BH - Biglari Holdings

[giofranchi]

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.

 

BVPS growth since 2008 is a completely wrong way to judge business results here. I have already said why many times in the past… And, sincerely, I am tired to repeat it! (To get an idea, just look at what investments were worth in 2008 and 2009!)

 

Instead, what I would like to know is the following: if you really think what you have written is a sound analysis of business results, and of Biglari’s job of value creation, then why are you investing in BH?!

 

The answer, I guess, might be: because it is cheap, and I will sell as soon as the gap with IV shrinks enough…

 

The great majority of people on this board believe that buying cheap stocks and selling expensive ones, and repeating the process all over again many times, will yield better results than simply owning a great business purchased at the right price.

Imo those people who are able to do better than a great business over the course of many years are very few… And almost all who try that game are likely going to be disappointed.

 

Cheers,

 

Gio

 

[mcmaaaaath]

Anyone else here going to the meeting Thursday or just me?

 

I'm going!

[Picasso]

This thread is crazy.

 

So Biglari bases his compensation, which I would assume is his best indicator of growth in intrinsic value otherwise why set this as the benchmark, as book value per share and suddenly this is not the important metric to look at?  Huh?

 

The fact is, book value per share has not performed very well since 2008.  Suddenly people want to compare BH to some asset light business which BH isn't.  This isn't PM or IBM or KO.  Berkshire set book value as the metric for around 40 years or so before it decided that it no longer reflected the right benchmark for shareholders.  BH isn't even close to that kind of a situation yet.

 

I can understand defending a thesis but I think the bulls are trying to fight this one too hard.  Is it not easier to say Biglari has done a less than great job the past several years during a massive bull market and hopefully he can find opportunities in the next several years or decades?  Why are people going through so much energy to defend someone who has done a mediocre job?

[Jurgis]

http://en.wikipedia.org/wiki/Confirmation_bias  8)

[giofranchi]

This thread is crazy.

 

Growth in BVPS since 2008 doesn’t make sense simply because Biglari bought S n S well below BV in 2008. And to understand the job done by Biglari of value creation, you should start with the price he paid to get control over S n S, not S n S BV in 2008. Furthermore, he needed time (two years, 2008 and 2009) to build up investments to the amount needed to meaningfully move the needle. So BVPS growth is the right metric to look at from 2010 onward. In 2011, 2012, and 2013 it grew at a CAGR of over 20%, while it was little changed in 2014.

 

Gio

 

[Picasso]

But wouldn't the growth in the business then show up through the cash flow, which so far is also not that impressive? 

 

Also isn't it nice that you can pick and choose what time periods to include the results you want?  I think a lot of managers would like to remove 2008 and 2009 off their track record and stick with 2010 onward.

[philly value]

Regardless of the book value question, there is the real performance of SnS [profits, not SSS growth] vs perceived performance. I had pointed out earlier that SnS and WS produced only $26M I think of operating income in 2014. This is for a group of businesses that I think NBL values at $500 + $200 + $25 = $725M in his valuation. Adding in the ~$220M of debt on the restaurant business, and you are assigning a $945M valuation. Meaning the restaurant business is worth $945 / 26 = 36.3X 2014 operating income.

 

The counterpoint was the $26M is depressed due to investment. I understand that the costs associated with growing the franchise business are expensed, and may be depressing earnings. Maybe we can be generous and call that $10M. Then, the point was made that earnings were low because SnS was investing in capex for the restaurants & corporate headquarters - which makes no sense because them items are capex, they don't show up in the earnings.

[giofranchi]

But wouldn't the growth in the business then show up through the cash flow, which so far is also not that impressive? 

 

No! Simply because a fast-food chain is not supposed to increase BV at high CAGRs! What instead it is supposed to do is to provide steady and reliable cash to build on investments. Which is exactly what it did!

 

Also isn't it nice that you can pick and choose what time periods to include the results you want?

 

Who cares! That simply is the reality of the business!

 

Gio

 

[Picasso]

But wouldn't the growth in the business then show up through the cash flow, which so far is also not that impressive? 

 

No! Simply because a fast-food chain is not supposed to increase BV at high CAGRs! What instead it is supposed to do is to provide steady and reliable cash to build on investments. Which is exactly what it did!

 

Also isn't it nice that you can pick and choose what time periods to include the results you want?

 

Who cares! That simply is the reality of the business!

 

Gio

 

Yeah - it is funny that Picasso intentionally jumped into a thread that he deems crazy.  There are plenty of crazy discussions going on around different companies here - I think most of us choose to refrain from jumping into crazy threads for companies we are not shareholders of or thinking of becoming shareholders in.  So jumping into a "crazy thread" about a company one has no interest in is probably even crazier than the thread itself.

 

But to address his or her underlying point - it is not about tearing down or defending a record - it is about trying to understand value.  At least for us value investors who are interested in the company.  That is why some of us have written voluminously about the value of the company.  Obviously you didn't read the longer posts and that is fine, but for value investors seeking value - they are usually interested in reading long valuations (though I realize some people only have the attention span to read three sentence posts).

 

And the simple use of book value, as has been discussed, is not an effective means of declaring any manager a success or mediocre or anything else.  It takes valuing the intrinsic value of the company.

 

Sorry if I try to throw some sense into the flow of nonsense that seems to be present in this thread lately.  What makes you think I have not read the "voluminous" posts on this thread?  I do not get much of a premium to the current price based on a realistic view of intrinsic value.  I find it funny that suddenly book value doesn't matter and instead it is a vague notion of "intrinsic value" that makes all the difference here.  Isn't the far more simple and likely explanation given the mix of assets under BH that book value is probably within 10% of intrinsic value?  Why spend 10x the effort to figure out the extra 10% of value that is considered intrinsic?  That instrinsic value, one could argue, is more than negated by the behavior of its Chairman.

 

This situation reminds me of what went on with Tetragon.  From this article in Bloomberg: http://www.bloomberg.com/news/articles/2014-07-29/hedge-fund-lakewood-bets-on-tetragon-greed-as-clos-jump

 

Lakewood acknowledges that “many investors have shunned” Tetragon because of compensation agreements, including payments in 2009 and 2010. The managers’ interests though are now more aligned with shareholders through increased equity from the Polygon purchase, Lakewood wrote in the letter.

 

Cooperman, Tetragon’s largest outside investor, agrees the stock is “very undervalued.” That’s for a reason, the 71-year-old investor said in a telephone interview yesterday.

 

“Unless they change the way they deal with shareholders the stock is not likely to change,” he said.

 

Who knows, maybe you guys get lucky and suddenly the market is willing to pay intrinsic value for all the mud on this stock. 

[philly value]

http://en.wikipedia.org/wiki/Confirmation_bias  8)

 

Confirmation bias works both ways.  If you had read the long valuation posts - you would have seen at least an attempt to fight confirmation bias.  Many of the people who just think Sardar is awful and dislike him and his corporate governance practices have not even considered the possibility that the company itself is significantly undervalued and may be a good investment.

 

I, and I imagine others, appreciate the substantial posts you have made, but it's also true IMO that quantity of thought and the length of time you have spent researching a company do not directly imply rigorous and correct thought. As I mentioned above, if I recall correctly you assigned a $725M equity value to SnS/WS, implying a total value of roughly $945M for the business. There was generally little quantitative basis for your valuation. Why exactly should SnS trade at TEV/EBIT of over 36X? What do reasonable comps trade at? What is the best quantitative estimate of income normalized for the expensed investments in franchising? When I questioned the valuation, you dismissed everything I said about operating income by discussing the 2014 restaurant capex spending and the purchase of the headquarters real estate, which has nothing/little to do with operating income being so low. And heck for that matter, even if income were doubled, 18X EBIT for a restaurant business seems pretty expensive to me.

 

 

[OracleofCarolina]

GAmco is going to withhold votes from the board according to 13D filed today. Kind of expected, but I don't think they will vote for Groveland.

[Jurgis]

GAmco is going to withhold votes from the board according to 13D filed today. Kind of expected, but I don't think they will vote for Groveland.

 

Relevant link: http://www.sec.gov/Archives/edgar/data/93859/000080724915000067/bh_10.pdf

 

IMHO, Mr. Maxim should have responded to GAMCO one way or the other. But then what do I know about shareholder relations...  8)

[BTShine]

GAmco is going to withhold votes from the board according to 13D filed today. Kind of expected, but I don't think they will vote for Groveland.

 

The GAMCO letter still allows room for GAMCO to vote in support of Groveland, no?

[merkhet]

Indeed it does.

[OracleofCarolina]

I think Gamco will just withhold their votes. They have been selling according the the bottom of the report

[mcmaaaaath]

http://en.wikipedia.org/wiki/Confirmation_bias  8)

 

Confirmation bias works both ways.  If you had read the long valuation posts - you would have seen at least an attempt to fight confirmation bias.  Many of the people who just think Sardar is awful and dislike him and his corporate governance practices have not even considered the possibility that the company itself is significantly undervalued and may be a good investment.

 

I, and I imagine others, appreciate the substantial posts you have made, but it's also true IMO that quantity of thought and the length of time you have spent researching a company do not directly imply rigorous and correct thought. As I mentioned above, if I recall correctly you assigned a $725M equity value to SnS/WS, implying a total value of roughly $945M for the business. There was generally little quantitative basis for your valuation. Why exactly should SnS trade at TEV/EBIT of over 36X? What do reasonable comps trade at? What is the best quantitative estimate of income normalized for the expensed investments in franchising? When I questioned the valuation, you dismissed everything I said about operating income by discussing the 2014 restaurant capex spending and the purchase of the headquarters real estate, which has nothing/little to do with operating income being so low. And heck for that matter, even if income were doubled, 18X EBIT for a restaurant business seems pretty expensive to me.

 

Well the SnS franchising business is doing negative EBIT apparently, so we must value that separately. And you have to back it out of NBL's valuation because it is a separate question. But NBL does appear to be valuing the stand alone, non-franchised SnS restaurant business at $700m on an EV basis.

 

If you buy the idea that FY 2011 (pre- franchising push) is the metric by which to value the SnS business, you have $41m in "operating earnings" according to the segment breakout. It does seem reasonable to me to say the SnS business is worth $700m on an EV base IF you give them credit that they "could" be earning the 2011 numbers if they pared back franchising.

 

That $41m implies a 17x EV/EBIT which would be sort of in line with peer comps (a quick look at bloomberg EQRV shows CBRL at 14x, DRI at 18x, RRGB at 19.7x on a NTM basis).

 

If they pay about $10m in interest and pay a 33% tax rate, this implies about $20m of net income or a 25x PE on the ~$500m equity value. However, looking at cash flows it does seem seem that D&A can be maintained at about $10m less than D&A (or $15m/year) given the last five year total of $70m of capex. This would mean the actual FCF of SnS is like $30m per year, making the $500m equity valuation less demanding and more like 16-17x FCF.

 

I'd be happy to hear push back against any of the above. The most  obvious one is "do we really trust him that he is spending $20m per year on franchising BEYOND the additional revenues he's generated?" This to me is the hardest question.

 

Separately, someone a few pages back suggested we start putting together a list of questions that need to be asked at the meeting. I will start.

 

 

Some questions I have:

 

1) Can you break out the franchising costs for 2014, and put them into buckets (ie store concept design, advertising, etc)?

2) With a backlog of 200 units in the pipeline, do these expenses need to be maintained into 2015 and 2016?

3) What % of franchising expenses, franchising units, and franchising unit backlog are international?

4) How are the newer franchisees performing  vs the old ones?

5) Have any of the newer franchisees objected to the $4 menu?

 

 

[philly value]

The one pushback I'll give on earnings is that there appears to be a decline in performance even above the effects of the franchising. The "Cost of Sales" and "Restaurant Operating Expenses", which I am not 100% certain but imagine are tied only to owned restaurants, have gone up by 1.5% as a percentage of revenue from FY 2012 -> FY 2014. On $778M of revenue, a 1.5% decline in operating margin is around $12M.

[Txvestor]

GAmco is going to withhold votes from the board according to 13D filed today. Kind of expected, but I don't think they will vote for Groveland.

 

Relevant link: http://www.sec.gov/Archives/edgar/data/93859/000080724915000067/bh_10.pdf

 

IMHO, Mr. Maxim should have responded to GAMCO one way or the other. But then what do I know about shareholder relations...  8)

 

 

Agree. However if he did that he would disarm himself of his true intent, which is if needed he will do what he must, ethics of voting his hedge fund shares(mostly shareholder funds)against the will of shareholders be damned.

Now if the vote is decisivey in his favor expect him to not vote those shares.

I agree with many posters here that the current board is not acting in shareholder interests, however grovelands slate and campaign has left me feeling like i've got little choice.

I'm trying to decide between withholding votes and voting for 2 of groveland nominees. Theres no way in hell i can endorse the current board and their actions. I'm hoping that over 50% of shareholder either withhold or vote for groveland, and that Sardar has to use the LF holdings to get himself over the top.

[LC]

Counterpoints to NBL's above post:

 

1. Why do the intentions of a poster matter? Whatever reasons a person had to post has nothing to do with the underlying argument. Not sure why NBL continuously brings this up.

 

2. Yes understanding the value here is the main goal. This should be obvious on a value investor forum. Value is affected by Biglari's character and performance, which had been rehashed multiple times. What I will say is the length of response is not a valid measure of the accuracy of valuation. Someone said something about explaining the merits of an investment in terms a fifth grader could understand.

 

3. As to book value, I think it has it's merits as an approximation of true value. Biglari does use it to home in on his compensation, so BV analysis is therefore worth discussion.

[vinod1]

http://en.wikipedia.org/wiki/Confirmation_bias  8)

 

Confirmation bias works both ways.  If you had read the long valuation posts - you would have seen at least an attempt to fight confirmation bias.  Many of the people who just think Sardar is awful and dislike him and his corporate governance practices have not even considered the possibility that the company itself is significantly undervalued and may be a good investment.

 

I, and I imagine others, appreciate the substantial posts you have made, but it's also true IMO that quantity of thought and the length of time you have spent researching a company do not directly imply rigorous and correct thought. As I mentioned above, if I recall correctly you assigned a $725M equity value to SnS/WS, implying a total value of roughly $945M for the business. There was generally little quantitative basis for your valuation. Why exactly should SnS trade at TEV/EBIT of over 36X? What do reasonable comps trade at? What is the best quantitative estimate of income normalized for the expensed investments in franchising? When I questioned the valuation, you dismissed everything I said about operating income by discussing the 2014 restaurant capex spending and the purchase of the headquarters real estate, which has nothing/little to do with operating income being so low. And heck for that matter, even if income were doubled, 18X EBIT for a restaurant business seems pretty expensive to me.

 

Well the SnS franchising business is doing negative EBIT apparently, so we must value that separately. And you have to back it out of NBL's valuation because it is a separate question. But NBL does appear to be valuing the stand alone, non-franchised SnS restaurant business at $700m on an EV basis.

 

If you buy the idea that FY 2011 (pre- franchising push) is the metric by which to value the SnS business, you have $41m in "operating earnings" according to the segment breakout. It does seem reasonable to me to say the SnS business is worth $700m on an EV base IF you give them credit that they "could" be earning the 2011 numbers if they pared back franchising.

 

That $41m implies a 17x EV/EBIT which would be sort of in line with peer comps (a quick look at bloomberg EQRV shows CBRL at 14x, DRI at 18x, RRGB at 19.7x on a NTM basis).

 

If they pay about $10m in interest and pay a 33% tax rate, this implies about $20m of net income or a 25x PE on the ~$500m equity value. However, looking at cash flows it does seem seem that D&A can be maintained at about $10m less than D&A (or $15m/year) given the last five year total of $70m of capex. This would mean the actual FCF of SnS is like $30m per year, making the $500m equity valuation less demanding and more like 16-17x FCF.

 

I'd be happy to hear push back against any of the above. The most  obvious one is "do we really trust him that he is spending $20m per year on franchising BEYOND the additional revenues he's generated?" This to me is the hardest question.

 

Separately, someone a few pages back suggested we start putting together a list of questions that need to be asked at the meeting. I will start.

 

 

Some questions I have:

 

1) Can you break out the franchising costs for 2014, and put them into buckets (ie store concept design, advertising, etc)?

2) With a backlog of 200 units in the pipeline, do these expenses need to be maintained into 2015 and 2016?

3) What % of franchising expenses, franchising units, and franchising unit backlog are international?

4) How are the newer franchisees performing  vs the old ones?

5) Have any of the newer franchisees objected to the $4 menu?

 

On an EV basis, NBL is valuing SnS company-owned units at about $800 million ($500 million in equity value, $200 million in debt and ~$100 million for the $10 million in annual corporate expenses which I think should logically fall mostly into this segment.) This is roughly $2 million per each company owned unit. Which I think is putting a pretty high value.

 

Vinod

[jschembs]

I have no dog in this fight, but I'll tell you this. Based on my interaction in other companies, Seth at Groveland is an honorable and no-nonsense guy.

[giofranchi]

What makes you think I have not read the "voluminous" posts on this thread?  I do not get much of a premium to the current price based on a realistic view of intrinsic value.  I find it funny that suddenly book value doesn't matter and instead it is a vague notion of "intrinsic value" that makes all the difference here. 

 

Well, you might have read a lot of this thread, but you have not read what I have written carefully.

 

I have never said BVPS is not meaningful… Because BVPS and its growth are essentially all I am looking for!

 

But:

In 2008 and 2009 Biglari went from running an hedge fund to running a public company. If you want to really understand the job of value creation he has done, you should make the right adjustments. Otherwise, the picture you get simply does not reflect reality.

 

Cheers,

 

Gio

 

[giofranchi]

I understand that the costs associated with growing the franchise business are expensed, and may be depressing earnings. Maybe we can be generous and call that $10M.

 

And you would be wrong!

Biglari has said G&A, adjusted to remove costs associated with S n S franchise initiative, have been 6.2% of revenue in 2014, instead of 8.3%.

This means that at least $64.9 / 8.3 x (8.3 – 6.2) = $16.4 million have been spent for the S n S franchise initiative in 2014.

 

Since 2011 almost $45 million have been invested, yet also expensed, in this S n S franchise initiative. ;)

 

Gio

 

[giofranchi]

http://seekingalpha.com/article/3056556-key-issues-and-tangible-solutions-for-biglari-holdings-shareholders?auth_param=7i5hb:1aia92c:73da1ade39427fd492ee7ef99423b61f&uprof=25

 

I think this is a good enough article.

With the exception of point 5, which I absolutely don't agree with, the rest of the compromise proposal seems sensible and well put together.

 

I'd also add that it would be much easier to achieve such a compromise, if a double class shares structure be implemented soon.

 

Gio

[Jurgis]

http://seekingalpha.com/article/3056556-key-issues-and-tangible-solutions-for-biglari-holdings-shareholders?auth_param=7i5hb:1aia92c:73da1ade39427fd492ee7ef99423b61f&uprof=25

 

I agree with the compromise suggested by Farnam Street Investments except the part of allowing uncapped 0%/25% fees for Mr. Big.

 

A compromise in toto would be better than current situation though.