In early April, I had the pleasure of attending my 2nd straight Biglari Holdings (NYSE:BH) annual meeting. Once again, I took notes as best I could, and look forward to sharing them with readers. In case you missed my notes from last year's meeting, check them out here.
Once again, I plan to break up my notes into multiple articles, with each one covering a portion of the company. The notes will also include my opinion on certain answers. For those of you looking for a strict chronological order, there is a great set of notes published on Scribd from the meeting, which I recommend you to review.
Finally, I strongly recommend reading Dana Kuhn's excellent 8-part series on the history of Biglari Holdings, especially if you are new to the stock. It's three years old at this point, but presents a detailed history of Biglari.
I plan to cover the following topics over a series of articles:
General meeting impressions and Biglari thought process
Steak 'n Shake and Western Sizzlin Q&A
Maxim and First Guard Q&A
Cracker Barrel and other investment Q&A
Sardar Biglari's compensation/Biglari discount
Long-term outlook for stock
General Meeting Impressions
Given the excitement and uncertainty surrounding the proxy battle last year, I was curious to see how CEO Sardar Biglari would respond to questions at a more "normal" meeting. Last year, he was understandably (in my eye's anyway) frustrated with the time and money wasted on dealing with the proxy battle. This year, he was visibly more relaxed and willing to answer probing questions in more detail.
Attendance at the meeting was visibly lower; only 100-125 vs. 150-200 last year. Amazingly, I still haven't seen a single press article regarding the meeting this year. Apparently, even Forbes' Antoine Gara couldn't find something to turn into a negative headline. To me, this is a great indication that investor sentiment may be coming full circle. Biglari was loved from 2009-2011, hated over the past five years, and now no one seems to be paying any attention anymore.
Personally, I also really enjoyed meeting more fellow investors this year. I managed to meet up with fellow contributor Yale Bock and another investor before the meeting, and then spent two hours after the meeting discussing it with more new acquaintances. For those of you on the fence regarding whether or not to attend in the future, I find that the discussions with fellow investors are an important part of the experience, and strongly recommend building that into your schedule.
The Biglari Holdings Advantage
Sardar Biglari started off the Q&A portion of the meeting with some prepared remarks. He first spent time describing the incredible turnaround at Steak 'n Shake [SNS], something he did last year and is likely to be doing in 30 years. I described it in some detail in last year's coverage, so I'll simply note that same-store sales at SNS have been up for 28 straight quarters, the longest streak in the food industry at this time (they were tied with Chipotle (NYSE:CMG) until the latter's E. Coli outbreak).
Biglari then laid out his rationale for why investors would want to invest in Biglari Holdings:
- Allocate capital to best potential returns
- Biglari Holdings is an efficient holding company structure
- Long-term orientation - expressed in decades
- Benchmark is S&P 500 index - should outperform over 10-year + periods
Over the past 8 years, we've seen all of these core principles in action. Biglari has taken excess cash from SNS and reinvested it into undervalued Cracker Barrel (NASDAQ:CBRL) stock, which has seen large unrealized gains and now yields 9% of Biglari's purchase price. The company's holding company structure allows the losses of turnaround situations like Maxim to offset the tax burden of successful enterprises, and Biglari invested into a franchising program that has lowered short-term profits at SNS with the goal of increasing long-term value. Finally, Biglari has so far handily outperformed the S&P 500 since taking over as SNS CEO in 2008.
|Starting value (Aug 2008)||$126.50||1,250|
|Current value (April 2016)||$377.00||2,090|
Of course, more recent investors would note that all of the returns occurred during Biglari's first three years in charge. The stock has actually gone basically nowhere over the past five years.
Biglari Holdings Stock Value Related Questions
Given the fact that the stock hasn't gone anywhere for five years, it was not surprising that one of first few questions was on that topic:
Question: My 14-year-old is interested in investing and wanted to understand why the stock price is where it is. My conclusion is that it is related to the way BH morphed with the Lion Fund. Could you explain how you see value and how we got here?
Biglari started by reiterating that he is focused on increasing value, not price. Over the long term, the current price to value has less effect on returns than compounding.
He then illustrated his point with an example. $1Bil, compounded at 15% over 30 years, turns into $66Bil. If the current price discount happens to be 50%, then total compounding, should the value gap close, only increased to 17.3% annually. Thus, the focus should be on increasing value creation, rather than stock price.
That said, Biglari did note that if the stock price continues to remain depressed compared to fair value, he would continue to take action. He recommended that investors interested in better understanding what actions he might take read pages 615-616 in Graham & Dodd's Security Analysis.
Question: Can you continue by giving us a history lesson?
In 2008, the Lion Fund took a controlling position in Steak 'n Shake and got seats on the board with the goal of implementing positive changes. As the situation worsened, Biglari decided they needed to take a more active position at Steak 'n Shake. A search was undertaken for a new CEO, but no one was interested in taking the position, even with a very generous incentive package. Thus, Biglari decided to take over as CEO to save the investment. Initial $900,000 annual compensation was actually much lower than what the board offered, as Biglari believed that the company's cash position was too poor for their initial offer to be appropriate.
Once Steak 'n Shake got turned around, a long discussion with the board ensued on what to do next. Biglari had to make the decision on whether to continue raising money at The Lion Fund, or continue working at Steak 'n Shake. In the end, they decided to merge Steak 'n Shake and Western Sizzlin into a new holding company, Biglari Holdings. They also wanted a clear demarcation between the operating company performance and investment performance.
Biglari noted that if he could've done this again from scratch, he would've created a new holding company with a dual-class structure. Doing this backward, as was done with Biglari Holdings, invites unease and criticism.
Phil Cooley added that investing in Biglari Holdings is like enjoying a nice meal; you can study every move made by the chef, or simply enjoy the meal.
Question: Why issue new shares at $250 and $265 over the past couple years, then buy them back at $420 last year? Why buy them in The Lion Fund versus directly by Biglari Holdings? Is it in TLF so you can have control and earn incentive compensation on the gains?
Biglari smiled and noted that the shareholder had answered the last part of the question himself. He continued by noting that control of the stock is to the benefit of long-term shareholders. Stability of ownership is key when making acquisitions such as First Guard. The Ed Campbell's of the world want to know that the situation won't change in a year when they decide to sell.
The proxy battle last year was not beneficial to long-term shareholders. Now they can continue to compound value without concern. The tender offer made at $420 last June was pretty spot on, given that almost all shared tendered were purchased; they got lucky in choosing the price.
Cooley added that without control, they cannot achieve their long-term vision.
Question: Would you ever consider taking the company private?
Biglari notes that there are significant advantages to being a publicly traded company. Can deal with respected auditors, and investors can learn more about public companies. It also reduces the cost of debt. Having a controlled company that is also publicly traded is the best of both worlds.
Question: Do you expect to switch to the Buffett compensation model later on, or will you always keep your incentive compensation as it currently is?
Biglari is slightly annoyed and notes that investors should not compare BH to Berkshire Hathaway. If they wanted to be like Buffett, they would buy a high-float insurer, not capital intensive restaurant assets. Investors find it easy to compare BH to Berkshire Hathaway because they both happen to have the same initials, but Biglari notes that when creating a holding company that included his name, there weren't a lot of alternative options (Biglari Consolidated, Biglari Enterprises).
While he does take some ideas from Warren Buffett, Biglari takes the best ideas from a number of people. In fact, Biglari believes that he takes more ideas from Sam Walton than anyone else. Walton was a master at driving down costs and passing the benefits to his customers; Biglari strives to do the same at Steak 'n Shake.
Sam Walton was 44 when he started his first Wal-Mart in 1962. That first year he had revenues of $250,000/$30,000 profit. 10 years later Wal-Mart generated $44 million in revenues. Sears, the whale in the retailing world at the time, had $9.2 billion in revenues. There was a meeting of regional retailer CEOs comparing best practices where each one predicted where their revenues would be in 10 years. Most guessed that they would increase their revenues by 50%-100%; Walton predicted he would increase to $2 billion. Biglari recommended reading Wal-Mart's annual reports (they go back all the way to 1972).
Another CEO that Biglari strongly praised later on in the meeting, Harry Singleton, who generated huge gains from three decades at Teledyne. Singleton started the company in 1960, within 10 years had increase in sales to $1.6 billion through the acquisition of over 130 different companies. Singleton said the value of building a brand, as he included Teledyne in all his company names.
Question: What do you say to critics that argue that you lack humility and your ego gets in the way of decision-making?
Biglari: Humility has never been my strong suit.
Biglari then notes that he does recognize failures quickly, and is willing to move on. Biglari has always worked hard to raise money, starting when he was 18 years old with his first business. He worked hard to raise additional capital for his investment fund when he was 22 and is going to keep working hard. He's used to living with discomfort and nebulous environment. The key to him, is to always think about the downside. Biglari Holdings could be bigger, could have grown faster, but he wants to avoid catastrophes. This is an essential part of having a concentrated portfolio. The advantage of concentrated portfolios outweigh the benefits of diversification.
I found Biglari's responses to the questions about BH's current share price to be enlightening. As someone in my early 30s, it was especially good reminder of the power of compounding.
In the long run, the compounding rate matters much more than the stock's relative starting or ending price/value.
As shareholders, we must all remember this whenever we wonder if the "Biglari Discount" will ever disappear. Given that I have plenty of years left where I plan to be a net buyer of the shares, I certainly hope the shares remain undervalued for at least a decade. However, I don't think the current value will last for nearly this long.
Next time, we'll review all the Steak 'n Shake and Western Sizzlin related Q&As.
Disclosure: I am/we are long BH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.