Biglari Holdings 2010 Letter

[Parsad]

No, it matters.

 

If you were disappointed with Sardar, it was because your expectations were very high, comparing him to Buffett in all respects.

 

When Warren took over BRK, he was already a very rich young man just happy to be in the investing game - salary and incentives did not matter. Since he was firmly in control of BRK and was free to do whatever he wanted without looking over his shoulders.

 

That is not the case with Sardar. His stake in BH is very small, not rich, eager to be super-rich ASAP, talented and aggressive. An X-hedge fund mangaer now a CEO of a corporation can not get rich earning $100k per year. If you had understood those limitations, you would not have been disappointed - you would have remained a happy BH shareholder and an admirer of Sardar.

 

So Kumar, exactly what does the name change have to do with him making more money? 

 

I've followed Sardar probably longer than anyone on this board.  I invested in Western Sizzlin, Steak'n Shake and subsequently Biglari Holdings.  The compensation package as introduced was fundamentally flawed, as was the name change...in particular the way they were introduced and handled with shareholders.  I didn't have a problem with the form of compensation, just the hurdles and incentive fee, since the capital is now captive...his risk is less than when he managed the Lion Fund. 

 

The truth is that shareholders who have now stayed with Sardar are the ones that are misleading themselves.  They've bought into his abilities and now are ignoring deficiencies in character that have become glaringly apparent.  Accompanied by a passive board, that becomes a dangerous combination where an individual is more likely to make miscalculated bets.  We missed an early example of this when he had put virtually all of Western Sizzlin's capital into Steak'n Shake.  Now it is becoming clearer that the accumulation of capital is paramount to anything else.  He's buying BH stock through the Lion Fund with BH's own capital for crying out loud!  Cheers!

[claphands22]

He's buying BH stock through the Lion Fund with BH's own capital for crying out loud!  Cheers!

 

 

Why is it so bad that he is buying BH stock through the Lion Fund with BH's capital?

 

If he believe BH is undervalued and believes it is a good way to invest the capital, why is it so bad?

 

[Guest Bronco]

I may disagree with everyone, but I am less interested in the race and more interested in entry points for FFH and BH.

 

BH I will revisit if it goes under $400.  FFH seems like dead money right now (but then again, that is my specialty).

 

Deckers/Apple Portfolio anyone?

 

 

 

 

[Guest Bronco]

Shalab - I haven't even read the 10k, but IMO the best way is to value each business.  Don't know if this is easy, and the hedge fund may be lumpy.

 

You have holding company cash and investments.

 

Restaurant ops.

 

Money management business. 

 

No idea what the FMV is, discount to FMV with the pay package, and discount on top of that for margin of safety.  But I know I would be buying like hell at $300.

 

Maybe sooner or later we will have to tack on an insurance company? 

 

 

[zarley]

His stake in BH is very small, not rich, eager to be super-rich ASAP, talented and aggressive. . .

. . . and perfectly happy to get rich at the expense of the other shareholders. This is the fundamental problem I see with Biglari:  his motivations and incentives are potentially at odds with other shareholders.  And, as Parsad notes, the Board does not appear willing or able to stand up to him or check his get rich desires (i.e., do their jobs). 

 

So, if BH got sufficiently cheap, it could be a decent investment.  But, for me, if I know the CEO is out for himself and his incentives are not aligned with my interests, then that puts up a pretty high hurdle to get me to invest.  Why would I want to if the CEO is working against me?

 

[Guest Bronco]

Zarley - all your points are good ones and valid.  But to play the other side...you could say the same thing with Steve Jobs and the option scandal.  That may have kept you out of Apple at $90 or whatever the price was.

 

Trust me, I am not comparing Biglari to Buffett, but extremes are always the best way to analyze scenarios.

 

Would you have invested in Berkshire in the 1960's with the only exception being Buffett would have the same pay package as Biglari?  I don't need to answer that...and BH is no BH. 

 

But my point, and your point too I guess, is that every investment has a price.  I think at $350 this may be interesting but doing the homework now.

 

 

 

 

[Ballinvarosig Investors]

Guys, there's no point comparing BH with a hedge fund just yet, most of its earnings are still going to be generated from the core Steak n' Shake operation for quite some time to come. What you really need to do is evaluate it against other restaraunt stocks, if you do that, you'll see that BH is good value (low price/book, high earnings growth, low price/cash flow, etc.). If you take the blinkers off, you'll see that BH is still good value, although I certainly wouldn't go as far to suggest it was spectacular value, like it was when the share price tanked a few months ago. I know some of you folks were keen on Red Robin, but when you stack the numbers up against each other, you'll see that they're quite similar, with the exception that Red Robin doesn't have the growth (it's in decline if anyting!) that BH has.

[zarley]

Zarley - all your points are good ones and valid.  But to play the other side...you could say the same thing with Steve Jobs and the option scandal.  That may have kept you out of Apple at $90 or whatever the price was.

 

Would you have invested in Berkshire in the 1960's with the only exception being Buffett would have the same pay package as Biglari?  I don't need to answer that...and BH is no BH.   

 

But my point, and your point too I guess, is that every investment has a price.  I think at $350 this may be interesting but doing the homework now.

 

I agree about every investment having a price. 

 

As for the Apple and BRK hypotheticals . . .

I can't imagine ever buying into something like Apple.  The resurgence of the company and the stock was the result of good execution and some great product ideas that really hit the market at the perfect time (imac, then ipod, then iphone).  I would never have had the foresight to recognize that Apple was on the verge of that kind of transformative product development. 

 

Early BRK with a greedy incentive package for Buffett is probably a harder question.  I don't think BRK would be the BRK we know today with a shareholder-unfriendly compensation package for Buffett.   

 

As a small investor, I have to feel like I understand what is motivating management.  I try to buy into businesses where I feel like my interests are aligned with managements.  I'm comfortable with BRK and Fairfax in that regard because I've followed them for a while, and I think I have a decent understanding of management's motivations and decision making framework.  In something like SHLD, I don't necessarily know what Lampert's long-term plans are (going private I'd guess), but since he owns so much of the common, our interests are aligned with respect to the benefits of long-term share price appreciation.  Most (certainly not all) of my positions have significant ownership by individuals or families that actively run the business. 

 

I just don't think Biglari's interests are aligned with the small shareholder.  That doesn't mean BH won't do well going forward, but Biglari will be better rewarded at the expense of the other shareholders.  The price better be compelling if I'm going to play with the deck stacked against me.

[Guest Bronco]

Zarley - it is good that you have your investing disciplines.  Very smart.

 

It really is tough finding Buffett style management teams.  Give me a list of CEO's making $100,000 per year.  Not many.

 

I am partial to Biglari Holdings not from a stock standpoint but from a business model standpoint.  I wrote a little book on the corporate structure of Berkshire and BH is very, very similar in all but compensation.  Flat org structure, few corporate employees, capital allocation model, use of float (TBD)...

 

So I have a keen interest in this, as I believe the Berkshire structure is superior to all others (how can you argue against allocating capital to its best source?)

 

I'll be watching BH and it seems like so will others.  We'll see.

 

Zarley - best of luck with your investments...don't forget that as a small shareholder you have some major advantages.  Look for great businesses at good prices and you will do fine.

[Parsad]

Why is it so bad that he is buying BH stock through the Lion Fund with BH's capital?

 

If he believe BH is undervalued and believes it is a good way to invest the capital, why is it so bad?

 

If they were such a good investment, then why not retire the shares through the treasury, which would definitely benefit BH and all shareholders? 

 

So was he buying it because it was a good investment, or was he buying it to acquire votes on the compensation package?  If those shares are retired from the treasury, then those are votes that cannot be exercised.  What do you think his intention was? 

 

In my personal opinion, and if you view it objectively, the CEO's share vote or shares controlled by the CEO, should be excluded from any vote on his/her compensation.  Not that it would have made an impact, since it was overwhelmingly in favor, but these things all add up to good corporate governance practices, and lately they have been lacking at SNS and BH. 

 

As a word of advice to those buying it on his abilities...never buy a stock based on a manager's abilities.  Buy it because it's cheap, not because of management.  Those people who bought Berkshire at $90K per share ten years ago could have done a hell of a lot better!  And that was with Buffett at the helm.  Cheers!

[ragnarisapirate]

Why is it so bad that he is buying BH stock through the Lion Fund with BH's capital?

 

If he believe BH is undervalued and believes it is a good way to invest the capital, why is it so bad?

 

If they were such a good investment, then why not retire the shares through the treasury, which would definitely benefit BH and all shareholders?  

 

So was he buying it because it was a good investment, or was he buying it to acquire votes on the compensation package?  If those shares are retired from the treasury, then those are votes that cannot be exercised.  What do you think his intention was?  

 

In my personal opinion, and if you view it objectively, the CEO's share vote or shares controlled by the CEO, should be excluded from any vote on his/her compensation.  Not that it would have made an impact, since it was overwhelmingly in favor, but these things all add up to good corporate governance practices, and lately they have been lacking at SNS and BH.  

 

As a word of advice to those buying it on his abilities...never buy a stock based on a manager's abilities.  Buy it because it's cheap, not because of management.  Those people who bought Berkshire at $90K per share ten years ago could have done a hell of a lot better!  And that was with Buffett at the helm.  Cheers!

 

Not trying to defend the guy, but, I am not trying to glorify him, either:

 

He might not want to retire them, so that they can be sold at a time in which the company is over valued in relation to a different company that he is trying to buy a stake in. It seems to give the company more flexibility, even though he is able to control more of BH... Maybe he wanted votes. Are shareholders better off with him there? What about with the company voting to get better tax treatment? To those questions, I think that the answer is obviously yes. REMEMBER: the issue here should probably be board independence, since they are the people that approved the plan initially, not Biglari's shares. The board is independent too, as they were almost all there even with previous management, and were initially against Sardar Biglari taking over.

 

Furthermore, for a company to truly reflect the wishes of it's shareholders, I believe that CEOs should be able to vote their shares on their own compensation. I see little difference in his voting on compensation than activist investors (such as Biglari) trying to vote themselves into the boardroom (should BH shares be able to vote for him to get a board seat, and thus, receive compensation, at Fremont?), or even try to get a dividend/share repurchase. Just because someone stands to gain by voting for something, doesn't mean that their actions are wrong.

 

His allocation abilities are part of what gives this company value. As I have said before, I have sold off virtually all of my stake; I personally own a single share of the company. So, at present, the over/under valued and  arguments matter very little to me. I would be willing to buy in again, but not at the current price, which seems to be more than fair. All things equal, under $300 and the company is interesting to me... $200 and I will buy a bunch of stock; at a price like that, you can price in any moral/ethical/emotional issues/reactions you might have with the guy and do quite well. It is all about what kind of 'risk' for this kind of stuff you price into the security...

 

to me, it seems easy to go against the stock blindly because some don't like what Biglari has done, I think that this is a mistake. It is obvious the guy isn't Buffett (I would argue, based on the type of investment that he does, but that is another story)- but he certainly is closer to Buffett than to Ken Lay...

 

Middle ground people... come to the middle ground. :D

[Parsad]

Middle ground people... come to the middle ground.

 

Sometimes there is no middle ground.  Someone I spoke to this morning told me "I just know the difference between right and wrong, and it seems wrong...".  There is no blurred line here. 

 

Name Change - Wrong!

Compensation Package Implementation - Wrong!

Buying Back BH Shares Through Lion Fund - Wrong!

 

No middle ground.  We all know the difference between right and wrong.  The only thing you could chalk it up to is a disconnect from reality.  In that case, add independent directors who are large shareholders, not maintain a compliant board of directors.  You want oversight, create a board that will give you that!  Cheers!

[Myth465]

As I said some of you all are looking for reasons why  instead of just looking at the facts.

 

I have seen this man defended through thick and thin. No matter what he does someone comes up with a BS rational to explain it away. I dont see that with other CEOs on the board. Every other company / CEO is either pressed or taken to the woodshed based on their actions.

 

I feel as though everyone is looking for the next Buffett and they are willing to take anything in order to "get in early". I guess thats what makes a market. I guess he will walk on water until he simple doesnt one day. Im impressed, a few years in the game and he is already compared to all of the great capital allocators of the last 30 years.

 

One thing is for sure, I need  to work on my writing. A few good shareholder letters and years of performance go very far in this business.

[shalab]

I have seen this man defended through thick and thin.

Amen to that. People find all sorts of defenses - e.g: I have heard that Jamie Dimon took Wamu because he could, integrity be damned! I have seen people criticize Buffett/Munger in this board but if you look at the way they did acquisitions, kind of people they surround themselves with and dealt with people - it is remarkable and uncommon.

[Kuhndan]

Question regarding the purchase of BH shares through The Lion Fund.... Since The Lion Fund's financial results are consolidated into BH's results, the purchases serve to reduce the company's book value. I know Sardar's incentive compensation arrangement made accommodations for any potential changes in equity for share purchases by the company. I wonder if this also includes the purchases by the investment fund? If not, he would benefit from the lower book value in the denominator on his incentive compensation.

[Parsad]

How many shares voted from the total outstanding (percentage-wise)?  How many of the voting shares (percentage-wise) were controlled through the investment by BH in the Lion Fund?  You may be surprised by exactly how many people voted for the plan.  Cheers!

[farnamstreet]

To Sanjeev's point, I posted this on Nov 9 but thought it would be a good time to bring it out again

 

***

The headline makes you think that 82.2% of shares voted in favour of the proposal. That might, however, be a little misleading.

 

Only 79.5% of total shares (937,343 of 1,433,553) voted. Of those (that voted), Biglari controls 209,550, so only 727,793 non-biglari shareholders voted in support of the new pay package. Looked at another way, only 50.7% of non-biglari shareholders voted in support of the proposal (and of those, some are his friends like Cooley).

***

 

Also, the proposal wasn't "do you agree with this compensation package" it was "To approve, for purposes of Section 162(m) of the Internal Revenue Code of 1986, the Amended and Restated Incentive Bonus Agreement with the intent of preserving the tax deductibility to the Corporation of the compensation payable thereunder"

 

***

One other interesting point that hasn't drawn the attention I think it deserves was this statement in the proxy "Book value is akin to shareholders’ equity or net worth, computed as assets minus liabilities. Book value is a construct of the past, based on what shareholders have invested and reinvested in the business. This value represents the capital that management has to invest."

 

 

---

You can read my blog at www.farnamstreetblog.com

[Guest Bronco]

My final thoughts.

 

I find BH has a superior business structure to most companies.

I find BH has an adverse compensation structure (who doesn't!)

I think around $350 I may be interested in jumping back in based on cash flow and balance sheet.

 

Is Biglari a good allocator of capital?  We'll see.  I think his most impressive accomplishment was the FCF generation of SNS. 

 

 

 

 

[shalab]

My final thoughts.

 

I find BH has a superior business structure to most companies.

I find BH has an adverse compensation structure (who doesn't!)

I think around $350 I may be interested in jumping back in based on cash flow and balance sheet.

 

Is Biglari a good allocator of capital?  We'll see.  I think his most impressive accomplishment was the FCF generation of SNS. 

 

I agree with you on the final thoughts - however, I will add one more:

 

Does BH have management that is trustworthy? I don't think so.

 

Also, did the FCF include the trading income? It is not clear to me. If trading income/investment income is attached ( some may say it should as it is the biglari premium ), it will distort the valuation metric. This is the reason I took out FCF from my valuation of BH. I think a reasonable value is around 300 and not 350.

 

[biaggio]

"Does BH have management that is trustworthy? I don't think so."

 

I feel that this trumps all the other positives noted.

[collegeinvestor]

I think trading gains/losses are usually included in NI for trading securities. AFS securities go on the equity statement.  Is this in the disclosures?

[collegeinvestor]

I am trying to figure out how someone influenced the Cash from operations so quickly. It doesn't make sense to me.

[twacowfca]

Parsad - interesting comments about leveraging float (you cited FFH and MKL).

 

I know it is old and cold, but does anyone here remember discussion about Buffett having an "unfair" or at least an advantage with having an insurance company in Nebraska.  In other words, was Buffett allowed to invest float differently than others b/c of state regulations?  It is a moot point now, but I find that interesting.

 

I seem to visit MKL every 6 months or so but have never pulled the trigger.

 

 

 

Web had @ 80% of the investments of his insurance companies in stocks in the mid 70's. ;)

[Rabbitisrich]

The investments are held as available for sale.

 

FCF, Owner's Earnings, and similar income statement derived going concern valuations are appropriate for BH because the restaurant operations comprise most of the value.

[Christopher1]

Some pictures of the SNS Las Vegas opening:

 

http://www.thevegastourist.com/things-to-do/steak-n-shake-has-finally-arrived-in-las-vegas/