A Close Look at Biglari's Latest Earnings: Part 2

This is Part 2 of our Biglari Holdings (BH +0.01%) second-quarter analysis. In the previous article, I outlined the company's financial results and why they may not be telling the whole story. You can read it here. Now, let's look at the company's individual assets, as well as the portfolio as a whole, to determine whether and why Biglari is set to outperform over the long term.

Positions
Biglari Holdings owns Steak n Shake and Western Sizzlin' outright, and both have already proved to be profitable investments over the long term for the company. The company's most recent venture has been in roadside staple Cracker Barrel (CBRL 0.04%), of which Biglari owns 20%.

Biglari has been engaged in a drawn-out battle with Cracker Barrel for the last couple of years, with some progress in terms of board influence, but plenty on the investment front. Since the company began accumulating Cracker Barrel stock in 2011, the stock has risen around 60%, netting Biglari millions in on-paper gains. But it has been anything but a symbiotic relationship.

The activist investor's arguments have centered on management's capital allocation strategies, and, specifically, misrepresenting ROIC on new stores. Management has disagreed along the way, and Biglari has been unable to secure a vote for board seats, even after three tries. The restaurant's management used a poison-pill tactic to keep Biglari from gaining more than his 20% share.

Biglari has recently opened a European office for international expansion of its wholly owned chains -- a long, long runway for growth that many other quick-service-restaurants have already tapped.

Management uses profits from its operating businesses to make investments in hopes of achieving high, risk-adjusted returns, just like Buffett's Berkshire Hathaway (NYSE: BRK-B). These types of companies don't always best reflect their performance in net sales gains, but instead book value. From 2010 to 2012, Biglari Holdings book value grew nearly 50%. With today's book value at $451.9 million, that represents another 43% gain since the end of fiscal 2012 in September. Since that same time, the stock is up a little more than 15%.

The real bottom line
As a fund-like holdings company, Biglari continues to generate long-term intrinsic value appreciation for shareholders. Though some valuation metrics may appear rich, such as a forward P/E of 20.35, investors are better off keeping an eye on price-to-book, which currently sits at 1.25. Berkshire Hathaway trades at a P/B of 1.41, which, of course, includes the Buffett premium. Quick-service restaurants may not be the eternal cash machines that well-run insurance companies are, but it has still formed the foundation for a growing holdings company run by a value-oriented, shareholder-conscious manager.

Investors who wished they had been in on the Buffett secret from the beginning should take a close look at this much smaller company -- one that requires much less mountain-moving to budge the needle -- and remains very attractively priced for a long-term hold.