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Sardar Biglari’s Annual Letter Shows a Huge Increase in Cash and Investments

December 12, 2011 | About:
Biglari Holdings released their annual letter this weekend, along with their 10-K. You can find the full letter by clicking here.

A few observations unrelated specifically to the letter before I begin: I hadn’t been to the Biglari Holdings website in awhile. It’s been updated and actually looks pretty good compared to what it used to look like. A friend of mine is a web designer and works on their Steak ‘n Shake website. It looks like Biglari allowed the design company to do something about the holding company’s website as well.

Two, I’m really surprised by the waning interest in Biglari. It seems like a lot of small-time value investors feel like they got burned by him and don’t want anything to do with him anymore. Perhaps they feel a sense of betrayal. That’s too bad because it appears that dramatic growth may soon occur.

Moving to the letter, the biggest thing to note is that the parent company now has $252.8 million of cash and securities at the end of fiscal year 2011. This is a dramatic increase from last year, a 113% increase to be exact. Not all of it is organic, though. Of that $134.1 million increase, $83.2 million was from borrowings at the Steak ‘n Shake level. I’ve gotten a few questions about the wisdom of these borrowings. I’ll say this, the loans are non-recourse to the parent company and are at low interest rates. Look through the 10-K for more information. I believe the borrowings are prudent. This is simply smart balance sheet management.

Biglari Holdings has the cash to make a sizable acquisition. The question is whether Biglari can find a willing company. So far his escapades into Cracker Barrel (CBRL), Fremont (FMT) and Penn Millers Holding (PMIC) have been short-term positive. He didn’t gain control of the last two, but he did walk away with large gains. It remains to be seen how Cracker Barrel turns out.

It should be noted that the company’s cash and investments hoard now equals almost 60% of its market cap. If he decided to pursue a buyback strategy he would be able to consolidate his control of the company and produce sizable gains for his shareholders, at least if you agree with me that shares are undervalued. I haven’t seen any discussion of a buyback, however. Perhaps it will be an issue that can be addressed at the company’s annual meeting in April. Whether this is pursued or not, it should be taken into consideration when trying to value the company.

The other part of the letter that stood out to me is Biglari’s comments about franchising. BH followers should know that this is the direction Steak ‘n Shake (SNS) was going, with significant investments into the franchise plan in 2011. We now know the company has commitments for 110 units in the coming years. That would be more than a 20% increase in the number of restaurants. That’s significant and will be a driver of significant revenue in the future despite the new restaurants being franchises compared to most of the current restaurants being company-owned. The franchise model decreases risk to Steak ‘n Shake and allows for faster growth.

Biglari said in the letter that he believes Steak ‘n Shake can become a global brand. I do too, but first there is plenty of growth opportunity within the U.S. The way Biglari has smartly gone about building the franchising foundation, combined with the tremendous efficiencies he has wrung out of current restaurants gives me confidence that the roll-out will be a success. Customer traffic and same-store sales continue to increase at an impressive clip against difficult comparisons. The operations of Steak ‘n Shake are impressive.

So, what we have for Biglari are tremendous year over year investment gains, continued great operations at Steak ‘n Shake, smart balance sheet management, huge expected future restaurant openings, and a big wild card in regards to what Biglari will invest the cash from the holding company. Those who felt burned by him in the past might want to get over that feeling and consider re-investing in the company. If not, they’re going to feel burned again when the stock price sees dramatic gains over the next few years.

Disclosure: Long BH

Intellectual Honesty

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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