Biglari's Troubles Are Investors' Blessings

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Cracker Barrel Old Country Store accounts for around three-quarters of Biglari Holdings' market cap, at about $570 million of the total $692 million. For investors in the latter, the question is what Biglari is going to do with the Cracker Barrel position. Liquidation, which looks somewhat unlikely, would immediately uncover value in Biglari Holdings and show investors and analysts the dirt-cheap multiple they're paying for the company's other cash-flow faucets. A continued activist presence in Cracker Barrel holds the potential for even juicier returns, but it could also experience a reversal in the stock's multi-year capital appreciation. One thing is for sure: Today, Biglari Holdings is a great company selling for cheap.

What to do
Upon reading the results of Sardar Biglari's third attempt at gaining a board seat at Cracker Barrel, my initial reaction was that the investor may now consider taking his profits (well over the $100 million mark) and delighting investors in his own holding company. After salivating at this immediate-gratification event, though, I realized this is still an unlikely event.

Though he claims to be a disciple of Buffett and mimics the Oracle's "buy good for cheap" investment style, Biglari is not quite the congenial, hands-off owner that Warren Buffett is so often idolized as. In yet another open letter to Cracker Barrel management in early November, Biglari again demanded change in the boardroom. The investor's claims have shifted slightly from his original argument, but the essential point remains the same: Cracker Barrel's leaders are not the best capital allocators and are preventing the otherwise "A"+ business from realizing its full potential -- both operationally and in value.

The language in the letter did little to suggest that Biglari had even the slightest interest in exiting his position. Referencing another note earlier this year, the investor said he will outlast any opposition, even if it takes eight years.

Meanwhile ...
While Biglari pushes up against the clearly uninterested Cracker Barrel shareholders and board, his own company's stock has yet to enjoy anywhere near the degree of success as the restaurant. At the same time, another Biglari asset, Steak n Shake, continues to generate heaps of cash that should yield a much chunkier stock price.

The market appears to lack confidence in the viability of Biglari's quest for Cracker Barrel acquiescence. While a little frustrating, it does allow for an opportunity in Biglari Holdings stock. The more Biglari's stake in grows in value, the cheaper the rest of the company becomes (as long as the continues to perform asymmetrically from Cracker Barrel's).

As any Buffett evangelist will tell you, companies will realize their intrinsic value at some point, but you may have to wait a while. Biglari Holdings doesn't have market approval yet, and part of that is due to the mercurial personality who runs it. Underneath the popularity contest, though, this business is very well run and offers investors a risk-averse way of investing in Cracker Barrel, and the bonus of undervalued cash flows from its other lines of business.

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