Has Biglari Holdings Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Biglari Holdings (NYSE: BH  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Biglari Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 2.3% Fail
  1-Year Revenue Growth > 12% 4.1% Fail
Margins Gross Margin > 35% 24.1% Fail
  Net Margin > 15% 3.9% Fail
Balance Sheet Debt to Equity < 50% 61.2% Fail
  Current Ratio > 1.3 2.37 Pass
Opportunities Return on Equity > 15% 8.6% Fail
Valuation Normalized P/E < 20 21.67 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   1 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Biglari Holdings last year, the company has lost a point. Yet despite ongoing ugliness in its financials, the stock is actually up 20% over the past year.

Biglari is a holding company run by Sardar Biglari, who has become well known for his forays into the restaurant business. Since becoming chairman of the board at Western Sizzlin in 2006, he succeeded in acquiring Steak n Shake as well, but he wasn't so successful with his activist efforts at Red Robin Gourmet Burgers (Nasdaq: RRGB  ) or Sonic (Nasdaq: SONC  ) .

Lately, Biglari has been struggling against Cracker Barrel (Nasdaq: CBRL  ) in an effort to execute a hostile takeover. In the most recent exchange, Cracker Barrel said it had given Biglari a chance to name two independent directors to its board, but Biglari called the announcement a "faux offer." The move came after Cracker Barrel rejected the appointment of Sardar Biglari and Biglari Vice Chair Philip Cooley.

Meanwhile, though, Biglari's own continuing operations have looked weak lately. The company has badly missed earnings estimates in both of the two most recent quarters, with the second quarter showing a roughly 37% drop in revenue and a 44% fall in net income versus the year-ago period. But because of Biglari's accounting, it's tough to draw conclusions from these comparisons. Steak n Shake had an increase in same-store sales of 2.9%, though, far short of the 8% gain that Chipotle Mexican Grill (NYSE: CMG  ) posted for its second quarter despite facing many of the same challenges, like higher food costs.

For Biglari to improve, it needs to get off the activist high-horse and actually make its businesses perform better. If it does so, then Biglari should be able to score more than one point in the near future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Biglari Holdings may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- read it today.

Add Biglari Holdings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Red Robin, Biglari Holdings, and Chipotle. Motley Fool newsletter services have recommended buying shares of Chipotle and writing covered calls on Red Robin. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2012, at 4:44 PM, rob24601 wrote:

    Where are your numbers coming from? I see increases in revenue per the 10-Qs on a quarter over quarter and annual basis? Not a 37% decline in revenue. How would revenue decline 37% when same store sales/traffic is increasing? There's a revenue increase quarter over quarter on every 10-Q in 2012?

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