BH Annual letter

[OracleofCarolina]

http://www.biglariholdings.com/letters/2011.pdf#zoom=100

 

[farnamstreet]

"The capital allotment decisions I will make will shape the organization. Therefore,  Biglari Holdings is a jockey stock. You are choosing the jockey; I am choosing the horses. It would be asinine to bet on the jockey and then deny him the saddle or whip."

[Kuhndan]

I know there is not a lot of love for Sardar on this board, but I must say the dude is putting up some nice numbers. They reported $250 million in cash and investments at quarter end. Based on Cracker Barrel's current market price that increases to $270 million. No matter what happens with the board seat vote I see further upside in cbrl. Steak and Shake continues to perform well and we are now starting to see some visibility into future franchising. Plus, this guy is fun to watch.

[farnamstreet]

Anyone looking to better understand Sardar, should read this book.

 

http://amzn.to/uJXZ69

 

The author, Fridson, was on the board at Western Sizzlin. I know Biglari has read this book (and loved it). While reading it, I couldn't help but thinking I was reading Biglari's playbook.

[racemize]

Anyone looking to better understand Sardar, should read this book.

 

http://amzn.to/uJXZ69

 

do you just post on this forum to make money?  This is the second post today alone.

[Guest Hester]

Anyone looking to better understand Sardar, should read this book.

 

http://amzn.to/uJXZ69

 

do you just post on this forum to make money?  This is the second post today alone.

 

I don't see how that book link will make Farnam Street money. Maybe I'm missing a connection.

 

In any case whomever runs FS blog does a very good job and must spend a lot of time, gathering extremely interesting content. All on a free/ad free site. If he/she/it wants to try to make money on something like a painstakingly recorded Munger transcript, and let people know it exists, so be it.

[augustabound]

In any case whomever runs FS blog does a very good job and must spend a lot of time, gathering extremely interesting content.

 

I agree, it's one of the few blogs I look forward to reading.

[Kraven]

Anyone looking to better understand Sardar, should read this book.

 

http://amzn.to/uJXZ69

 

do you just post on this forum to make money?  This is the second post today alone.

 

I don't see how that book link will make Farnam Street money. Maybe I'm missing a connection.

 

In any case whomever runs FS blog does a very good job and must spend a lot of time, gathering extremely interesting content. All on a free/ad free site. If he/she/it wants to try to make money on something like a painstakingly recorded Munger transcript, and let people know it exists, so be it.

 

Agreed.  Also, it's quite an ironic statement about it being Farnam's 2nd post of the day from someone, especially a new poster, who is averaging over 5 posts a day himself.

[oddballstocks]

Anyone looking to better understand Sardar, should read this book.

 

http://amzn.to/uJXZ69

 

do you just post on this forum to make money?  This is the second post today alone.

 

I don't see how that book link will make Farnam Street money. Maybe I'm missing a connection.

 

In any case whomever runs FS blog does a very good job and must spend a lot of time, gathering extremely interesting content. All on a free/ad free site. If he/she/it wants to try to make money on something like a painstakingly recorded Munger transcript, and let people know it exists, so be it.

 

Agreed.  Also, it's quite an ironic statement about it being Farnam's 2nd post of the day from someone, especially a new poster, who is averaging over 5 posts a day himself.

 

Ha! Noticed that myself..

 

Along with the piling on, I love the Farnam Street stuff, follow them on Twitter for even more links.  The quality of content they dig up is excellent.

[racemize]

that link has a reference ID which makes him money if you click/buy it.  My point was that was his second post today that was directly asking for money for himself...

[racemize]

for more info:

 

http://www.phpied.com/short-amazon-affiliate-links-a-bookmarklet/

 

maybe I was wrong to say this since I am new, but it seemed like a blatant attempt to make money and not very helpful to the discussion. 

 

However, he has since edited it to make it more germane.  I also went back and reviewed his other posts, which do have substantial content, so I apologize if I offended anyone.  I very much enjoy the content and free exchange of ideas on this board.  However,  I personally would appreciate a disclaimer (which he has made in other posts) about being an affiliate, but perhaps that is because I am very sensitive to the copious amounts of affiliate links in other parts of the Internet that are not very helpful.

[collegeinvestor]

"Over the last three years our operating subsidiaries sent an aggregate of $266 million upstairs to BH, of which $83.2 million was in the form of a special dividend paid by Steak n Shake using proceeds from its new credit facility. Steak n Shake’s debt is non-recourse to BH for the cogent reason that we aim for every subsidiary to stand independent. As of now, BH has no debt, and all our capital is under no restrictions for reinvestment."

Wait, so this 83.2 million is not recorded on BH's balance sheet even though it is a debt? How?

I don't get how he gets away with saying using an 83.2 million credit facility is not debt?

[collegeinvestor]

I would love to pay myself "special dividends" with a credit facility!

[Grenville]

"Over the last three years our operating subsidiaries sent an aggregate of $266 million upstairs to BH, of which $83.2 million was in the form of a special dividend paid by Steak n Shake using proceeds from its new credit facility. Steak n Shake’s debt is non-recourse to BH for the cogent reason that we aim for every subsidiary to stand independent. As of now, BH has no debt, and all our capital is under no restrictions for reinvestment."

Wait, so this 83.2 million is not recorded on BH's balance sheet even thought it is a debt? How?

I don't get how he gets away with saying using an 83.2 million credit facility is not debt?

 

Based on your quote above, its just like BNSF taking on debt to fund its operation and sending a special dividend up to the parent, Berkshire Hathaway. If the terms of the debt indenture allow it, it is ok. It's like a company paying out a dividend to its shareholders even though it has debt outstanding. A credit facility is another form of debt.

[oddballstocks]

And the debt is non-recourse, so if SnS went belly up BH would get to keep the cash without having any obligation to SnS.

 

I've never looked at BH's financials but I'd assume they own enough of SnS that they have to consolidate so the debt should be listed on the balance sheet.

[link01]

Wait, so this 83.2 million is not recorded on BH's balance sheet even thought it is a debt? How?

I don't get how he gets away with saying using an 83.2 million credit facility is not debt?

 

he probably meant that that BH at the parent level had no debt....the sns sub certainly would

 

 

[Guest Hester]

"Over the last three years our operating subsidiaries sent an aggregate of $266 million upstairs to BH, of which $83.2 million was in the form of a special dividend paid by Steak n Shake using proceeds from its new credit facility. Steak n Shake’s debt is non-recourse to BH for the cogent reason that we aim for every subsidiary to stand independent. As of now, BH has no debt, and all our capital is under no restrictions for reinvestment."

Wait, so this 83.2 million is not recorded on BH's balance sheet even thought it is a debt? How?

I don't get how he gets away with saying using an 83.2 million credit facility is not debt?

 

This is fairly standard, you see some in the REIT industry, and as Grenville noted BNI and Mid-American do it under Berkshire. It's non-recourse debt so technically BH parent has no responsibilities to it.

 

Although it's semi-normal way of doing business, it is a hidden earnings risk to BH rather than a balance sheet risk. That is to say, if Steak N Shake has problems and the debt holders take control from BH, no holes in BH's balance sheet appear but their earnings/dividends from subsidiaries will fall greatly.

 

Really, if there were problems at Steak/Shake then BH would probably eventually bail them out, so the debt is a psuedo-balance sheet risk. Of course many investors who don't dig deeper miss these risks. I'm short a REIT that does this all day long and the market totally underestimates the risks inherent.

[moore_capital54]

What is up with Biglari's ego? This has to be the most egotistical annual letter I have ever seen...

 

As I do not follow BH at all, can someone give me a quick run down of how he increased marketable investments from 118 to 252 if his gains were only 7 on investments in 2011?

[ragnarisapirate]

for more info:

 

http://www.phpied.com/short-amazon-affiliate-links-a-bookmarklet/

 

maybe I was wrong to say this since I am new, but it seemed like a blatant attempt to make money and not very helpful to the discussion. 

 

However, he has since edited it to make it more germane.  I also went back and reviewed his other posts, which do have substantial content, so I apologize if I offended anyone.  I very much enjoy the content and free exchange of ideas on this board.  However,  I personally would appreciate a disclaimer (which he has made in other posts) about being an affiliate, but perhaps that is because I am very sensitive to the copious amounts of affiliate links in other parts of the Internet that are not very helpful.

 

OH NO!!! Could it be that Farnam Street is actually putting up a book link that would help us understand Sardar Biglari a little bit better? Personally, I like to be able to look at the book links posted, figure out if it is good or not, and then make our decision based on my own analysis. Just because he stands to make a few quarters (if that) from my purchase doesn't necessarily make him il-intended. Plus, it isn't like it makes any body using the link pay more for the book.

 

After all, this is a board where we post ideas that we have about stocks... Saying that he is trying to get a commission would be like saying any of the rest of us that throw out ideas on the board are trying to up the price so that we can make money. I think you will find that virtually all of us are simply here to exchange ideas and leran from one another.

 

Getting back to BH... It does seem (based on historical allocations) that Biglari will be able to grow the investment portfolio value quicker than what he is paying on the interest from the cash he took out on the debt facility at SNS. If there is a liquidity crunch or interest rates soar, it will be interesting to see what happens to BH. I am quite impressed by how quickly he is growing the franchise base, and frankly, am envious of you New Yorkers that will get to eat at the new concept store in early/mid January... If any of you want to do a guest blog post on Ragnar of the new concept, let me know. Despite not presently owning any BH, I would love to see what you come up with just because I am interested to learn about the new concept store!

 

As always, the letter was a good read. While some have ill-feelings towards Biglari, we can certainly learn something from him.

[PlanMaestro]

As I do not follow BH at all, can someone give me a quick run down of how he increased marketable investments from 118 to 252 if his gains were only 7 on investments in 2011?

 

He did the Private Equity thing: paid himself/corporate a fat dividend from its subsidiary after increasing its debt. Of course, the debt is non-recourse.

[moore_capital54]

But I thought that was only 84 million where did the other 50 come from? Is he selling long-term properties wiht leasebacks and freeing up cash or was the rest derived from operating earnings...

[PlanMaestro]

But I thought that was only 84 million where did the other 50 come from?

 

Somebody else wants to step in? I am not such fan of SB to do the detailed analysis and just want  keep up with his general moves ... as moore_capital.

[Parsad]

You know what is quite amusing?  That in the 2nd paragraph of the letter, Sardar finally admits to what I pointed out to him and Phil right in the beginning:  That the new incentive-based compensation structure was not appropriate, as Biglari Holdings would have an advantage that the Lion Fund did not have...captive capital!  We had sold half of our holdings after the name change, and we sold the rest after the compensation change.  We were not against the incentive structure, just that the hurdle should have been 10% and the incentive-fee should have been 15% above the hurdle. 

 

You cannot treat your shareholders ethically, when you have a board that may bend to whatever desires the CEO initiates.  This is a perfect example of why Buffett wants his son as non-executive Chairman.  Someone who personally owns less than 4% of stock renames the company after himself, and initiates a compensation structure that will reward him incredibly handsomely over time, but where the incentives don't have the appropriate hurdles built in.

 

Incidentally, was this a Freudian slip on the first page:

 

Phil Cooley, Vice Chairman of BH, and I believe we have designed an ideal concept that maximizes our potential for aggrandized returns. 

 

The 113% increase in investments due to a special dividend from the sub is not an accurate representation.  Really, he should exclude the special dividend from the actual performance number.  While the increase in debt is not a direct responsibility of the holding company, it is an indication of the health of the entire enterprise.  If my left toe has gangrene, should I talk about how healthy my heart is?  Anyway you look at it, recourse or non-recourse to the parent, BH is operating with significantly more leverage. 

 

Steak'n Shake continues to be the core driver of the business.  It's fantastic, and probably one of the best restaurant chains in America!  I agree with Sardar and think this can definitely become a global brand.  Cheers!

 

 

[moore_capital54]

Geez, the audacity on this guy to tell shareholders in the letter several times to "sell their stock" if their unhappy with this or with that... The guy only owns 2-3% and is redeploying a base of capital that was accumulated under previous management and owners and he dares to tell people to sell the stock if their unhappy?

[ragu]

The book value increased by 12.3% year over year.

 

This isn't critical, but reported book value increased by the amount you cite. The adjusted book value (accounting for BH's investments in the LF and LF's holdings in BH that are recorded as Treasury stock) that is a fairer reflection of economic reality rose by 9.6%.

 

Best,

Ragu