A 'Sum of the Parts' Strategy

 | Dec 16, 2011 | 10:00 AM EST
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I am a big fan of "sum of the parts" opportunities, where you can identify potential value plays based on the underlying assets of a business. This can't always be done easily, but there are cases where there's enough information to make it worthwhile to try. For instance, in situations where companies own stakes of other publicly traded companies, it's easy to put a valuation on those pieces based on current market prices. When these stakes are very large, they should be discounted, but we'll save that topic for another day.

Biglari Holdings (BH), which has garnered its share of press coverage recently due to a proxy fight with Cracker Barrel (CBRL), is a potentially interesting example. With a market cap of about $458 million, the company ended the most recent quarter with $99 million in cash, and $115 million in investments. We don't know everything that is included in these investments, but a large portion is the company's 9.9% stake in Cracker Barrel, which is worth $113 million. There are also disclosed holdings in CCA Industries (CAW), worth about $6 million. Given the fact that Cracker Barrel shares have risen 23% since Biglari Holdings' most recent quarter ended, we can presume that the investment account has grown since then, but for now, I'll leave it at $115 million.

We also know that Biglari Holdings owns the Steak 'n Shake, and Western Sizzlin restaurant chains. There are 489 Steak 'n Shake restaurants, and 94 Western Sizzlin restaurants. For the most recent fiscal year, the restaurants generated $703 million in revenue and $30 million in net earnings. Putting a very conservative, Sonic (SONC)-like lowball price-to-sales multiple of 0.81 on the restaurants yields $569 million. Considering that Biglari owns the land and buildings for 153 restaurant locations, I'd argue that this segment is worth much more, but for argument sake, let's call it an additional $100 million.

All together, there's $99 million in cash, $115 million in investments, a conservative $569 million for the restaurants, plus an additional $100 million for the real estate. There's an additional $19 million in investments held by affiliated partnerships, including the Lion Fund LP. This yields about $902 million in all; after backing out debt of $128 million and lease obligations of $121 million, that leaves $653 million. This implies a price for Biglari Holdings shares of about $455, which is 22% above the current price of $373, and lowball in its own right.

Of course, this is essentially a "back of the envelope" calculation, not a detailed valuation. In doing these, however, it pays to be conservative in order to build in a margin of safety. There are also parts of Biglari Holdings that I have placed little or no value on because it is simply too difficult to be accurate, and I'd rather err on the side of caution.

I'll offer more of these "sum of the parts" opportunities in future columns. Have a great weeken.

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