RichardGibbons Posted April 3, 2015 Share Posted April 3, 2015 NBL0303, yeah, it doesn't surprise me that you feel TripleOptician's logic was quite sound. That said, you must have missed my question. You said there were many better criticisms of the rights offering that I missed. What were they? I'm curious. (When I learned about the problems with rights offers back in 1996 from someone on a message board, it was a big revelation to me. So I'm eager to learn if there's something even worse than what I understand already.) Thanks! Link to comment Share on other sites More sharing options...
giofranchi Posted April 3, 2015 Share Posted April 3, 2015 All that said, you and I use totally different criteria for investing. Richard, as I have often said, I look for great entrepreneurs in good businesses which I could purchase at fair prices… BH imo right now is the chance to partner with a great entrepreneur in a great business at a great price. I might have misinterpret what you look for… But I thought you weren’t a cigar but guy, nor a technical analysis guy, nor a macro guy, etc… Plus, I might be influenced by regret minimization -- it would be really embarrassing to underperform in this stock after seeing all the red flags waving so brightly. It surely would be! But the fear of embarrassment doesn’t always lead to the most rational decision. Cheers, Gio Link to comment Share on other sites More sharing options...
BTShine Posted April 3, 2015 Share Posted April 3, 2015 NBL0303, yeah, it doesn't surprise me that you feel TripleOptician's logic was quite sound. That said, you must have missed my question. You said there were many better criticisms of the rights offering that I missed. What were they? I'm curious. (When I learned about the problems with rights offers back in 1996 from someone on a message board, it was a big revelation to me. So I'm eager to learn if there's something even worse than what I understand already.) Thanks! Richard, Out of respect for everyone's time, I recommend you read the last 1/2 or 1/3 of this message board on BH. You just said you're eager to learn. That is awesome. On the other hand, you've said "I am absolutely not a careful reader of this thread or Biglari security filings." The posts on this message board are not perfect, but they are generally well thought out and insighful. You should use some of your energy and craving to learn by reading this board. NBL and others have created well thought out posts that are very insightful. You may not agree with everything that is written, but you will learn. Link to comment Share on other sites More sharing options...
RichardGibbons Posted April 3, 2015 Share Posted April 3, 2015 I might have misinterpret what you look for… But I thought you weren’t a cigar but guy, nor a technical analysis guy, nor a macro guy, etc… Yeah, you're focussed more on the jockey than anyone I've ever seen. I do jockey investing a bit, but my weighting of things I am looking for in the jockey are completely different. Historically, I was mostly looking for value. More recently, I've been looking for moats and value. But the fear of embarrassment doesn’t always lead to the most rational decision. Agreed. That was partly my point -- it's a bias I need to be aware of. In another way, rationally, "red flags" are just another indicator impacting the probability of success. Thus, it's irrational to invest in a company with lots of red flags, since it implies the probability of success is lower than it should be. Link to comment Share on other sites More sharing options...
RichardGibbons Posted April 3, 2015 Share Posted April 3, 2015 Out of respect for everyone's time, I recommend you read the last 1/2 or 1/3 of this message board on BH. You just said you're eager to learn. That is awesome. On the other hand, you've said "I am absolutely not a careful reader of this thread or Biglari security filings." The posts on this message board are not perfect, but they are generally well thought out and insighful. You should use some of your energy and craving to learn by reading this board. NBL and others have created well thought out posts that are very insightful. You may not agree with everything that is written, but you will learn. I actually have read probably 99% of the posts on this board. Just not closely. The challenge from this approach is it's bad from an ROI perspective. First, most of the most vociferous posters don't understand what I consider the most basic things (e.g. raising money is likely to increase the size of Biglari's paycheck). Second, they have a fervant pro-Biglari bias. So, reading the board carefully means that I have to figure out for every post the extent to which the individuals understand what they're talking about, the extent to which they are blinded by their fervor, and whether there's anything to learn. That's a lot of effort, considering I'm not going to buy the stock. Thus, I agree that I'd be likely to learn something. But because of the above factors, the density of valuable information likely to be low and the effort to get that information high. Thus, it seems better to do things that are likely to be more productive, like read other topics on COBAF, books, annual reports etc. Nevertheless, I appreciate the suggestion. Thanks BTShine. Link to comment Share on other sites More sharing options...
peridotcapital Posted April 4, 2015 Share Posted April 4, 2015 I find the back and forth on this board pretty fascinating. To me it seems like a bit of overkill, arguing about whether Sardar is screwing over shareholders with his compensation plan, how skilled he really is, whether you should invest or not, etc. Throughout all of this nobody has mentioned (or if they have, not very often --- I've read most of this board but perhaps not every single post) the actual book value gains BH has registered since Sardar took over as CEO. We know that stock price changes might not always reflect business value changes in the short term, and although book value is not an exact proxy for intrinsic value, it's probably the best gauge we have as to how good of a job Sardar is doing with our capital and whether he is getting rich at our expense or not. So, with that said I will throw out some very simple figures below. Sardar became CEO in August 2008, so I tend to judge his performance starting in fiscal 2009, which began on September 24, 2008: Book value per share on 9/24/08: $198.16 Book value per share on 9/24/14: $309.36 6-Year CAGR: +7.7% annually Tangible book value per share on 9/24/08: $187.00 Tangible book value per share on 9/24/14: $278.86 6-Year CAGR: +6.9% annually I think it's pretty clear that Sardar's track record creating value for shareholders thus far has been okay, but not great. Bulls like Gio who think he can compound book value per share at 20%+ over the long term are likely going to be disappointed. But those who think Sardar will get rich and screw us all over in the process are likely being overly pessimistic. I'd be curious to hear why you all think we should/should not just let simple figures like these guide our conclusions, rather than going back and forth with a bunch of other stuff people are repeating over and again to justify their view., 99% of which is really not at the core of what we should care about (per-share value creation). Chad Link to comment Share on other sites More sharing options...
Nnejad Posted April 4, 2015 Share Posted April 4, 2015 I disagree.. BH doesn't pay dividends, so I would think the fact that it's only grown book value by $119 over 6 years is telling. Link to comment Share on other sites More sharing options...
Nnejad Posted April 4, 2015 Share Posted April 4, 2015 There is really no good answer to you on this as I don't have a dog in this race. But I'll just say that a company (which doesn't pay dividends, doesn't usually repurchase stock, etc.) growing book value by only $X over a six year period seems to me to be a good indication of normal earnings power per year. Now does that conclusion change substantially if you use 9/2014 or today as your end date? You've pointed out that it probably does due to CBRL gains. I did find it interesting though that if you were looking at this from the perspective of six months ago, you would have only seen $120 per share of book value growth over a six-year period. Link to comment Share on other sites More sharing options...
cobafdek Posted April 4, 2015 Share Posted April 4, 2015 I also like Martin Whitman's distinction between accounting (GAAP) book value vs. net asset value or business value. As he says, it's not what the numbers are but what they mean. P.S. Like tombgrt, I'm wondering what's with the fonts? Again, I would just say to any investor - intensely read all of Buffett's public comments about the use of book value. If you are a cigar butt investor, who is investing small sums in liquidating trusts or other run-off/special type situations, then by all means - book value is a really important tool. If, however, you are investing in productive assets like operating businesses - then book value has almost no place in this discussion. [/font] First off the book value per share has grown from $198 per share to over $400 per share from 9/24/2008 to the present time. But, more importantly, your comment about dividends is not a substantive reply to the line of reasoning from Warren Buffett that basically says to ignore book value when considering investments that I laid out in the previous post. Put me down for NBL0303 to use both fonts, depending on the circumstance. Years ago, my Evelyn Wood Speed Reading instructor said that typefaces with serifs are easier to read faster. I found this to be true for myself (unfortunately, the scientific evidence is conflicting, so ignore the contrary evidence for my sake.) I think it would be a good idea for the dissertation-length posts to use a serif-based typeface, but the ordinary shorter posts can remain sans serif. (Although I'd like to put in a plug for a slightly smaller font size for the long posts.) Link to comment Share on other sites More sharing options...
link01 Posted April 4, 2015 Share Posted April 4, 2015 I find the back and forth on this board pretty fascinating. To me it seems like a bit of overkill, arguing about whether Sardar is screwing over shareholders with his compensation plan, how skilled he really is, whether you should invest or not, etc. Throughout all of this nobody has mentioned (or if they have, not very often --- I've read most of this board but perhaps not every single post) the actual book value gains BH has registered since Sardar took over as CEO. We know that stock price changes might not always reflect business value changes in the short term, and although book value is not an exact proxy for intrinsic value, it's probably the best gauge we have as to how good of a job Sardar is doing with our capital and whether he is getting rich at our expense or not. So, with that said I will throw out some very simple figures below. Sardar became CEO in August 2008, so I tend to judge his performance starting in fiscal 2009, which began on September 24, 2008: Book value per share on 9/24/08: $198.16 Book value per share on 9/24/14: $309.36 6-Year CAGR: +7.7% annually Tangible book value per share on 9/24/08: $187.00 Tangible book value per share on 9/24/14: $278.86 6-Year CAGR: +6.9% annually I think it's pretty clear that Sardar's track record creating value for shareholders thus far has been okay, but not great. Bulls like Gio who think he can compound book value per share at 20%+ over the long term are likely going to be disappointed. But those who think Sardar will get rich and screw us all over in the process are likely being overly pessimistic. I'd be curious to hear why you all think we should/should not just let simple figures like these guide our conclusions, rather than going back and forth with a bunch of other stuff people are repeating over and again to justify their view., 99% of which is really not at the core of what we should care about (per-share value creation). Chad I find the back and forth on this board pretty fascinating. To me it seems like a bit of overkill, arguing about whether Sardar is screwing over shareholders with his compensation plan, how skilled he really is, whether you should invest or not, etc. Throughout all of this nobody has mentioned (or if they have, not very often --- I've read most of this board but perhaps not every single post) the actual book value gains BH has registered since Sardar took over as CEO. We know that stock price changes might not always reflect business value changes in the short term, and although book value is not an exact proxy for intrinsic value, it's probably the best gauge we have as to how good of a job Sardar is doing with our capital and whether he is getting rich at our expense or not. So, with that said I will throw out some very simple figures below. Sardar became CEO in August 2008, so I tend to judge his performance starting in fiscal 2009, which began on September 24, 2008: Book value per share on 9/24/08: $198.16 Book value per share on 9/24/14: $309.36 6-Year CAGR: +7.7% annually Tangible book value per share on 9/24/08: $187.00 Tangible book value per share on 9/24/14: $278.86 6-Year CAGR: +6.9% annually I think it's pretty clear that Sardar's track record creating value for shareholders thus far has been okay, but not great. Bulls like Gio who think he can compound book value per share at 20%+ over the long term are likely going to be disappointed. But those who think Sardar will get rich and screw us all over in the process are likely being overly pessimistic. I'd be curious to hear why you all think we should/should not just let simple figures like these guide our conclusions, rather than going back and forth with a bunch of other stuff people are repeating over and again to justify their view., 99% of which is really not at the core of what we should care about (per-share value creation). Chad again, are you adjusting for the rights offerings issued at a discount to the co. book value per share? because shareholders equity in that co's reported book val per share will incorporate & adjust up for that difference whereas the co reported book val per share on its own without reference to shareholders that received the rights at discount to book val will not. also, do you deem todays each dollar of book val per share to be worth no more or no less than a dollar of book val/share in 2009 in terms of normalized earnings power? but that's another story... Link to comment Share on other sites More sharing options...
peridotcapital Posted April 5, 2015 Share Posted April 5, 2015 "Book value is virtually not a consideration in investment decision-making at Berkshire." -Warren Buffett (1995 Shareholders Meeting) Chad -- while I'm glad that your focusing on value, the book value of this company does not accurately affect its intrinsic value and I don't think your book value analysis is illustrative of this company. (Chad - your numbers are off a bit too - but we'll get into that below. The current book value is over $400 per share - but I realize you were using 9/24/2014 numbers. But, again, I really do not care about this number at all.) For Ben Graham cigar butt investors, book value is obviously a useful approach. For a company that is in run-off mode or some other similar mode, book value can be determinative. For ownership of productive businesses, however, book value is nearly useless. Understanding this difference between when book value is important and illustrative and the vast majority of the time when it isn't, is as important for a chef to understand the difference between chicken salad and chicken shit. As an aside, for anyone that thinks book value is really important, they should be shorting (or buying puts or whatever) the company Valeant with a significant portion of their net worth. Valeant's tangible book value is something like negative $15 billion - or probably more after the Salix deal closed. For anyone that thinks book value is even remotely important as an investing tool, they must find it interesting that the market is giving Valeant a $70 billion valuation with a negative-$15 billion tangible book value. Or take Seth Klarman's largest US equity investment, Cheniere, it also has a negative book value. Cheniere has a $18 billion market cap but a negative book value. But Seth Klarman has allocated five times more capital to it than any other US equity. My thoughts on this were hugely shaped by Warren Buffett. I used to be somewhat obsessed with book values - I was a strict adherent of Ben Graham when I was young. Then after years of going to Berkshire meetings, I heard Buffett dismiss people's questions and analysis using book value so many times that I began to rethink it. I remember specifically when someone asked a question about Wells Fargo and how it didn't look cheap or something or other based on its book value - and Buffett literally almost waved his hand and said he doesn't care about its book value at all - he only cares about its earnings power and the durability of that earnings power. This was years ago, but then I had read everything I could and aggregated all of my own notes on what Buffett has said over the years about book value and what Charlie has said about it. And I realized they don't use book at all. Occasionally as short-hand, Buffett will say something like - it was trading at X multiple of book or something - but when actually analyzing - he seems to totally ignore it most of the time. This is of course confusing because he lists the book value growth on the front page of the annual report and has set a book value metric (1.2x) for the share buyback threshold for Berkshire itself - but as an investor, over the last 40 years - Buffett really doesn't think about book value. Actually the very first question at the shareholders meeting either last year or the year before (or maybe the year before that) Buffett got into a long explanation about how for Berkshire book value growth was once a very rough proxy and tracking device for intrinsic value growth but even for Berkshire book value growth isn't really a useful tracking device anymore. But, he emphasized, for almost no other company is it an effective means to evaluate the company as an investment. When he was younger he thought it was, but as he grew as investor he looked to the competitive dynamics of the company, its earnings power and things that would affect the return that earnings power would deliver to the shareholder (debt/etc.). This Intrinsic Value Analysis of course overlaps with book value in some aspects, but it is entirely distinct in its focus from book value. Buffett was warning investors against doing simple book value analysis. In this case... I think analyzing each of the businesses in the Biglari constellation itself is a better approach. Though that enjoy the concretized aspects of the Ben Graham approach will obviously take comfort in looking at its book value. Of course Biglari's compensation is tied to book value growth, but they settled for that as the best proxy they could for realized value creation - not as a true reflection of its long-term worth. To show the futility of this approach - let's look at 9/24/2014 to 12/31/2014 - in the 9/24/2014 10-K filed on 11/24/2014 - the company had a book value of $638 million (taken from the balance sheet on page 33) and there were 1,878,457 shares outstanding (taken from the Treasury Shares note on page 38) - so the book value on that 9/24/14 is $340 per share ($638,717,000/1,878,457 shares). (Chad - I think your number was off because you used a higher outstanding share figure that didn't subtract treasury shares and those shares BH owns of itself through the partnership.) Then on 12/31/2014, these numbers are taken from the 10-KT filed on 3/13/2015, the company's book value was $725.5 million (taken from page 37) and the outstanding shares were 1,868,053 (taken from the Treasury Shares note on page 42). This equals a book value of $388 per share ($725,551,000/1,868,053). The book value as of March 2015 (at present) is over $400 per share. So the book value went up substantially from September to December of last year - why? Two reasons primarily - first, the run-up in price of Cracker Barrel shares. Secondly, Biglari Holdings began buying some of its own shares back and the share price of those buybacks did not reflect a commensurate price increase with the rise in Cracker Barrel shares. So if you take this $400 per share - figure - it would have gone from $198 to over $400 in six and a half years. I don't really ascribe anything to that - but that nearly doubles the CAGR in your calculation. I only point this out to show the futility in this approach. Did Biglari's managerial acumen double because of the performance of the book value per share metric over the last few months? Of course not. If you were actually going to get into book value analysis - I would subtract out the aspects of the book that are not really productive assets and the ephemeral liabilities. In some ways, Biglari's book value overstates its productive potential and in other ways it understates it. So I would subtract out of the current book value the land & property for the most part, since while that lowers the rent they would otherwise have to pay, it is not really a part of the cash flow of Steak n Shake or Biglari Holdings. They are not buying or selling it right now (except at the margins) - so it is a static condition. So I would subtract out many of its assets. I would also subtract out the capital lease "debt" that is carried on its balance sheet. This is not real debt - it is simply promises to pay rent in the future - but those rent payments then flow through the business results, so the capital lease obligations are essentially ephemeral. Subtracting these out would get you a smaller book value number I think. But of course you should adjust the 2008 book value similarly. If you do this, I'm guessing that this adjusted book value of then Steak n Shake now Biglari Holdings - call it the economic book value - would have grown at a substantially greater rate than what is suggested in Chad's post. This is so because Steak n Shake's book value in 2008 was comprised mostly of the land, property improvements and equipment. So even a bankrupt Steak n Shake would have had a significant book value - or if the company kept spinning it would have sold a lot of its real estate and its book value would have gone way down - but it may have saved the company for a while even if a turnaround in unit-level economics did not occur. But basically if you subtract out the land, improvements and equipment from the 2008 version and subtract those same components out of the 2015 version - that adjusted book value growth would be very high. This may seem artificial to some people - but what you're trying to get at here is the earnings power and actual productive value of the businesses. Real estate can mean such a different thing to a different company; if the company were buying and selling real estate as part of their business - then of course, the real estate would be an important part of its current worth as a business. But in this case, the 2008 version of Steak n Shake wasn't selling real estate and the 2014 version wasn't using it for that and it is carried at similar levels - so to see whether the book value has grown - it would be misleading to take the growth rate with all of these items that were necessarily static. Basically if this adjusted book value was something like $50 million in 2008 - it is not something like $600 million. So from that perspective - the economic intrinsic value growth has proceeded well over the last few years. For both people who see the value in Biglari Holdings and people who are very skeptical of it or him, basically for both sides, Maxim also shows the weakness and lack of illumination that book value provides for this company (as for most productive business assets). Maxim has only a tiny effect on the current book of Biglari but it represents either a strong negative - $50 million or so more in losses if they never get the ship turned around (or whatever you think his outer limit of the loss would be before he shuts it down) - or a very significant upside if they begin making $10 million or more a year from Maxim next fiscal year. Either way, its impact is not negligible but its impact on book value is very close to negligible. So if you do want to look at book value growth for Biglari Holdings, again which I think is really sort of a waste of time (look instead to the economic earnings capacity of the individual components of the company and the company as a whole), look at the assets and liabilities that are actually relating to Biglari’s management of the company. Again, I would just say to any investor - intensely read all of Buffett's public comments about the use of book value. If you are a cigar butt investor, who is investing small sums in liquidating trusts or other run-off/special type situations, then by all means - book value is a really important tool. If, however, you are investing in productive assets like operating businesses - then book value has almost no place in this discussion. NBL, My post does not suggest that book value is a good proxy for absolute intrinsic value. I was talking merely about the growth in that metric as a proxy. Yes, Buffett has said that the gap between BRK's book value and intrinsic value has widened as the company has acquired more and more operating companies, but he still lists it in the annual report for a reason. If he thought it was completely worthless, as you say, he would not put it in there and use the first sentence of his letter to reference it. Of course, intrinsic business value based on present value of future cash flow is a better way of gauging value creation. The problem, though, when searching for a metric we can all track is that IV is quickly eliminated because we will all come up with different IV estimates due to using slightly different methods. That is why I chose BV/share, because it is easily calculated and we can't argue about the inputs (if you want to deduct BH shares owned by the LPs, that's fine -- but you have to adjust the 2008 number as well. In your example you used my $198 figure as the starting point and only adjusted the current figure to being over $400 per share). Over the last 50 years, BRK's book value growth and stock price growth are within 10% of each other (on a CAGR basis). Do you think this is a coincidence? Do you think BRK is one of the only companies where this is true? I'm not saying book value is a perfect metric, or even a great one. While you hate book value, I suspect you would not like using other per-share metrics either. EBITDA per share, or operating cash flow per share, or earnings per share, for instance. In fact, I would bet you might even prefer book value to those metrics given how much worse those three alternatives look (operating cash flow, as an example, has barely grown at all if you just compare fiscal 2009 with fiscal 2014, for reasons we all understand). You offer your "adjusted" book value as another option, but there again we would all have to agree as to which line items to exclude and which not to. I think this is why Biglari and Buffett both acknowledge the shortcomings of book value and yet both use it regularly for bonus calculation or performance comparisons. It's the best of a bunch of subpar choices. However, simply dismissing it and saying that it has no possible relationship whatsoever to growth of business value (except in the case of BRK, at least until WB said it didn't anymore) I think is a bit unfair. I suspect over the first 50 years of BH, book value and stock price will grow much more closely to one another than other straightforward metrics available to us. But we will have to wait and see. Link to comment Share on other sites More sharing options...
Txvestor Posted April 5, 2015 Share Posted April 5, 2015 I find the back and forth on this board pretty fascinating. To me it seems like a bit of overkill, arguing about whether Sardar is screwing over shareholders with his compensation plan, how skilled he really is, whether you should invest or not, etc. Throughout all of this nobody has mentioned (or if they have, not very often --- I've read most of this board but perhaps not every single post) the actual book value gains BH has registered since Sardar took over as CEO. We know that stock price changes might not always reflect business value changes in the short term, and although book value is not an exact proxy for intrinsic value, it's probably the best gauge we have as to how good of a job Sardar is doing with our capital and whether he is getting rich at our expense or not. So, with that said I will throw out some very simple figures below. Sardar became CEO in August 2008, so I tend to judge his performance starting in fiscal 2009, which began on September 24, 2008: Book value per share on 9/24/08: $198.16 Book value per share on 9/24/14: $309.36 6-Year CAGR: +7.7% annually Tangible book value per share on 9/24/08: $187.00 Tangible book value per share on 9/24/14: $278.86 6-Year CAGR: +6.9% annually I think it's pretty clear that Sardar's track record creating value for shareholders thus far has been okay, but not great. Bulls like Gio who think he can compound book value per share at 20%+ over the long term are likely going to be disappointed. But those who think Sardar will get rich and screw us all over in the process are likely being overly pessimistic. I'd be curious to hear why you all think we should/should not just let simple figures like these guide our conclusions, rather than going back and forth with a bunch of other stuff people are repeating over and again to justify their view., 99% of which is really not at the core of what we should care about (per-share value creation). Chad I think you have hit the most cardinal nail on the head with this post. A chimpanzee could have generated 7% PA returns since 2008/9. Which then begs the question. Is Sardar's compensation worthy of that performance? The bulls like Gio will then argue that the 'intrinsic value' has increased far more. Since that lies in the realm of subjectivity, this debate will not be settled in the short term. I guess time alone will be the arbitrator. Link to comment Share on other sites More sharing options...
philly value Posted April 5, 2015 Share Posted April 5, 2015 The book value argument has gotten silly pretty fast. I think we all know that the usefulness of any metric such as book value varies depending on the company and the circumstance. For Berkshire 20 years ago, change in book value was a reasonable proxy for change in intrinsic value because Berkshire was largely an investment company. For Berkshire today, the usefulness of BV is significantly less because of the focus on operating businesses. Among operating business even, the usefulness of book value varies drastically. Companies with intangibles driving their value are likely to have book values far below intrinsic value. For a business like dry bulk shipping where the businesses are completely commodities, book value is the only thing that matters, to the extent book value reflects relatively current values. So that last point is also important, for businesses that have made investments recently, book value is far more important than for businesses that are made up significantly of assets purchased in the past. Anyway, for BH, book value as of today is likely to be a pretty good proxy for intrinsic value. By far the largest asset at BH is CBRL and other investments/cash. Book value obviously reflects the current value of these accurately. Book value may not reflect quite the true value at the other businesses but they are each a much smaller part of BH's value. Link to comment Share on other sites More sharing options...
philly value Posted April 5, 2015 Share Posted April 5, 2015 The book value argument has gotten silly pretty fast. The role of book value in investing does not seem silly to me - it is interesting and important. Absolutely, but as far as I know it's also pretty well understood, so there shouldn't be much to debate. Link to comment Share on other sites More sharing options...
peridotcapital Posted April 5, 2015 Share Posted April 5, 2015 I would just say that this is confusing because as you say book value is on the cover of the Berkshire's annual report. But I would just note that every single time, essentially without exception, he has been asked about it over the last 25 years, he tries to focus people awe from using book value as an investing or valuation tool. Instead he tries to focus anyone who mentions this' attention to earnings power/cash flow generative capacity. I think people get hung up on this because Buffett obviously has used it in the past - it is on the front page of the report - but I think he regrets using it and has stuck with it out of consistently. The regret portion is obviously a little bit of a conjecture, but what is more telling than him using this is the few dozen times he is asked about it and he is almost apologizing for it. I'm in the minority on this - most value-oriented investors read some sort of meaning into book value - and many of them do it because they are confused by this exact point and they think that Buffett does it - but I would say that Seth Klarman and Buffett understand its lack of utility. My belief is that the relationship between % change in annual book value and % change in annual intrinsic value is far closer than the relationship between absolute book value and absolute intrinsic value. So I can both agree with you that book value may be nowhere near intrinsic value in dollar terms, but at the same time choose to use % change in book value as a proxy for % change in intrinsic value. I would prefer using operating cash flow - even if it makes this look worse. It is not about making things look better or worse - it is about illuminating value. Even if it makes it look worse - use it. If I was forced to - I would say that some sort of rolling 5-year average of cash flow is a better metric - but of course a thoughtful investor, like yourself, can understand when the recent past will not reflect the future on the upside or the downside and adjust accordingly with a margin-of-safety built in. I like the operating cash flow metric as well. Interestingly, here are the 5-year rolling average operating cash flow figures for BH since fiscal 2008: 2008: $49.8M 2009: $50.8M 2010: $51.7M 2011: $52.1M 2012: $53.4M 2013: $56.3M 2014: $51.3M At the peak about a 13% increase (2014 figure very impacted by the double whammy of Maxim and franchising initiatives). After adjusting my book value figures to 12/31/14 and adding back the value of the BH shares owned (to jive with the fact that I used the total share count including TLF shares), the growth in book value per share since fiscal 2008 is about 12% annually. The stock price has done a bit better than that, but it's not too far off. Link to comment Share on other sites More sharing options...
intothebreach Posted April 5, 2015 Share Posted April 5, 2015 My belief is that the relationship between % change in annual book value and % change in annual intrinsic value is far closer than the relationship between absolute book value and absolute intrinsic value. So I can both agree with you that book value may be nowhere near intrinsic value in dollar terms, but at the same time choose to use % change in book value as a proxy for % change in intrinsic value. I agree with this and it is also what Buffett has said repeatedly said over the years about Berkshire (that while it fails in adequately capturing the intrinsic value of Berkshire, it is a valid proxy in measuring its change over time). To me, the other reason to use change in annual book value is because it is the metric that Biglari has singled out to base the bulk of his compensation on. Link to comment Share on other sites More sharing options...
snowball82 Posted April 5, 2015 Share Posted April 5, 2015 I find the back and forth on this board pretty fascinating. To me it seems like a bit of overkill, arguing about whether Sardar is screwing over shareholders with his compensation plan, how skilled he really is, whether you should invest or not, etc. Throughout all of this nobody has mentioned (or if they have, not very often --- I've read most of this board but perhaps not every single post) the actual book value gains BH has registered since Sardar took over as CEO. We know that stock price changes might not always reflect business value changes in the short term, and although book value is not an exact proxy for intrinsic value, it's probably the best gauge we have as to how good of a job Sardar is doing with our capital and whether he is getting rich at our expense or not. So, with that said I will throw out some very simple figures below. Sardar became CEO in August 2008, so I tend to judge his performance starting in fiscal 2009, which began on September 24, 2008: Book value per share on 9/24/08: $198.16 Book value per share on 9/24/14: $309.36 6-Year CAGR: +7.7% annually Tangible book value per share on 9/24/08: $187.00 Tangible book value per share on 9/24/14: $278.86 6-Year CAGR: +6.9% annually I think it's pretty clear that Sardar's track record creating value for shareholders thus far has been okay, but not great. Bulls like Gio who think he can compound book value per share at 20%+ over the long term are likely going to be disappointed. But those who think Sardar will get rich and screw us all over in the process are likely being overly pessimistic. I'd be curious to hear why you all think we should/should not just let simple figures like these guide our conclusions, rather than going back and forth with a bunch of other stuff people are repeating over and again to justify their view., 99% of which is really not at the core of what we should care about (per-share value creation). Chad I think you have hit the most cardinal nail on the head with this post. A chimpanzee could have generated 7% PA returns since 2008/9. Which then begs the question. Is Sardar's compensation worthy of that performance? The bulls like Gio will then argue that the 'intrinsic value' has increased far more. Since that lies in the realm of subjectivity, this debate will not be settled in the short term. I guess time alone will be the arbitrator. 7,7 % ...I don't know the BH story, sometime interesting to make comparaisons. Rene Goehrum grew the Biosyent's book value by 64 % CAGR over last 5 years. ROE is now 49 %. Very important to choose the right vehicule (see the Biosyent discussion) and the right sector. My 2 cents. Link to comment Share on other sites More sharing options...
mcmaaaaath Posted April 6, 2015 Share Posted April 6, 2015 These book value calculations are nonsense. Taking a quick look at the makeup of the book value of the business in Sept 2008, the thing that jumps out at me is that net PPE has gone from $433m to $354m from 9/08 to 9/14. But SnS sales at company owned restaurants are up, and profits ex-franchising (and I do agree that this adjustment is questionable) are up as well. Does anyone think the PPE at the company owned SnS units are worth 20% LESS now then they were in 2008? Second, while the franchising business has proven to be expensive to develop, there is no question that a valuable asset has been generated. There are now (as of 9/30/14) 124 SNS franchise locations vs 68 in 2008. Since marketing and franchising costs are expensed as incurred, this substantial asset will not show up in book value. But it is a real asset nonetheless. The easiest way to see this is to look at book value and stock price for other businesses investing heavily in franchising and see what that relationship is. You won't find one. Consider the disparity between share price and BVPS for MCD, DENN, DIN, EAT over the last ten years (below). The stocks are up 200-350%, and the book values are up 16% to down 100%. EAT and DENN have essentially zero book value! Perhaps their managers should be fired despite the stocks trouncing the market over the last ten years. Link to comment Share on other sites More sharing options...
gfp Posted April 6, 2015 Share Posted April 6, 2015 Egan-Jones recommends Groveland group according to Groveland. http://www.sec.gov/Archives/edgar/data/93859/000089706915000294/cg579.htm Link to comment Share on other sites More sharing options...
philly value Posted April 6, 2015 Share Posted April 6, 2015 mcmaath, your analysis of the usefulness of the book value of BH's restaurant operations in giving a sense of intrinsic value seems correct to me. But the restaurant operations, and particularly the franchising, are only one part of the bigger picture at BH. As I see it, BH is an extremely concentrated hedge fund with a restaurant business and two other small businesses attached. In terms of the numbers, that seems to be the way to look at it. As I figure it, the value of the CBRL stake alone dwarfs the equity value in SnS/WS. Then there are other cash/investments. So if the point is that, on average BH's book value represents pretty well the intrinsic value, then that statement has much more to do with whether or not book value properly values cash and equity investments. Obviously it does. Link to comment Share on other sites More sharing options...
mcmaaaaath Posted April 6, 2015 Share Posted April 6, 2015 mcmaath, your analysis of the usefulness of the book value of BH's restaurant operations in giving a sense of intrinsic value seems correct to me. But the restaurant operations, and particularly the franchising, are only one part of the bigger picture at BH. As I see it, BH is an extremely concentrated hedge fund with a restaurant business and two other small businesses attached. In terms of the numbers, that seems to be the way to look at it. As I figure it, the value of the CBRL stake alone dwarfs the equity value in SnS/WS. Then there are other cash/investments. So if the point is that, on average BH's book value represents pretty well the intrinsic value, then that statement has much more to do with whether or not book value properly values cash and equity investments. Obviously it does. It seems to me that intrinsic value is about equal parts CBRL (post-tax) and Steak and Shake. In NBL's valuation he assigned significantly less to CBRL ($550m) than to Steak n Shake ($700m). You can disagree with those numbers but at most CBRL is about 1/2 the value (post tax). So no I don't think book value "represents pretty well the intrinsic value" if it represents it exceedingly poorly for half or more of the business. I mean literally some franchise businesses have completely annihilated their book value (EAT and DENN) in the transition from primarily company owned to primarily franchised. You just have to look at the parts separately. Book value will lead you completely astray here. Link to comment Share on other sites More sharing options...
Kuhndan Posted April 6, 2015 Share Posted April 6, 2015 I'll make a prediction, If Biglari loses the proxy contest, he will battle to the bitter end to get every last $ he thinks he due if he exits. It will be a huge, costly distraction for the company. Link to comment Share on other sites More sharing options...
frugalchief Posted April 7, 2015 Share Posted April 7, 2015 Anyone else here going to the meeting Thursday or just me? Link to comment Share on other sites More sharing options...
Buckeye Posted April 7, 2015 Share Posted April 7, 2015 Did anyone look at the very end of that Schedule 14A that globalfinancepartners posted the link to? Here is the contacts section: Media: Anthony Giombetti Gio Public Relations anthony@giombettipr.com 818-821-7530 Now we all know why Gio is so adamant about this investment! ;) ;) Link to comment Share on other sites More sharing options...
frugalchief Posted April 7, 2015 Share Posted April 7, 2015 Another BH proxy note... http://www.sec.gov/Archives/edgar/data/93859/000092189515000878/defa14a07428036_04062015.htm Link to comment Share on other sites More sharing options...
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