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Biglari Holdings: Undervalued at $430 per share

July 30, 2014 | About:

1. Company

Biglari Holdings (BH) is a holding company founded by Sardar Biglari through his corporate takeover of Shake 'n Shake Operations Inc. After Mr. Biglari took over Steak 'n Shake he began to streamline and restructure its operations. His goal was to restore the company to profitability and then to began to produce free cash flow that he could reinvest. His goal is to take the free cash flow produced by Steak 'n Shake and reinvest in the purchased of equity or entire company to add to his holdings. The company is in the business of finding undervalued company that are having problems and normally produces lots of free cash flow from there operation. Mr. Biglari has proven to be a great capital allocator through his redeployment of capital into buying Maxim Magazine and First Guard Insurance in February 2014.

Market Cap: $740 million

Enterprise Value: $926 million

Revenues: $755.82 million

Debt: $424 million

Pretax Earnings : $196.4 million

After Tax Earnings: 140.3 million

Tax Rate: 34%

Taxes Payed: $56.6 million

Free Cash Flow: $24.6 million

Cash and Marketable Securities: $635 million

Revenues Per Share: $539.87

Debt Per Share: $302.86

Pretax Earnings Per Share: $140.29

Earnings Per Share: $97.90

Taxes Payed Per Share: $40.43 million

Free Cash Flow Per Share: $17.18

Cash and Marketable Securities Per Share: $453.57

Marketable Securities Per Share: $61.07

Cash and Marketable Securities Per Share: $128.64

Ticker (BH)

1.1 Company History

Steak 'n Shake

  • Founded in 1934 by Gus Belt
  • Gus Belt served four years in the Marine Corp. and was born in Illinois.
  • He converted the combination gas station and chicken restaurant that he owned into a hamburger stand.
  • The original building was damaged by a fire in the early 1960's.
  • In the the late 1990's the company sold the original store to Monical's Pizza company.
  • Belt purchased a chain of "Goal Post" restaurants throughout central Illinois. After taking over he converted them into Steak 'n Shake restaurants.
  • The company continued to grow and expand after the death of Gus Belt in 1954.
  • Ownership of the company passed through many hands.
  • When E.W. Kelley bought the company through his company E.W. Kelley and Associates.
  • Mr. E.W. Kelley was largely responsible for the growth of Steak 'n Shake restaurant growth until his death in 2003.
  • In 2004 the company entered into a agreement to buyout its largest franchisee Kelley Restaurants Inc. Which was own my E.W. Kelley Family.
  • In 2008 the company went through a board shakeup lead by Sardar Biglari when he and Phillip Cooley were elected to the board with 70% of the votes.
  • As a result, Biglari was elected the Chairman of the board.
  • Mr. Biglari after takeover when own a restructuring and streamlining operations.
  • In 2009 he proposed a reverse stock split and got approval for his 20 to 1 reverse stock split that sent the stock price from $13 to $260 per share.
  • In 2010 he proposed to chain the name of the company to Biglair Holding.
  • Biglari Holding expanded its operation into other business including Western Sizzlin', Maxim Magazine, and First Guard Insurance.

1.2 Overview of The Business

Biglari Holdings (BH) is primarily in the business of operation restaurant chains like Steak n' Shake and Western Sizzlin'. Mr. Sardar has a long history of investing and turning around distressed restaurant chains through is Lion Fund. He has for the last few year been trying to expand the business into other industries. Early this year he was successful in this when Biglair acquired Maxim Magazine and First Guard Insurance.

Board of Directors:

  • Sardar Biglari - Chairman of the board and is CEO as well. He is also Chairman and CEO of Biglari Capital and General Partner of the Lion Fund LP
  • Phillip L. Cooley - Vice Chairman of the board and director since 2010. He has served as a advisory director for Biglari Capital since 2000.
  • Kenneth R. Cooper - Director of the board since 2010. Is a attorney in private practice in San Antonio TX, specializing in real estate transaction.
  • William L. Johnson - Director of the board since 2012. President and CEO of The Berean Group LLC, a consulting firm since 2002.
  • James P. Mastrian - Director of the board since 2012. He was the special advisor to Chairman and CEO and COO of Rite Aid.
  • Ruth J. Person - Director of the board since 2010. Dr. Person has years of experience in leadership and board positions.

Subsidiaries:

  • Steak n' Shake - Is a casual restaurant chain with over 500 locations throughout the Midwestern and Southern United States.
  • Western Sizzlin' - Is a chain of buffet and steakhouses with locations in 19 states and 99 franchises in the United States. The first Western Sizzlin' open in 1962 by Nick Pascarella. The restaurant is recognized for its famous "FlameKist steaks.
  • Maxim Magazine - Is an international men's magazine that reaches nearly 9 million readers each month. Maxim Digital reaches nearly 4 million unique viewers and the magazine publishes 16 editions in 75 countries.
  • First Guard Insurance - Founded in 1937, as a Detroit-based insurance agency. The company original sold general line insurance to small businesses. First Guard later created a trucking insurance division to supplement its general line business. As the years went by the company sold off its general line business to focus on its profitable trucking insurance business.

1.3 Capital Structure

Mr. Biglari designed the structure of the company to allow Biglari to take advantage of leverage without the parent company assuming the financial liability. To achieve this the company has separated the debt obligations of subsidiaries from Biglari Holdings. Debt is present on Biglari Holding's consolidated balance sheet, debt resides on the company's wholly-owned subsidiaries balance sheets.

1.4 Right Offering

Has offered subscription rights to all shareholders, for each share a shareholder owns the company will distribute one transferable subscription right by August 19, 2014. Every five rights will entitle a shareholder to subscribe for one share of common stock at a price of $250 in cash per share. The rights excluding oversubsciption privileges will be transferable and expected to be admitted for trading on the New York Stock Exchange under (BH RT) during the course of the right offering. Biglari subscription period will commence on August 19, 2014 and expires September 12, 2014.

1.5 Divestiture of Biglari Capital

The company divested its asset management company which triggered an accounting rule that means Biglari is no long required to consolidate the Lion Fund's financials. The changes in value of our investments in The Lion Fund will be recorded on Biglari income statement. By moving thesecurities from BH to the Lion Fund lead to the Lion Fund affected Biglari Holdings reported earnings by $128 million.

2. Management

Sardar Biglari has been the Chairman and CEO of Biglari Holdings (BH) since he was elected to the board with 70% of the vote in 2008. Since he found the Lion Fund LP, he has returned on average 30% annually for the fund. Mr. Biglari is a classic capital allocator who has reinvested the company's capital through purchases of stock and entire companies. His own compensation is connected to the return on book value and which has lead the company to grow its book value at 30% since he took over the company.

Executive Officers:

  • Sardar Biglari - Chairman and CEO
  • Phillip L. Cooley - Vice Chairman of the board
  • Ruth J. Person - Independent Director
  • Kenneth R. Cooper - Independent Director
  • James P. Mastrian - Independent Director
  • William L. Johnson - Independent Director
  • Duane E. Geiger - Vice President and Interim. Chief Financial Officer
  • Bruce Lewis - Controller

2.2 Executive Compensation

Total Executive Compensation for 2013 of $12 million

Key Executive Compensation:

Name/Title 2009 2010 2011 2012 2013
Key Executive Compensation 808,342 2,493,945 5,335,485 11,880,337 12,107,127
Salary 661,943 1,100,000 1,100,000 1,359,077 1,467,308
Bonus 90,000 160,000 200,000 448,000 585,000
Annual Other Income 0 0 0 0 0
Restricted Stock Award 0 0 0 0 0
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 1,206,896 3,992,391 10,000,000 10,000,000
Other Compensation 56,399 27,049 43,094 73,260 54,819
Total 808,342 2,493,945 5,335,485 11,880,337 12,107,127

Sardar Biglari:

Sardar Biglari/Chairman of the Board and Chief Executive Officer 515,445 2,122,556 4,922,655 10,917,778 10,942,797
Salary 467,231 900,000 900,000 900,000 900,000
Bonus 0 0 0 0 0
Annual Other Income 0 0 0 0 0
Restricted Stock Award 0 0 0 0 0
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 1,206,896 3,992,391 10,000,000 10,000,000
Other Compensation 48,214 15,660 30,264 17,778 42,797
Total 515,445 2,122,556 4,922,655 10,917,778 10,942,797

Duane E. Geiger

Salary 194,712 200,000 200,000 227,692 247,308
Bonus 90,000 160,000 200,000 230,000 285,000
Annual Other Income 0 0 0 0 0
Restricted Stock Award 0 0 0 0 0
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 0 0 0 0 0
Other Compensation 8,185 11,389 12,830 15,066 12,022

Bruce Lewis

Bruce Lewis/Controller - - - 489,801 620,000
Salary - - - 231,385 320,000
Bonus - - - 218,000 300,000
Annual Other Income - - - 0 0
Restricted Stock Award - - - 0 0
Securities Options - - - 0 0
LTIP Payout - - - 0 0
Non-Equity Compensation - - - 0 0
Other Compensation - - - 40,416 0
Total - - - 489,801 620,000

Top Insider Holders

Major Direct Holders (Forms 3 & 4)
Holder Shares Reported
BIGLARI, SARDAR 25,552 Mar 26, 2014
COOLEY PHILIP L 5,489 May 21, 2014
GEIGER DUANE 1,527 Sep 20, 2013
MASTRIAN JAMES P 180 Mar 26, 2014
PERSON RUTH J 427 Sep 16, 2013

Top Institional Holders

Holder Shares % Out Value* Reported
Dimensional Fund Advisors LP 109,867 6.38 53,559,063 Mar 31, 2014
Advisory Research, Inc. 100,109 5.82 48,802,136 Mar 31, 2014
Gamco Investors Inc 100,024 5.81 48,760,699 Mar 31, 2014
Vanguard Group, Inc. (The) 96,503 5.61 47,044,247 Mar 31, 2014
JANUS CAPITAL MANAGEMENT, LLC 96,624 5.61 47,103,233 Mar 31, 2014
BlackRock Fund Advisors 83,585 4.86 40,746,851 Mar 31, 2014
Kovitz Investment Group, LLC 57,475 3.34 28,018,487 Mar 31, 2014
BlackRock Institutional Trust Company, N.A. 43,533 2.53 21,221,902 Mar 31, 2014
Biglari Capital Corp 250,187 14.54 121,963,660 Mar 31, 2014
Fenimore Asset Management, Inc. 32,925 1.91 13,926,287 Jun 30, 2014

3. Financial Summary

Biglari Investments

The company ended fiscal year 2013, with $635 million in cash and investments. $75 million of this came through a right offering to existing shareholders. By the end of fiscal year 2013 total investments (cash, stocks, and Biglari Holdings investments in the Lion Fund) increased to $637 million. Investments increased by 47% from $378 million, this excludes equity issuance. Over the last five years investments have climbed by $628.5 million.

Investments Over the years in Millions:

2013 2012 2011 2010 2009 2008
Cash and Cash Equivalent $94.6 $60.4 $99.0 $47.6 $51.4 $6.9
Marketable Securities 85.5 269.9 115.3 32.5 3.0 -
Lion Fund 455.6 48.3 38.5 38.6 - -
Total Investment $635.4 $378.6 $252.8 $118.7 $54.4 $6.9

In 2013, net operating earnings of $12 million versus the $19 million from the previous year. This was caused by the company strategy over the last few years that has harmed neear-term profts in order to expand long-term cash flow.

For the 28 weeks ended April 2014, revenues increased 4% to $406 million and net income increased 59% to $10 million. Revenues reflect comparable store sales, Steak 'n Shake increase from 0.9% to 3.4% and growth in guess count increase from 0.75 to 2.8%. Sales increase of 3% to $395 million. The company Franchises Royalities and fees increase of 32% to $7.6 million.

Profitability:

Gross Margins 25%
Operating Margins 2.74%
Net Margins 18.56%
Return on Equity 24%
Return on Assets 14.19%
Return on Investment 18.48%

Balance Sheet

2013

25/09

2012

26/09

2011

28/09

2010

29/09

Total Current Assets 197.49 349 240.58 109.83
Cash and Short Term Investments 180.1 330.22 214.31 80.09
Cash - - - -
Cash & Equivalents 94.63 60.36 98.99 47.56
Short Term Investments 85.48 269.86 115.32 32.52
Total Receivables, Net 7.05 7 4.13 5.82
Accounts Receivables - Trade, Net 7.05 7 4.13 5.82
Total Inventory 6.47 6.62 5.89 6.06
Prepaid Expenses - - - 2.97
Other Current Assets, Total 3.85 5.16 16.26 14.89
Total Assets 988.54 773.79 672.86 563.84
Property/Plant/Equipment, Total - Net 346.15 356.64 371.74 386.18
Property/Plant/Equipment, Total - Gross 686.79 675.93 669.3 667.43
Accumulated Depreciation, Total -340.64 -319.3 -297.56 -281.25
Goodwill, Net 28.25 27.53 27.53 28.76
Intangibles, Net 7.72 6.25 6.95 7.96
Long Term Investments 397.7 25.27 18.78 23.5
Note Receivable - Long Term - - - -
Other Long Term Assets, Total 11.24 9.11 7.28 7.61
Other Assets, Total - - - -
Total Current Liabilities 113.01 124.29 114.87 90.76
Accounts Payable 37.51 33.21 29.24 26.75
Payable/Accrued - - - -
Accrued Expenses 41.02 40.8 30.29 24.22
Notes Payable/Short Term Debt - - 15 18
Current Port. of LT Debt/Capital Leases 15.99 17.85 16.41 4.71
Other Current liabilities, Total 18.5 32.43 23.93 17.09
Total Liabilities 423.95 424.66 393.18 314.84
Total Long Term Debt 216.75 230.6 217.48 142.03
Long Term Debt 110.5 120.25 101.42 17.78
Capital Lease Obligations 106.25 110.35 116.07 124.25
Total Debt 232.74 248.45 248.9 164.74
Deferred Income Tax 84.53 8.68 6.66 10.31
Minority Interest - 52.09 45.25 62.24
Other Liabilities, Total 9.67 9 8.91 9.5
Total Equity 564.59 349.12 279.68 249
Redeemable Preferred Stock, Total - - - -
Preferred Stock - Non Redeemable, Net - - - -
Common Stock, Total 0.9 0.76 0.76 0.76
Additional Paid-In Capital 269.81 143.03 144.57 143.52
Retained Earnings (Accumulated Deficit) 348.34 251.98 230.39 195.82
Treasury Stock - Common -75.92 -90.55 -90.57 -89.95
ESOP Debt Guarantee - - - -
Unrealized Gain (Loss) - - - -
Other Equity, Total 21.46 43.9 -5.47 -1.15
Total Liabilities & Shareholders' Equity 988.54 773.79 672.86 563.84
Total Common Shares Outstanding 1.59 1.32 1.32 1.32
Total Preferred Shares Outstanding - - - -

Cash Flow Statements

2013

25/09

2012

26/09

2011

28/09

2010

29/09

Period Length: 12 Months 12 Months 12 Months 12 Months
Net Income/Starting Line 142.17 24.75 33.96 29.42
Cash From Operating Activities 38.79 49.97 74.75 68.62
Depreciation/Depletion 25.25 26.42 28.36 29.26
Amortization - - - -
Deferred Taxes 72.03 -2.73 -2.19 0.21
Non-Cash Items -197.97 8.84 -11.67 -2.29
Cash Receipts - - - -
Cash Payments - - - -
Cash Taxes Paid - - - 9.88
Cash Interest Paid - - - 1.27
Changes in Working Capital -2.7 -7.31 26.28 12.03
Cash From Investing Activities -60.77 -87.89 -89.5 -31.42
Capital Expenditures -17.94 -8.68 -13.02 -8.65
Other Investing Cash Flow Items, Total -42.83 -79.21 -76.48 -22.77
Cash From Financing Activities 56.34 -0.71 66.18 -41.03
Financing Cash Flow Items 74.37 -0.29 -17.47 -0.2
Total Cash Dividends Paid - - - -
Issuance (Retirement) of Stock, Net 0.01 0.02 -0.51 -35.67
Issuance (Retirement) of Debt, Net -18.04 -0.44 84.16 -5.15
Foreign Exchange Effects -0.1 - - -
Net Change in Cash 34.27 -38.63 51.42 -3.83

Income Statements

2013

25/09

2012

26/09

2011

28/09

2010

29/09

Total Revenue 755.82 740.21 709.2 673.78
Revenue 755.82 734.26 706.07 671.94
Other Revenue, Total - 5.94 3.13 1.84
Cost of Revenue, Total 566.85 545.14 523.91 501.57
Gross Profit 188.97 189.13 182.16 170.37
Total Operating Expenses 734.06 698.98 656.71 623.76
Selling/General/Admin. Expenses, Total 139.83 124.89 103.86 93.02
Research & Development - - - -
Depreciation / Amortization 25.25 26.42 28.36 29.26
Interest Expense (Income) - Net Operating - - - -
Unusual Expense (Income) 1.33 2.57 0.7 0.13
Other Operating Expenses, Total 0.8 -0.03 -0.12 -0.2
Operating Income 21.76 41.23 52.49 50.02
Interest Income (Expense), Net Non-Operating 174.63 -10.03 -4.66 -8.58
Gain (Loss) on Sale of Assets - - - -
Other, Net - - - -
Net Income Before Taxes 196.39 31.2 47.83 41.44
Provision for Income Taxes 74.29 6.45 13.87 12.02
Net Income After Taxes 122.1 24.75 33.96 29.42
Minority Interest -1.9 -3.15 0.6 -1.33
Equity In Affiliates 20.07 - - -
U.S GAAP Adjustment - - - -
Net Income Before Extraordinary Items 140.27 21.59 34.56 28.09
Total Extraordinary Items - - - -
Net Income 140.27 21.59 34.56 28.09
Total Adjustments to Net Income - - - -
Income Available to Common Excluding Extraordinary Items 140.27 21.59 34.56 28.09
Dilution Adjustment - - - -
Diluted Net Income 140.27 21.59 34.56 28.09
Diluted Weighted Average Shares 1.43 1.44 1.44 1.51
Diluted EPS Excluding Extraordinary Items 97.9 14.98 23.99 18.55
DPS - Common Stock Primary Issue - - - -
Diluted Normalized EPS 98.48 16.4 24.34 18.61

4. Valuation

Biglari Holdings (BH) sells for 4.4x its earnings, sells for 1.30x its book value, and sells for 3.4x its pretax earnings. If Biglari sold closer to the industry average like a 10x to 12x its earnings then the stock would sell for $970 to $1174.80 per share. At 10x to 12x earnings the investor could potentially make 2x to 3x on there investment. Currently debt is only 2.5 times its pretax earnings which is far below Warren Buffett (Trades, Portfolio)'s cut off that debt not exceeding 5x pretax earnings. One of the best ways to value an operating company is through its pretax earnings and applying a 9x to 10x multiple. Current Biglari sells for only 3.4x times its pretax earnings if it sold for 9x to 10x its pretax earnings then it would sell for $1260.00 to 1400 per share. It is very clear that at $431 per share that Biglari is undervalued and if you buy today you can potentially make 2x to 3x your money. Fair value range is between $736.50 to $1260 per share thats 6x to 9x its pretax earnings, which means you can keep buy up to $970 and still potentially make up 2x to 3x on your money. Intrinsic value of Biglari Holdings is $1400 per share.

5. Risk

Potential risk the investors is that there will be another financial crisis that will send the stock price crashing along with the market as a whole. Or that Mr. Bigalari who the shareholders don't trust because he continues to try consolidate his control through reverse stocks or try to create a similar equity structure as Berkshire Hathaway.

5.1 Outlook

Over the long-term the company will continued to grow its intrinsic value per share. Base on the compensation setup for Mr. Biglari the high the return on book value the more he will make up to $10 million. Book value growth has average between 25% to 39% since Mr. Biglari took over. This means the intrinsic value of the company is grown at 25% annually and selling at 4.4x its earnings is a steal. It is clear that this company will and is worth more then $1400 per share.

About the author:


Rating: 3.0/5 (4 votes)

Voters:

Comments

quixote1
Quixote1 premium member - 2 months ago

It´s a steal for Mr. Biglari...after his lofty 12 m. compensation .....not much is left to shareholders.

Last 10 years had seen low single digits growth acros de board.

By the same token W. Buffett ought to have a compensation of 4,5 Billions more or less (and donig miles better allocating capital).

maestroken
Maestroken - 2 months ago

This story needs to be proofread. There are multiple grammatical errors.

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