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Biglari Holdings (BH), a diversified holding company that has wholly owned subsidiaries that include Steak 'n Shake Operations and Western Sizzlin' Corporation, reported 2013 net earnings of $140.27M vs. $21.59M for 2012 in its annual letter to shareholders. The key driver to the substantial earnings growth came from gains on contributions to investment partnerships that totaled $182.75M. Net sales increased 2.1% from $721.75M to $736.97M primarily because of the performance of restaurant operations. Steak 'n Shake same-store sales increased 2.2% from fiscal 2012.

Cost of sales rose to $219.20M, or 29.6% of net sales, compared with $207.23M, or 28.7% of net sales, in 2012. This was partly due to an increase in commodity prices. Restaurant operating costs as percentage of sales rose to 47.3% from 46.8% in 2013. This was largely due to increased staffing and insurance costs. Marketing expense as percentage of net sales rose from 5.7% to 5.9% in 2013 due to an increase in radio advertising. General and administrative expenses increased from $64.29M, or 8.7% of total net revenues, in the 2012 to $76.80M, or 10.2% of total net revenues, in 2013. Higher expenses were due to increased efforts to franchise the Steak 'n Shake concept. Operating cash flow fell to $12M from $19M in 2012.

Biglari opened an international office in Europe in Q3 that sets up for international expansion of the Steak 'n Shake and Western Sizzlin' brands, as well as potential European investments of other international brands.

Total Restaurants
CompanyCompany-operatedFranchisedTotal
Steak 'n Shake418106524
Western Sizzlin'38184

Total

421187608

Franchise royalties and fees increased 21.9% in 2013, primarily attributable to newer Steak 'n Shake stores opened in 2012 and 2013.

Steak 'n Shake Customer Traffic
YearQ1Q2Q3Q4Fiscal Year
2009(0.9%)7.8%13.4%20.0%10.1%
201023.0%7.4%9.6%8.6%10.6%
20113.5%5.2%4.8%5.4%4.8%
20125.7%5.2%2.2%1.7%3.7%
20131.6%(0.2%)4.0%3.4%2.1%
Cumulative35.5%27.9%38.4%44.4%35.1%

Traffic has risen 35.1% on a cumulative basis since the end of fiscal 2008.

Steak 'n Shake Franchises
YearTotalRevenue Per UnitRevenue Growth Rate
201071$4.21MN/A
201176$5.35M27.2%
201283$6.50M21.5%
2013104$8.71M34.0%
Overall Gain (2010-2013)33$4.50M107.1%

Total franchised units has grown 46.48%, or 33 units, since the end of fiscal 2010. The revenue per franchised unit has more than doubled from the end of fiscal 2010 to $8.71M.

Competitors

Denny's Corporation (DENN), DineEquity (DIN), and Ruby Tuesday (RT) are among the competitors of Biglari Holdings in the casual dining space with similar market capitalizations.

CompanyBHDENNDINRT
P/S1.091.362.500.35
Forward P/E33.0518.6117.98-62.27
Forward PEG0.561.222.12-0.78
EPS growth59.20%15.20%8.50%79.60%
FCF (previous year)+$24.6M+$45.0M+$35.9M-$1.2M
Long-term D/E0.20-39.794.300.55
Enterprise Value$823.53M$813.3M$2.89B$658.5M
Market Capitalization$818.0M$630.9M$1.57B$420.5M

The price-to-sales ratio shows Biglari shares trade at a cheaper multiple than Denny's and DineEquity, but are well under that of Ruby Tuesday. This is due to negative earnings this year and are also projected negative for next year, which is deserving of a P/S under 1.0 for Ruby Tuesday shares. Biglari trades at a higher forward P/E than the other competitors, but the 59.20% EPS growth results in a forward PEG ratio under 1.0. Both Denny's and DineEquity have a forward PEG ratio above 1.0. Due to negative projected growth, forward P/E and PEG ratios are irrelevant to Ruby Tuesday.

Positive free cash flow has been a problem for Ruby Tuesday too, unlike it's three larger competitors. Long-term D/E is an issue for Denny's and DineEquity as both companies are highly leveraged. Neither Biglari or Ruby Tuesday have issues with future liabilities at the moment, but continued negative free cash flow for Ruby Tuesday could drive that ratio above 1.0. Large long-term debt obligations translate into an enterprise value above the market cap for Denny's and DineEquity. The recent, sizable cash position brings down the enterprise value to around where the market cap currently stands in Biglari.

Biglari Holdings owns 4,737,794 shares of Cracker Barrel Old Country Store (CBRL), or a 19.9% stake, valued at $500 million as of Dec. 12. This investment was purchased for $241M. The Cracker Barrel investment is equal to 61.12% of the current market cap of Biglari Holdings. Sardar Biglari, chairman and CEO of Biglari Holdings, has advocated for a board seat and a special $20 dividend to shareholders. He believes Cracker Barrel management isn't allocating capital appropriately and is instead allocating to new stores that result in low ROI. Neither have been granted yet, but the 36-year-old CEO is unlikely to shy away anytime in the near future and seems committed to shaking up the culture at Cracker Barrel. Shares of CBRL are up 40% year to date vs. a 28.70% gain in BH shares.

Technical Analysis

Click to enlarge images.

Monthly Chart: Just starting to break out above long-term resistance at $450.

Weekly Chart: Could trade down to $440-$450, but continues to trend higher.

Daily Chart: Recent pullback gives investors an opportunity to start a position.

Conclusion

U.S. revenue and intrinsic value growth of the Steak 'n Shake brand combined with the opportunity for international expansion in the coming years alone make Biglari an attractive investment. In the 2013 annual letter to shareholders, Sardar Biglari stated that the first company-operated Steak 'n Shake store in Ibiza, Spain, will open in the spring of 2014. If this initial store and others set to open in 2014 gain similar traction compared to U.S. stores, expect BH to move aggressively into other European countries such as France and the United Kingdom.

The potential for a special dividend in CBRL shares could result in a payout in the tens of millions of dollars to BH if Biglari gets his wish, which would allow for more value investments from the proven Biglari management. CBRL regular dividend payments have increased every year since 2010, rising 50% to $0.75 per share in 2013. A fairly large expansion isn't out of the question for next year either. CBRL EPS is expected to grow 11% and revenue is expected grow 3.8% next year. Look for BH shareholders to be rewarded in 2014 as Biglari Holdings offers both the growth of Steak 'n Shake and Cracker Barrel, plus the likelihood of new investments into Europe on a controlling and non-controlling basis in different entities.

Applying a conservative forward PEG ratio of 0.70, BH could reach $600, or a 26% increase, in 2014. Current downside risk of less than 8% offers a reward/risk ratio of 5.0 to investors. Now is the time to buy a partial position in the stock and build that position on pullbacks.

Source: Steak 'n Shake And Cracker Barrel Offer Significant Upside Potential For Biglari Holdings