BH - Biglari Holdings

[ragu]

At 9/26/12, BV was 349m (with 1.43m shares out).

 

WideMoat,

 

The reported BV understates the economic BV. Please see the section titled 'Accounting Rules Regulating Affiliated Partnerships' (Pg. 8 ) of the 2010 Annual Letter in order to make the necessary adjustments.

 

 

Given those results, it strikes me as excessively optimistic to expect BH to return 15% per annum on BV (even before incentive comp).

 

What then do you make of Sardar's stated goal of 15% growth in per-share intrinsic value over the next decade in the 2011 letter?

 

Best,

Ragu

[premfan]

If biglari holdings increases BV at 15 percent you as a shareholder gains about 10 percent BV and he profits the rest. So to realize shareholder gain of 15 percent BV he would need to average 20 percent BV per year.

 

Gross BV Increase        Compensation (25% over 6%)      Net BV Increase

        11.33%                                1.33%                                  10.0%

        15.0%                                    2.25%                                12.75%

        18.0%                                    3.0%                                  15.0%

        20.0%                                    3.5%                                  16.5%

 

My bad my math was wrong. Thanks man

[wescobrk]

@Ragu

I think he has a good shot once he starts buying I insurance companies. He can't do it without leverage in my opinion though especially net to shareholders since book value was artificially low when book value declined 50 million merely because BH bought the lion fund thanks to bizarre GAAP rules.

 

By the way, email me your contact info if you are attending the meeting again in NY.

I'll be there.

[wescobrk]

I meant he got a one time fillip with that lowered bv. It'll be a little tougher now but even with slowly converting to pure franchise model will raise roe but to get to net 15 to the shareholder he"ll need leverage (insurance)

[giofranchi]

WideMoat,

the question is: how much did Mr. Biglari pay to get control of SNS equity? That, I think, is the number you should compare to 349m at 2012 year end. Why? Because, once you have used the bulk of your capital to get control of a large business like SNS, what you are left with is SNS, which is a solidly profitable business, but cannot grow BV per share at high rates, and a very small capital invested elsewhere. Result: you must have the time to build up new capital, and deploy it into new investments, before being able to grow BV per share at high rates. If you see how fast Biglari has grown investments in the last 5 years, you get the picture!

 

premfan,

I have not read all the archives of the board about BH, but I do have read all his annual reports, the ARs of the Lion Fund included (thanks Christopher1!).

You see? I just like the business. It is conceived and structured in a way that makes me believe a good strategist and capital allocator at the helm can compound capital at high rates of return. Mr. Biglari surely is gifted, recognizes a good bargain when he encounters one, and will always be focused on improving fcf and deploying it opportunistically. He also understands the importance of insurance float, and I won’t be surprised if sooner rather than later he gets control over some insurance operations.

Cannot he blow up? Of course he can! Every business deals with the future… and the future is always uncertain… That’s why we must put our attention on the process: is he doing the right things and taking the right choices? If so, odds are future results will be very satisfactory!

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[giofranchi]

WideMoat,

the question is: how much did Mr. Biglari pay to get control of SNS equity? That, I think, is the number you should compare to 349m at 2012 year end. Why? Because, once you have used the bulk of your capital to get control of a large business like SNS, what you are left with is SNS, which is a solidly profitable business, but cannot grow BV per share at high rates, and a very small capital invested elsewhere. Result: you must have the time to build up new capital, and deploy it into new investments, before being able to grow BV per share at high rates. If you see how fast Biglari has grown investments in the last 5 years, you get the picture!

 

premfan,

I have not read all the archives of the board about BH, but I do have read all his annual reports, the ARs of the Lion Fund included (thanks Christopher1!).

You see? I just like the business. It is conceived and structured in a way that makes me believe a good strategist and capital allocator at the helm can compound capital at high rates of return. Mr. Biglari surely is gifted, recognizes a good bargain when he encounters one, and will always be focused on improving fcf and deploying it opportunistically. He also understands the importance of insurance float, and I won’t be surprised if sooner rather than later he gets control over some insurance operations.

Cannot he blow up? Of course he can! Every business deals with the future… and the future is always uncertain… That’s why we must put our attention on the process: is he doing the right things and taking the right choices? If so, odds are future results will be very satisfactory!

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

I should add that Mr. Biglari obviously understands very well the importance of working with permanent capital and the importance of controlling a machine that constantly generates new capital he can deploy wherever he finds compelling bargains. SNS is exactly that kind of machine. Think of how Mr. Buffett has always talked about See’s Candies: by itself See’s cannot grow to the sky (mature industry, limited market, etc.), but by constantly and predictably generating fcf (even if that fcf doesn’t grow much), and investing it shrewdly elsewhere, See’s has been the instrument through which Mr. Buffett has been able to create much wealth for BRK’s shareholders. The same, imo, applies to SNS.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

[ragu]

By the way, email me your contact info if you are attending the meeting again in NY.

 

wescobrk,

 

No plans as of yet on attending the AM this year. Will let you know if things change.

 

Best,

Ragu

[ragu]

Looks like Biglari has found a winner in CBRL.

 

The investment case for CBRL from Sardar has been compelling. Not that that's any surprise. I wouldn't call it a winner yet though. You have management that is tremendously challenged when it comes to capital allocation. And that's putting it mildly. CBRL will be a decent, but not great, investment for BH shareholders unless Sardar gets on the board.

 

It will be interesting to see how this fight with CBRL's management is finally resolved.

 

I find it interesting that, even after 2 failed proxy contests, management is still worried enough that they offered to buy him out. Sardar, quite rightly IMO, told them off in no uncertain terms. Fascinating to see this play out. 

 

Best,

Ragu

 

 

[Kuhndan]

Anybody attending the BH annual meeting?

[kam2308]

If biglari holdings increases BV at 15 percent you as a shareholder gains about 10 percent BV and he profits the rest. So to realize shareholder gain of 15 percent BV he would need to average 20 percent BV per year.

 

Gross BV Increase        Compensation (25% over 6%)      Net BV Increase

        11.33%                                1.33%                                  10.0%

        15.0%                                    2.25%                                12.75%

        18.0%                                    3.0%                                  15.0%

        20.0%                                    3.5%                                  16.5%

 

I believe Biglari's pay is capped at $10 million.  As the equity base rises in absolute dollar amounts, the returns to equity shareholders will come closer to the actual increase in BV.

 

Here's the quote from the incentive agreement: "[P]rovided that in no event shall the Incentive Compensation Amount payable to the

Executive with respect to any fiscal year exceed $10 million."

[vinod1]

 

I believe Biglari's pay is capped at $10 million.  As the equity base rises in absolute dollar amounts, the returns to equity shareholders will come closer to the actual increase in BV.

 

Here's the quote from the incentive agreement: "[P]rovided that in no event shall the Incentive Compensation Amount payable to the

Executive with respect to any fiscal year exceed $10 million."

 

I would expect Mr. BigLiar to increase the cap as the share holders equity increases. 

 

Vinod

[Redskin212]

I would be "shocked" if Biglari changed the terms of his agreement  ;)

[GrizzlyRock]

Allow me to toss my hat into the ring on Biglari (the company).  Note: I have a materially different approach than Biglari the man and not a fan of his aggressive approach and disregard for corporate governance. Yet, I am a fan of steady, cash-flowing businesses trading at 2.7x EV and 5.6x FCF.

 

Investors surely can hate the manager but shouldn’t continue to ignore Biglari Holdings’ performance. Biglari Holdings is cheap today on an absolute basis, as evidenced by the company trading at liquidation value with conservative DCF and sum of the parts valuations indicating material upside.

 

This analysis is not assessment of a 5+ year return investing alongside of Biglari the man. Rather, this analysis is a discussion of a current mis-priced investment with multiple event paths to value realization.

[giofranchi]

Allow me to toss my hat into the ring on Biglari (the company).  Note: I have a materially different approach than Biglari the man and not a fan of his aggressive approach and disregard for corporate governance. Yet, I am a fan of steady, cash-flowing businesses trading at 2.7x EV and 5.6x FCF.

 

Investors surely can hate the manager but shouldn’t continue to ignore Biglari Holdings’ performance. Biglari Holdings is cheap today on an absolute basis, as evidenced by the company trading at liquidation value with conservative DCF and sum of the parts valuations indicating material upside.

 

This analysis is not assessment of a 5+ year return investing alongside of Biglari the man. Rather, this analysis is a discussion of a current mis-priced investment with multiple event paths to value realization.

 

Thank you very much for posting this! I will read your analysis with much attention and interest!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[dcollon]

Thanks for sharing your research.  Very nice of you.

[MYDemaray]

Hehe...welcome Kyle

[Hielko]

Nice work on the write-up! What I'm wondering though is: have you accounted for the costs of Biglari's compensation? I wouldn't be paying NAV for investments if I have to give away 25% of the upside above 6% (does this have a high water mark?) I also not so sure that his interests are aligned with shareholders when he has to buy Biglari shares with the money from his compensation. Seems like a strong incentive to depress the share price, and he seems to have been doing an excellent job on that front...

 

I'm the first to believe that the assets underlying the business are worth a lot more than the market cap of the company, but how much of that value is going to shareholders and how much will go to Biglari?

[Greg]

  It's more than just giving away 25% of the upside above 6%. When Biglari's current compensation agreement was adopted the economic value of the company vastly exceeded the book value. This economic value was built of over many, many years, a lot of it just because of inflation. A chunk of the value built up over the many, many years was transferred from the stockholders to Mr. Biglari.

[GrizzlyRock]

Heiko - sure. For reference here is Sardar's incentive agreement: http://www.biglariholdings.com/IncentiveAgreement.pdf#zoom=100

 

Sardar receives the lesser of the following: (1) $10 million or (2) 25% of the positive change in Biglari Holdings book value * 6% above the previous high water mark. So this past year he will receive $10 million.  The calc would amount to $13.2 as defined by the previous YE book value of $279.6 * 1.06 = $296.4.  The difference in new book value of $349.1 and 6% above old BV of $296.4 million is $52.7 million.  25% of this amount is $13.2 million. Note: also per the incentive agreement Sardar has to use 30% of this comp to buy BH stock in the open market.

 

Ok so there are a few ways to look at this: (1) The new high water mark is $370 million ($349.1 million *1.06) So $10 million represents 2.70% of this figure and each year thereafter this % would naturally decrease. This seems fairly reasonable to me.  (what would not be reasonable would be a change in the cap amount)

 

To your point regarding not wanting to pay NAV for investments for which you would have to pay a performance allocation, what do you think hedge funds are?  Most HFs don't even have a hurdle rate (most do have a high water mark). You may not be a HF investor but many sharp asset allocators pay higher "fees" that those which BH is paying Sardar Biglari.

 

So for the time being, Sardar can make good $$ on the incentive contract but over time his change in net worth will be determined by the change in BH's share price as more and more of his net worth is directly tied to the price of BH equity.

 

Lastly, here is one report on BH's AGM held 4/4/12: http://www.thestreet.com/story/11888316/1/biglari-wants-to-make-you-money.html

[Hielko]

Smart capital allocators are putting money in hedge funds, but there is probably more dumb money that is put in hedge funds. Just because some of the funds are a good investment doesn't mean that paying a lot of money to someone to manage your money is smart on average. He might be worth it, but if his track record consists of a couple of really big concentrated leveraged bets I'm not that easily convinced that he's really worth his money, because that's not a big track record even if it's spread over a 10+ years. And as far as I understand that is basically what he did to make it.

 

I would also not be so sure that his compensation will remain at the $10 million/year level. How can you trust him to keep that part of the deal if he's screwing shareholders at will in the past?

 

So I see how big the pie is, but the question is: will you get your fair share? I'm not that convinced, but I'm probably also not easy to convince...

[onyx1]

Ok so there are a few ways to look at this: (1) The new high water mark is $370 million ($349.1 million *1.06) So $10 million represents 2.70% of this figure and each year thereafter this % would naturally decrease. This seems fairly reasonable to me.  (what would not be reasonable would be a change in the cap amount)

 

Expect the cap to go up, it's only a matter of time.  If I recall correctly, Phil Cooley has already laid the groundwork when he said publically that the cap will need to be raised (I don't remember exactly where, but maybe someone else on the board does). 

 

Either way, raising the cap would be consistent with my experience with Sardar.  As a member of the 13(d) group that took over SNS in 2008,  I dealt directly with Sardar & Phil Cooley.  I don't regret it as my investment tripled.  Under the right circumstances, I would do it again (but not at today's prices).  Sardar is a good businessman and will do well for himself. But he is also a perfect example of the importance of the old adage "actions speak louder than words."

[bookie71]

My problem is that he changes it whenever he wants. 

[Packer16]

Allow me to toss my hat into the ring on Biglari (the company).  Note: I have a materially different approach than Biglari the man and not a fan of his aggressive approach and disregard for corporate governance. Yet, I am a fan of steady, cash-flowing businesses trading at 2.7x EV and 5.6x FCF.

 

Investors surely can hate the manager but shouldn’t continue to ignore Biglari Holdings’ performance. Biglari Holdings is cheap today on an absolute basis, as evidenced by the company trading at liquidation value with conservative DCF and sum of the parts valuations indicating material upside.

 

This analysis is not assessment of a 5+ year return investing alongside of Biglari the man. Rather, this analysis is a discussion of a current mis-priced investment with multiple event paths to value realization.

 

Grizzley,

 

Thanks for the analysis.  I am having a hard time coming up with your level of EBITDA for your analysis.  As far as I can tell, it is around $72.5 million on a consolidarted basis but I have only been able to come up with about $61 million TTM and $66 million of FY 2012.  I must be missing something in your calcs that I did not see in your report.  Thanks.

 

Packer

[premfan]

  I do not wish this on Mr. Biglari but if he were to be run over and killed by a truck what price do you guys think the stock would be? (My number is very different from the current market price.)

 

 

whoa man. what kind of statement is that.

[GrizzlyRock]

Packer16 - Your figure of TTM at 12/19/12 which has some timing issues in fiscal Q1. 2012 EBITDA of $71.9 million is derived below and I estimate 2013 EBITDA to be directionally in line with this figure:

 

Net Income                                                              +21.6

Income Allocation from Non-Controlling Interests    +3.2

Taxes                                                                        +6.5

Interest                                                                    +18.2

Depr & Amort                                                            +26.2

Back out "Realized Investment Gains"                      -4.0   

Total Biglari Holdings 2012 EBITDA                            +71.9