With the S&P 500, Russell 2000, and Russell Microcap Indexes all down around 10% year-to-date, at least one thing again becomes clear: The overall direction of the markets has a huge impact on the direction of individual stocks. Now, that may sound like either a stupid, or overly obvious statement depending on your perspective, but it is a simple concept too often forgotten by investors.
In this environment, a company has to do something out of its norm, perhaps a better-than-expected quarter, or show that it is turning around, in order to fight the overall trend of a down market. This week, we got a great example.
Mini-conglomerate Biglari Holdings (BH) , (BH.A) , which owns among other things the Steak n Shake and Western Sizzlin restaurant chains, First Guard Insurance, Southern Oil Company, and Maxim magazine, has been a controversial name over the years, for many reasons. But the release of the company's 10-K last week -- it is not big on earnings releases, and garners no analyst coverage -- showed great progress, and the shares have rallied (BH is up 24%, BH.A up 30%) the past two trading days.
Shaking Things Up
The key takeaway is the turnaround in Steak n Shake, which has been a disaster in recent years. Biglari acquired the company in 2008, at which point it was in terrible shape, and turned it around. But in 2017, performance began to suffer. The company ended up closing many of the locations, and adopted a new strategy to sell franchises for $10,000, plus up to 15% of revenue and 50% of store profits. It sounded like a losing strategy to me, a last gasp to keep the chain from going under. However, three years in, that strategy appears to be bearing fruit. In 2021, Steak n Shake generated $13.5 million in operating earnings, following losses of $4.6 million in 2020, $18.6 million in 2019, and $10.7 million in 2018.
In addition, BH paid off Steak n Shake's $152.5 million in debt in 2021; there were fears at one point that Steak n Shake would go bankrupt due to the debt. What remains is a debt-free 536-store chain, that is now generating significant franchise revenue.
Biglari still owns 199 units, down from 415 in 2017, but has essentially flipped to a franchise model, which typically generates higher margins. There is still a real-estate play here, though; Biglari owns the land and buildings for 157 locations, and 10 other restaurant properties.
The company also retains an 8.8% stake in Cracker Barrel (CBRL) , worth about $255 million. Considering that BH's current market cap is just under $450 million, that is a considerable stake. In addition, BH currently trades at just 0.88x tangible book value, and earned $111.83 per Class A share (BH.A) in 2021, putting the trailing price-earnings ratio at less than 7.
Value Dreaming
Biglari is not without controversy; CEO Sardar Biglari calls the shots, controls the voting rights of the company with 70.4% of the voting interest, and has not endeared himself to investors, or some shareholders (myself included). The company owns an undervalued package of assets, at least in my view, but has been hampered by what I call the "Biglari Discount." One way to potentially fight through that is to demonstrate success in the acquired assets, and 2021 has shown promise in that regard.
The purchase of Southern Oil Company in 2019 for $51.5 million was a bit of a head scratcher at the time, but appears to be paying off. Since the acquisition Southern has reportedly returned nearly $41 million in cash to BH.
Biglari, which should be a value investors dream, has been hampered by its reputation. We'll see if recent successes help to alter that dynamic.
