Biglari Holdings' Lesson for Value Investors

 | Feb 24, 2016 | 12:00 PM EST
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One of my annual "must-read" letters to shareholders came out this week from Sardar Biglari, chairman of Biglari Holdings (BH). It's worth reading even if you're not a BH shareholder or have never even heard of the company.

By way of background, Biglari Holdings owns a 19.8% stake in Cracker Barrel Old Country Store (CBRL), as well as 100% of the Steak 'n Shake and Western Sizzlin chains. It also owns 1st Guard Insurance, Maxim magazine and other holdings.

But BH has a somewhat bizarre, confusing corporate structure that has rewarded Chairman Biglari very handsomely even as many shareholders still wait for similar rewards.

Biglari fancies himself as an adept capital allocator, and he's had his share of successes over the years. In fact, the executive filled his latest letter to shareholders with examples of BH's victories, albeit with the usual warning that the stock isn't for everyone. That's for sure!

On paper, Biglari Holdings should be worth well more than its current $370 a share or so. BH has around a $1 billion enterprise value and a $762 million market capitalization, even though its Cracker Barrel stake alone is worth some $700 million.

Sardar Biglari's attempts to get on Cracker Barrel's board of directors and institute some changes have failed, but CBRL has nonetheless been a big winner for BH. Thanks to Cracker Barrel's hefty 4.4% dividend, BH netted more than $34 million in cash distributions from its stake last year.

As for Biglari Holdings' other properties, Steak 'n Shake has 561 locations, including 417 company-run ones. The unit had $806 million of revenues and $39.75 million in operating earnings last year, while Biglari Holdings owns the land and buildings that 144 locations use -- a great sweetener.

While it's difficult to estimate Steak 'n Shake's exact value, the chain's revenues and operating earnings are similar to those of casual-dining firm BJ's Restaurants (BJRI), which currently has a $1.1 billion market cap. (Although admittedly, the two chains aren't very similar.)

And even if you simply value Steak 'n Shake at 1x revenues, that puts the chain's price at around $800 million. That seems pretty reasonable, especially when you add in the company-owned real estate.

Throw in Western Sizzlin for free and a back-of-the-envelope calculation values BH's restaurant holdings at about $1.5 billion. Even if you apply a discount to that and deduct something for taxes, you can still put BH's total value at around $1 billion without even considering the firm's other holdings.

Now, Maxim magazine -- which Biglari admits he basically bought on a whim -- could be worthless, although the chairman believes it will turn profitable by year's end. (I'm not holding my breath.)

But that aside, you might ask: "Why are BH shares so cheap compared to the firm's underlying holdings?" I believe it's due to what I call the "Biglari Discount," or investors' skepticism and confusion surrounding how BH actually operates.

Some players believe Chairman Biglari is overpaid and doesn't have shareholders' best interests at heart. Investors are also confused by the company's structure and Sardar Biglari's business approach.

Activist investor Groveland Partners last year attempted a proxy battle to seek board seats and Sardar Biglari's ouster, but that failed. In an apparent bid to prevent future proxy fights and gain even greater control, The Lion Fund (which Sardar Biglari runs and Biglari Holdings effectively owns) later made a public tender offer for stock at $420 a share.

I for one was surprised by the response. Shareholders oversubscribed the tender and The Lion Fund ended up buying 616,000 BH shares, effectively giving Sardar Biglari control of about half of the company's outstanding stock.

Shares have fallen about 18% since then and have been effectively flat over the past five years. That's been a difficult, frustrating run for long-term stockholders like me. But it's also been a great example of one of value investing's biggest pitfalls. You can know a stock offers a great deal of value, but you can lack the ability to unlock it.

Why didn't I tender my shares over the summer at $420? Call it a combination of stubbornness, patience and (perhaps) stupidity. But I'll no doubt be back for this year's BH annual shareholders meeting, which is one of the more interesting ones among public companies.

It's well attended for a smaller-company meeting, and it gives shareholders several hours to hear Sardar Biglari's outspoken views. It's also short on the formalities associated with many other shareholder meetings, and you can ask the chairman questions directly. In other words, it's anything but boring!

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