Owner Operated Business - Biglari Holdings (NYSE: BH) - Excellent Entry Point??

Business:

Biglari Holdings Inc. is a holding company engaged in a range of diverse business activities. The Company, along with its subsidiaries, is engaged in investment management and the franchising/operating of restaurants. As a capital allocating vehicle, it is also in the business of owning other businesses in whole and in part.  The portfolio companies are:

Steak n Shake restaurants (414 owned, 87 franchised) (100%)

Western sizzlin restaurants (5 owned, 92 franchised) (100%)

Biglari capital/The Lions fund (100%)

Cracker Barrel restaurants (621 owned, 0 franchised) (~20%) – Ongoing proxy war for last 2 years to be on board

Unico American Corporation (~10%)

CCA Industries (~10%) – Board member

ITEX Corporation (~8.4%)

Situation & Valuation:

Currently the company is selling in the market for ~$510M (Enterprise value of 625M), which has a look through operating earnings/cash flow of more than $85M & likely growing at a reasonable clip for years. The company is in excellent financial condition by both ample cash on the balance sheet & credit facility. There is a lot of flexibility with the capital structure; they can issue cheap interest bonds (as the case right now) or if the stock gets priced high, they can issue stocks to acquire other companies wholly or in part. There is a huge opportunity of franchising SNS both domestically & abroad. Recently the company is working with partners in middle eastern countries on its franchising efforts as it has a potential of achieving high returns on invested capital.

Market Cap – 510M

Debt – 115M

Look through earnings from portfolio companies – 85M

EV/FCF – less than 8 times

Management:

Sardar Biglari is the Chairman & CEO of Biglari Holdings, solely responsible for capital allocation decisions. He was running a hedge fund called Lion fund with over 20% annual return for 8 years just before he took a control position in Steak ‘n Shake. Phil Cooley (Vice Chairman) is a sounding board to the CEO and also his teacher in his business school days. CEO is incentivized properly to increase the per share value/book value of the company.

Catalyst:

There is no catalyst/situation/timeline to unlock the value of this business. Current value is its own catalyst, and an efficient way of deploying capital in the right business will increase the value of the company immensely. If value gets higher due to the combination of retaining earnings, investment in right areas/subsidiaries will ultimately unlock the value in time.

Reasons Why Opportunity Exists:

Complicated holding company structure, no analyst coverage, no guidance from the management on the quarterly/annual results from the company, unconventional CEO pay structure, high share price & low liquidity.

Risks:

Aggressive/confident CEO can run into a situation where he bets the company on a single acquisition by taking on excess debt, although it is highly unlikely.

Public market participants late to realize the opportunity.

Final Comment:      

The company is a wonderful platform for owning companies in part or full to increase the net worth of any investor. CEO Sardar Biglari is being young (36 yrs) & unconventional is great asset to the company.  I own shares of Biglari Holdings.