore I can consider the ROA to be 20% for indefinite period of time.

Of course, when the asset base growth to be too large to find enough franchisees to sign up, the ROA will start to drop if Biglari does not have other platforms to achieve 20% ROA, but that would be a long time from now.

 

muscleman,

I hope you are right! And in theory I also agree with you! ... In practice, though, many things could go wrong … Just ask mateo999: he believes Stake and Shake won’t be successful as a franchiser! :(

 

Gio

 

[giofranchi]

Is this new news?

 

http://nrn.com/blog/biglari-holdings-faces-its-own-proxy-contest

 

No... And it is pretty funny that Mr. Seth Barkley has 0 shares and wants to be elected as a director. What a truly "independent" director!

I think it is just a cheap PR strategy to get his fund known by people. Otherwise who would have heard of Groveland Fund?

 

I have no horse in the BH race, but in my experience Seth and Nick are trustworthy and serious in their endeavors. I have run into them on SODI and AIRT and have nothing but respect. IMO they initially bought a token share to throw their hat in the proxy ring, but I wouldn't dismiss their interest in advocating for the OPMI (sorry for the Marty Whitman reference). If anything, as an OPMI I'd be ecstatic to see them involved.

 

+1

 

I don’t know who they are, and as a BH shareholder I just don’t care.

 

Please, get out of the way as soon as possible!

 

If I am right about Biglari, I will make a lot of money. If I am wrong about him, I will lose money. And I just want to keep it as simple as that!

 

Thank you! ;)

 

Gio

 

[giofranchi]

Gio - change of board is a good thing for BH shareholders. It is the catalyst that will unlock value  and remove some of the burdensome agreements in place.

 

This kind of things only validate what Biglari has been doing until now. What you call “burdensome agreements” are nothing but well thought out precautions.

Any shrewd entrepreneur, who has no complete control over the company he runs, should do what Biglari has done.

If a change of the board won’t happen, like I believe, it is because Biglari thought about how to deal with such a situation well in advance, and prepared himself.

I have more respect for Biglari today than I had yesterday.

 

Cheers,

 

Gio

 

[muscleman]

Gio - change of board is a good thing for BH shareholders. It is the catalyst that will unlock value  and remove some of the burdensome agreements in place.

 

 

I don't understand.... Seth has 0 shares of BH. His fund only has 3000 shares. He has almost no skin in the game. What's the point here to push for a change?