Monday, June 13, 2011

Biglari Holdings Takes A Crack At Cracker Barrel.

Here is the 13D that Biglari Holdings just filed on Cracker Barrel.

My first observation, is that BH actually sold shares of CBRL around $53/share, netting a nice, quick profit. This is one of the reasons why I am presently not long BH; it is really hard to project what they will earn (and when they will earn it), as earning are increasingly coming from investments, rather than operations of Steak 'n Shake- markets can turn, and keep this sort of gain from happening like clockwork.

When combining this sort of trading with his actions at Fremont and others, it seems that Biglari may actually be making investments to spice up earnings in the short term... With that said, in a truly unique manner, he seems to only be doing so in a manner that is in line with a long term value mentality; just because he has traded in and out of stocks like Red Robin, Advanced Auto Parts, and Sonic, it doesn't mean that he isn't willing to hold on to them for the long if necessary. The guy seems to be building an empire, and I am sure is able to bring about a ton of efficiencies in a business, almost irrespective of the industry.

So far, Biglari has a knack for value... It is obvious that CBRL is a cash flow machine. In 2008, they opened 17 new stores, in 2009, they opened 11, in 2010, they opened 6 new stores... this, after returning over $343 million (net) to shareholders and lenders, in the form of share repurchases, dividends, cash flow, and debt repayments- on a present market cap of $1 billion... pretty damned impressive, considering what the company spends on cap-ex and the fact that is has stores that actually look nice!

Speaking of dividends, the present 2% dividend yield of the CBRL investment alone, will increase the pre-tax income of BH by almost $2 million (compare that to earnings of ~$32 million).

Most interesting, is that as of the last quarterly filing for BH, investments, cash, and investments held by consolidated partnerships totaled just over $108 million... Something to remember here, is that BH filed a 13G when they sold their position in Red Robin and Sonic.

SOOO... Based on the most recent filings for each of the major investments that BH has made 13D filings on, here are the approximate present values of their investments as of the date of their last 10Q (which reported cash levels on April 13th):

Fremont: ~$4.7 million
CCA: ~$4.6 million
Penn Millers Holding Company: ~$3.02 million (per filing)
Cracker Barrel: ~$95.16 million (per filing)

Given that with Biglari Holdings, according to their most recent 10Q, " investments are carried at fair value with any unrealized gains/losses included as a component of Accumulated other comprehensive income in Shareholders’ equity..." the present value of the investment of Fremont, Penn, and CCA at the most recent 10Q plus the total purchase price of Cracker Barrel was ~$107.48 million... which is about $.6 million dollars less than all the cash, investments, and investments held by partnerships that BH held just a few months ago (I recognize that I am leaving out the trading profits from CBRL).

What does this tell us about the situation at hand? Well, provided that BH didn't close out their position in Freemont or Penn Millers (unlikely, given the lack of volume in FMMH) or CCA (again, unlikely, since Sardar and Phil are now going to be on the board) that went unreported through some sort of lag in the filing dates, it lets us know that BH either doesn't have many other significantly sized investments, they just came into a nice bit of cash, or, a combination of the 2. As of the 10Q, the company had 205,743 shares of BH stock, recorded as treasury stock, despite being owned by the consolidated partnerships... the market value of which was over $82 million on that day. It is possible that the Lion Fund sold some of these shares to buy a stake in CBRL... however, without a filing being made, and Biglari's need for control of the company, it is doubtful. I will admit that this sort of accounting is one thing that makes me uncomfortable with the company as it is a bit hard to understand. I can't guarantee that I am totally right in regards to anything regarding the Lion Fund's ownership of BH.

Biglari has previously stated that they are raising capital to manage. The operations of Steak 'n Shake seem to be going well, and the company does have assets for sale. Regardless of which contributed to cash on hand, it does say something about Sardar Biglari's view of the business at both BH and Cracker Barrel. It has been obvious for a long time that operations have been turned around and this investment should just solidify that fact. If you are a shareholder of BH, you are probably sleeping a lot better at the news of this recent allocation of capital.

As is always the case with Sardar and company, this will be a very interesting case to watch. This is a huge investment for him to make. I can't imagine that he would try to buy the company, as that would require a huge issuance of shares, which would dilute his control of BH (unless he tried to issue class b type shares), or, would require a ton of debt, which doesn't seem to go along with his historically portrayed/espoused investment philosophy. For the time being, it seems that this is just a huge, super consolidated investment. Again, Sardar Biglari doesn't seem to know how to do anything in a conventional manner, so, I am sure that the story is far from over.

Consider this, though. If CBRL goes to 15x earnings in the next year, BH can liquidate it's holdings, it will well more than double the company's earnings for the year.

Disclosure: I have no position in any of the securities mentioned. This is not advice of any kind. Always do a ton of your own research in regards to anything that I say, write, do, or so much as talk about.

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