Biglari Holdings (NYSE: BH) (NYSE: BH.A) operates as a holding company with diverse businesses across various industries, including restaurants (Steak n Shake and Western Sizzlin), insurance (First Guard Insurance and Southern Pioneer Property & Casualty), oil and gas (Southern Oil Company and Abraxas Petroleum), and media & licensing (Maxim).
The company’s largest segment is its restaurant operations, with Steak n Shake being the primary business.
The company also has significant investments in two affiliated investment partnerships run by Biglari Capital, The Lion Fund L.P. and The Lion Fund II L.P, which hold stakes in companies like Cracker Barrel Old Country Store, Inc. (CBRL), Ferrari N.V. (RACE), and Jack in the Box Inc. (JACK).
Governance Issues and Compensation Concerns
Sardar Biglari, the CEO, controls over 70% of the voting power of Biglari Holdings. His compensation structure raises concerns due to its atypical nature for a public company. Sardar’s annual cash compensation is $900k, which might seem modest compared to other CEOs. However, his incentive fee structure for Biglari Capital is problematic.
Sardar, through Biglari Capital, earns a 25% incentive allocation on profits generated above a 6% hurdle rate. This structure is more typical of hedge funds and private equity funds, not public companies.
Furthermore, Biglari enjoys a similar incentive fee structure for Biglari Holdings, earning 25% of the increase in BH’s book value versus the previous high-water mark, subject to a 6% hurdle. This compensation is primarily driven by the performance of the Lion Funds and the increase in BH’s book value, which can differ significantly from the share price performance of BH.
As a result, Biglari’s compensation can be high relative to the company’s financial performance.
For instance, in FY 2023, Biglari earned approximately $8.2 million in total cash compensation, which was about 16% of the company’s free cash flow (FCF) for the period. In comparison, the CEO of Yum! Brands (YUM) earned around $6 million, which was only 0.5% of YUM’s FCF for the same period.
Operational Performance and Financial Results
In Q1 2024, Biglari Holdings reported total revenues of $89.5 million, a year-over-year decrease of 0.8%, and net earnings of $22.6 million, a 65.5% decline from the previous year. The drop in earnings was primarily due to lower gains from the company’s investment partnerships. Excluding these gains, operating earnings from BH’s businesses were $4.1 million in Q1 2024, down from $6.6 million in Q1 2023.
The restaurant operations continue to face challenges, with Steak n Shake same-store sales up 9.9% in Q1, but profits declining due to higher costs. Other segments, including insurance and oil and gas, also saw declines in earnings.
Capital Allocation and Buybacks
Another significant issue is the method of share buybacks. Unlike other companies that retire repurchased shares, Biglari Holdings acquires its own stock through the hedge funds and does not retire the stock. Biglari votes the shares like any other shareholder.
These funds control more than half of Biglari Holdings’ shares, giving Sardar Biglari voting control over the company.
Valuation and Market Sentiment
Biglari Holdings trades at a discount to book value (currently 0.9x P/B), reflecting market skepticism regarding management. While this multiple may appear low, it is considered warranted given the governance issues and capital allocation track record.
Risks to the Thesis
- Operational Improvements: Significant improvement in restaurant operations, particularly at Steak n Shake, could boost cash flows and investor sentiment.
- Investment Partnership Gains: Significant gains in the funds managed by Biglari Capital could flow through to earnings, potentially driving the stock higher.
- Valuation Uplift: Market sentiment could shift positively if governance concerns are addressed, enhancing the perceived value of BH’s assets.
Conclusion
Despite owning some attractive assets and trading at a discount to book value, concerns around governance and capital allocation outweigh any potential upside. The company’s governance practices and compensation structure present significant risks that could continue to weigh on shareholder returns.
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Kevin is an experienced business development strategist and content writer specializing in finance and stock market topics. He has a proven track record of driving sales and enhancing communications for small businesses by blending academic knowledge with practical experience to create engaging and accurate content.
