When Will Biglari Price Catch Up to Value?

The other day, I was covering Cracker Barrel's (NASDAQ: CBRL  )  third-quarter earnings and re-examining the position of one of its largest shareholders: Sardar Biglari of Biglari Holdings (NYSE: BH  ) . Biglari's Cracker Barrel position has a current market value of roughly $465 million. The total market cap of Biglari Holdings is $587 million. Now, this isn't a new thesis, as others have asked the question, but are we to believe that Biglari's other assets, the entire Steak 'n Shake chain as well as Western Sizzlin', are worth a combined $220 million? Either there is something missing here, or Biglari Holdings is an undervalued stock.

Can it be?
So, upon seeing this glaring disconnect between Biglari's market cap and the company's assets, my first inclination was that I missed something.

To repeat, Biglari's Cracker Barrel stake is worth $465 million -- today. Taking out cash and adding in long-term debt, you have an enterprise value of roughly $700 million, implying a market value of $122 million for the remainder of Biglari Holdings, and an enterprise value around $220 million.

In the recently ended 16-week period, Steak 'n Shake and Western Sizzlin' hauled in $218.74 million. The company generated nearly $19 million in cash flow in the same period. If we annualize Steak 'n Shake's free cash flow to, say, $50 million (likely more), Biglari's restaurant operations are trading at 4.4 times one-year forward cash flow.

As of the end of April, the company had about $20 million in cash and long-term debt of $131 million.

A reason or two
I can understand some mispricing due to the fact that Biglari Holdings is not a household name, and even though its founder modeled the business after Berkshire Hathaway (and has thus far performed in a similar manner), it doesn't hold near the weight that Berkshire does on the investment scene. The stock is also more than $400 per share, perhaps discouraging would-be investors. But I don't see any fund managers buying up the stock meaningfully, either. Mario Gabelli holds a decent position, but his investment business is gigantic and not necessarily based on stock picking.

Biglari angered investors after taking hold of Steak 'n Shake -- he renamed the firm Biglari Holdings, consolidated other operations, and gave himself a hedge-fund-esque salary. I, for one, don't mind paying a hedge-fund-manager salary if the manager compounds my money at an attractive rate. I especially don't mind paying it when it appears that I am getting all of the Steak 'n Shake I want for a bargain.

This is a weak thesis, I agree. The facts that the stock is literally pricey (not valuation wise), that people may not like Sardar Biglari, and that not enough people know what Biglari Holdings is just aren't enough to warrant the big difference between the intrinsic value of the company and its market equivalent.

Perhaps when Biglari monetizes the Cracker Barrel position, the market will have no choice but to correct its large discount to Steak 'n Shake's operations. Until then, Biglari shares are on sale.

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  • Report this Comment On June 10, 2013, at 5:13 PM, TMFBlacknGold wrote:

    I love these articles on undervalued firms. I do not know anything about this sector, but Yahoo! and Google Finance report that Biglari has a market cap of just $505 million as of the close of June 10th's trading session. Are there more shares out now that are not yet accounted for on those sites or is the market cap displayed in our (TMF's) system incorrect?

    --Maxxwell

  • Report this Comment On June 10, 2013, at 6:05 PM, XMFMadMardigan wrote:

    Maxxwell, I was originally fooled by Yahoo! Finance's $505 market cap. When first writing the article, I almost fell out of my chair doing the math because Steak n Shake appeared to be selling for free at that level. But, if you take a look at the most recent 10Q, you see the market cap is actually ~$587m.

    Thanks for your kind words!

  • Report this Comment On June 11, 2013, at 7:13 AM, mikeinmadrid wrote:

    A problem with this analysis is that you are assuming CRBL's market value to represent fair value. Historically it has very weak sales growth, around 2% on a five year basis. It is trading on a p/e of 20x and a forward p/e of 17x. I think a 10-12x p/e would be more appropriate, putting CBRLs fair value at $49-$59, which is similar to prices at which Biglari last bought CBRL stock.

    Perhaps BH investors are smarter and don't value CBRL at $98. I am long BH, but I'm considering shorting CBRL as a hedge.

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