Investors in Biglari Holdings Now Getting Core Steak ‘n Shake Business for Free

It has been a while since I last wrote about Biglari Holdings (BH) and their efforts to diversify into a holding company far bigger than just the core Steak ‘n Shake restaurant operations. BH has acquired a 20% stake in Cracker Barrel (CBRL), as well as purchased Maxim magazine, First Guard Insurance, and Western Sizzlin outright. Accounting for a recently completed rights offering that raised $86 million, BH has around $200 million of cash and no holding company debt (the Steak ‘n Shake subsidiary does have debt of $220 million). An update seems in order now that BH shares are trading for $330 each, for an equity market value of $680 million.

Why? Well, the valuation seems off, to put it mildly. At the current quote of $103 per share, BH’s Cracker Barrel stake is worth $488 million. Add in a net cash position of approximately $200 million and you quickly realize that buyers of BH today are getting Steak ‘n Shake (a business with more than $700 million of annual sales) for free, as well as all of the company’s other assets. To give you an idea of how ridiculous this is, consider that the Steak ‘n Shake generated annual free cash flow of $60 million in 2010 and 2011 (that figure has come down in recent years as CEO Sardar Biglari has invested a lot of capital into accelerating Steak ‘n Shake’s franchising business globally). As such, it is not a stretch to value Steak ‘n Shake equity at multiple hundreds of millions of dollars (accounting for its debt load). Getting that business for free is a big deal on a percentage basis considering that BH’s total equity capitalization is currently valued at less than $700 million by the market.

I am not the only investor who sees value in BH shares. Och-Ziff Capital Management (OZM) recently filed a 13G disclosing an 8% passive stake in the company, and that filing was made when the stock was trading over $400 per share. It will be interesting to see if they increase their stake at current prices. Accordingly, you may not be surprised to learn that BH is currently my largest equity holding.

Full Disclosure: Long shares of BH at the time of writing, but positions may change at any time.

Noodles & Company Falls Back To Earth, Still Not A Bargain

About 14 months ago fast casual restaurant chain Noodles and Company (NDLS) had one of the most successful initial public offerings of the year, more than doubling on its first day of trading from an offer price of $18 per share. That very day I warned how overvalued the stock was at its then-$36 price. Investors trampled over each other to buy the shares for a few more days (the stock peaked at $51.97 on its third day of trading) and then reality slowly began to set in. Paying more than 40 times cash flow for NDLS, or any stock for that matter, is a very dangerous proposition.

After several quarters in the public spotlight, many recent high-flying IPOs have crashed and burned. Most are in the retail space, such as The Container Store (TCS) or Zulily (ZU). Amazingly, even after huge drops, most of these stocks are not yet bargains. Circling back to Noodles & Company, which is trading below $20 per share today after reporting lackluster earnings last night, the stock still trades at about 15 times cash flow (enterprise value of more than $600 million for a company that booked EBITDA of about $20 million during the first half of 2014). That price is still on the high side of fair, even if you believe in the growth story and think NDLS will succeed in continuing to grow its unit base by double digits annually for many years to come. I’m not a huge fan of the company to begin with, so a 15 multiple is not even in the ballpark for me to consider it as an investment, despite the fact that I have favored growth stories in the restaurant area for a very long time.

For bargain hunters, it certainly makes sense to watch these recent IPOs as they crater back to earth. However, be careful not to jump at something just because it is down 50% or more from its peak. NDLS is a perfect example of a stock that is down a ton (62% in the past year) but is still not cheap. You really need the valuation to be favorable to justify bottom fishing in recent IPOs. Some of them went so far above a reasonable price right out of the gate that a price drop alone puts them in the “less expensive” category, as opposed to “undervalued.”

Full Disclosure: No positions in NDLSTCS, or ZU at the time of writing, but positions may change at any time

Sales Figures Disprove Thesis That Whole Foods Shoppers Are Fleeing To The Competition

I wanted to briefly follow up my post from yesterday (The Death of Whole Foods Market is Likely Greatly Exaggerated) with a telling chart. The financial media has been reporting that Whole Foods Market (WFM) is being hurt by lower cost natural food grocery stores, thereby implying that the company has less brand loyalty and differentiation than some had previously thought. I would challenge the notion that WFM is losing customers to other stores. While it could happen in the future, the sales data show that WFM’s sales per store are actually continuing to rise:


Not surprisingly, the growth in average weekly sales per store peaked in 2007 and dropped 11% during the 2008-2009 period. Customers came back quickly post-recession, however, enabling WFM to reach record sales per store just two years later in 2011. Not only have sales increased every year since, but they are continuing to rise this year. This is definitely a number to watch as times goes on to gauge potential customer defections, but the idea that Whole Foods stores are beginning to really struggle is completely unfounded if you look at the data. It might make for a good story, but it’s not very helpful for investors.

The Death of Whole Foods Market Is Likely Greatly Exaggerated

I am always amused (and oftentimes thrilled) when Wall Street wakes up one day and decides a company’s fate has changed forever, despite very little actual evidence supporting such a view. Severely harsh winter weather earlier this year put a lid on sales and profits at many retailers, and the result has been very poor stock market performance for many consumer-oriented companies. Others have been hit by worries over online-only competition or simply an increase in the number of players competing in the marketplace.

Consider Whole Foods Market (WFM). The pioneer of the natural food grocery business has gone from market darling to growth stock has-been in a matter of months, with investors sending the stock down nearly 20% in a single day after the company released its most recent earnings report, and the shares now sit at multi-year lows. How bad was WFM’s first calendar quarter of 2014? Well, the company reported record sales and record sales per square foot at its stores. Same store sales rose a very impressive 4.5% versus the prior year. But Wall Street focused on profit margins, which narrowed slightly year-over-year and quickly concluded that Whole Foods is dead, a victim of ever-growing competition. After reaching a high of $65 late last year, the shares now trade in the high 30’s.


With all of the new competition aiming squarely at Whole Foods, how can they possibly compete effectively and continue to post strong financial results for their shareholders? Recent stock market action is telling us that investors have given up on the company. The media headlines have been extremely negative too. Nonetheless, in the face of extreme pessimism, I am a buyer of the stock. Let me tell you why.

There is no doubt that Whole Foods is facing more and more competition every day. For years people thought the natural foods business was a niche market, but now they are coming to realize that it has gone mainstream in many markets across the country. Not only have traditional grocery stores added natural and organic sections to their stores, but smaller Whole Foods wannabes are popping up too. In fact, many of them are newly public, such as Sprouts Farmers Market (SFM), Fresh Market (TFM), and Fairway (FWM). But guess what? They can all coexist.

As consumers opt for healthier food, natural foods will increase their share of the overall food market and there will be plenty of room for multiple players to operate stores profitably. Witness Whole Foods’ +4.5% same store sales number for last quarter. If people were really leaving Whole Foods and switching to these other stores (the bears say price will be the biggest reason), their sales would not be rising faster than the rate of food inflation. Despite new competition (Sprouts and Fresh Market combined have nearly as many stores nationwide as Whole Foods, and all three are doing very well), Whole Foods has a very loyal customer base and there are few signs that they will abandon Whole Foods.

I think a great way to think about the future of Whole Foods is to compare it to another strong pioneering consumer brand that sells a high-end product to a very loyal customer base and has faced enormous competition over the years; Starbucks (SBUX). The similarities to me are uncanny. Think about how many companies have tried to eat into Starbucks’ growth in the specialty coffee market. Scores of local coffee shops have popped up urging you to support your neighborhood business, and big players like McDonalds (MCD) and Dunkin Donuts (DNKN) have littered the market with me-too coffee options. And what happened? Did Starbucks’ customers flee in favor of a slightly less expensive drink? Not at all. Interestingly, the new players did well too. Both Dunkin and McDonalds sell a lot of coffee, even as Starbucks continues to thrive.

That is exactly how I see the natural foods story playing out. Whole Foods Market will cross the 400 store mark later in 2014. Ultimately they see room for 1,200 stores in the U.S. alone. Their growth is far from over and I expect them to continue to be seen as the leader and industry pioneer for many years to come (just like Starbucks).

Here’s the best part; the stock is cheap and most people don’t realize it. At first blush it doesn’t look undervalued. Whole Foods will earn about $1.50 per share this year and trades at 25 times earnings. A 50% premium to the S&P 500 for a growth company facing stiff competition doesn’t seem like a bargain to most casual onlookers. But you have to dig deeper to see the value.

Since Whole Foods has high capital needs (as it opens new stores at a rapid rate), the company’s operating cash flow dwarfs its reported earnings per share. Depreciation expense last year came to $370 million, or about $1 per WFM share. In fact, WFM generated about $2.70 per share of operating cash flow in fiscal 2013. All of the sudden that 25 P/E multiple comes down to about 14x operating cash flow if you look at actual cash generation.

It gets better. Of that $2.70 of operating cash flow Whole Foods spent more than half of it on capital expenditures, and of that, about two-thirds went towards new store construction. As a result, when we calculate how much cash profit every WFM store generates, we arrive at an impressive $2.25 million. With an expected 400 stores at year-end (which will generate $900 million of free cash flow annually), we can assign a value to the existing WFM store base only, excluding all future development. If we use a very reasonable 15x free cash flow multiple (a discount to the S&P 500), we conclude that the existing store base is worth $13.5 billion.

And that’s the best part of the story. At current prices, Whole Foods trades at an enterprise value of $13 billion ($14.5 billion equity value less $1.5 billion of net cash). That means that investors at today’s prices are buying the existing stores for a very fair price and are getting all future store development for free.

If you share my view of the natural food industry and believe that Whole Foods can continue to be a leader in the market, even in the face of increased competition, then investors at today’s prices are likely going to do extremely well over the next 5-10 years. After all, WFM is only about 1/3 of the way to their goal of 1,200 U.S. stores, and today’s share price does not reflect the likely upside from years and years of future development.

Full Disclosure: Long shares of WFM at the time of writing but positions may change at any time.

Biglari Holdings Buys Maxim Magazine In Distressed Sale

There was a time when Steak ‘n Shake and Maxim magazine would have first brought to mind my college days, but oh my how things have changed. Now one of my largest investments, Biglari Holdings ($BH), owns both companies. Activist investor Sardar Biglari recently announced that the holding company he runs has acquired Maxim magazine from Alpha Media Holdings in a distressed sale. The purchase price was not disclosed, but media reports suggest a cost between $10 and $15 million. That is a far cry from the near-$30 million deal with another buyer that fell through late last year. Always a seeker of a bargain, Biglari appears to have picked up a solid brand on the cheap. The magazine, despite millions of readers and tens of millions in advertising revenue, has been losing several million dollars annually in recent years, so there is work to be done for this investment to pay off.

At first glance it may seem quite odd that the owner of Steak ‘n Shake, as well as a 20% stake in publicly traded Cracker Barrel (CBRL), would venture into the media business, but Biglari has made it known for years now that he aims to build a diversified holding company and will not shy away from entering any industry that offers the potential for significant profits. While he had hinted that an insurance company was on his shopping list, this deal should not surprise (or worry) close watchers of Biglari Holdings.

While success with Maxim under the Biglari umbrella is hardly assured, when you pay such a low price for an asset with a large readership and a strong brand among its core young man demographic, there are multiple levers you can pull to create value from the transaction. Biglari has shown he prefers strong brands (something both Steak ‘n Shake and Cracker Barrel possess) and there is no doubt that the Maxim name could find itself attached to far more than just a magazine cover over the next several years. Licensing opportunities could very well be a core part of Biglari’s future plans for Maxim. The recently launched Esquire Network cable television station is a good example of how media brands can be extended in order to broaden their reach and appeal.

If we assume Biglari paid approximately $12 million for Maxim, it is not hard to see how reasonable it is to expect that it could pay off in spades. If the company five years from now earned free cash flow of just $5 million per year, it would be a hugely successful investment that could be sold for many multiples of original purchase price, or Biglari could hold onto it long term and use the cash flow to fund additional acquisitions. As part of a larger comapny with more financial backing, it is likely that meaningful investments will be made into the Maxim brand, which could make that scenario a reality far easier than would have been possible within a struggling media company.

While some may be scratching their heads as to why Biglari made this deal, I believe it fits the exact mold that Sardar has been describing since he became CEO. As a result, I think the odds of success are likely far greater than casual onlookers may believe, and for that reason I remain as bullish on the company’s long-term prospects (and the stock) as I was before the acquisition was announced.

Full Disclosure: Long shares of Biglari Holdings at the time of writing, but positions may change at any time

Noodles & Company IPO Doubles in Price, Already Overvalued After One Day


The IPO market has certainly warmed up in 2013, but fast casual restaurant chain Noodles and Company (NDLS) has taken it to the next level with a more than 100% first-day gain. We haven’t seen that in a really long time.



So should investors jump in? Noodles and Company currently has about 340 units, has been growing at 15% annually recently (at least 10%+ each of the last ten years) and sees a potential market at 2,500 units over the next 15-20 years. In addition, the company earns a 20% unit-level cash flow margin, at the high end of its peer group.

The problem for investors though is not the growth story, it’s the price. After doubling on its first day of trading, NDLS fetches a $1.1 billion market value on about 33 million fully diluted shares. That is over 30 times the company’s 2012 EBITDA of $37 million, a ridiculous price! Even Chipotle Mexican Grill (CMG), the most expensive dining stock around, trades at less than 20 times EBITDA.

The bottom line for me is that the Noodles and Company IPO has been very successful, but I would not touch the stock after it has doubled from $18 to $36 on the first day of trading. Chipotle is too expensive for my taste as well, but if you are looking for a very profitable casual dining stock with lots of growth potential and valuation is not a crucial element for you, CMG looks to be far more attractively priced than NDLS at today’s prices.

Full Disclosure: No positions in the stocks mentioned at the time of writing, but positions may change at any time.

Biglari Stake Pushes Cracker Barrel Management Into A Corner

Shares of restaurant operator Cracker Barrel Old Country Store (CBRL) are jumping $4 today to new all-time highs on the heels of a strong quarterly earnings report and news that it will raise its dividend by 50% to $3.00 per year, giving the $93 stock a yield of over 3%. While I do not own CBRL shares directly, Biglari Holdings (BH) is a large position in the client accounts I manage and that company owns a 20% stake in Cracker Barrel, after having started buying the stock in the 40’s two years ago. That stake is now worth over $440 million and represents a majority of BH’s current equity market value of $585 million.

I have written about Biglari Holdings quite a bit previously, so I suggest searching this blog for those articles if you would like to learn more on that front. What I find interesting today is that Biglari has really cornered Cracker Barrel into a position where Biglari and its shareholders can win on multiple fronts with its CBRL investment. The Biglari-Cracker Barrel relationship is a dicey one, which is contrary to many situations where a company and its largest shareholder communicate amicably on a fairly regular basis. As a 20% holder, Biglari has agitated for board seats for two years now, and has been rejected by both management and CBRL shareholders both times. Biglari’s main beef was with how CBRL was being managed, and as a large holder he wanted to sit down with the senior management team and work together to improve capital allocation and get the stock price higher.

Interestingly, Cracker Barrel has been quick to dismiss Biglari’s ideas publicly, only to later implement them and try and take credit. Many of those changes have contributed to the doubling of CBRL’s share price over the last two years. Now that CBRL is generating excess free cash flow at a very healthy clip, they are faced with the decision of how to allocate that capital. Previously CBRL has repurchased shares, but now that Biglari Holdings owns 20% of the company (the maximum amount it can own due to a poison pill put into place by Cracker Barrel management) any share repurchases would increase Biglari’s stake in the company without any additional cash investment. If that stake were to rise, Biglari’s odds of gaining seats on the company’s board of directors would also increase, and given the tense relationship, CBRL has no incentive to buy back stock right now.

So that leaves the issue of the company’s dividend. When Biglari Holdings bought its first shares of Cracker Barrel in 2011, CBRL’s quarterly dividend was 22 cents per share. Since then they have raised it on four separate occasions, more than tripling the payout to the current 75 cents per quarter rate. Cracker Barrel likely thought doing so would make Biglari happier and might cause him to be less vocal. However, that has not happened and there is every indication that he will continue to seek board seats in the future.

From Biglari’s perspective, he really could not be in a better position. If Cracker Barrel hoards its cash or spends it unwisely (unprofitable unit expansion has been a core tenet of Biglari’s critique), he will likely get more shareholders on his side when it comes time to re-elect the company’s directors. If CBRL decides to buy back shares with its free cash flow (something Biglari has suggested they do), his ownership percentage will increase and help him in that quest.

Not surprisingly, Cracker Barrel has opted for the dividend increase approach, as it eases shareholder concerns generally and does nothing to help Biglari get on the company’s board. However, it serves to funnel cash right into Biglari Holdings’ bank account. So shareholders of Biglari Holdings are going to win either way; they benefit from the torrid pace of the stock price’s ascent, and they are getting ever-rising dividend payments every quarter, with which Biglari can make additional investments. On BH’s 4+ million share stake, that equates to over $12 million a year in dividends, which comes to about 2% of Biglari Holdings’ market value.

I’ll make one final observation as it relates to the merits of Biglari Holdings as an investment, since I am playing this scenario indirectly through BH stock. Before BH even purchased its first share of CBRL, its stock was trading at $400 per share. Now, two years later with that stake in CBRL worth over $440 million (and paying $12 million out annually), BH shares trade for $405. The market has not yet fully appreciated what Biglari has been building here, but I think it will just be a matter of time.

Full Disclosure: Long BH shares at the time of writing, but positions may change at any time

Chipotle Stock: Rapidly Approaching An Attractive Level

Hedge fund titan David Einhorn has been on fire in recent years with his bearish calls (Lehman Brothers, St Joe, Green Mountain, etc) and his latest presentation at the Value Investing Congress detailed a negative outlook for Mexican fast casual restaurant chain Chipotle Mexican Grill (CMG). Some of his points on CMG were easier to agree with (sky-high valuation, slowing growth, pricing pressures) than others (a strong competitive threat from Taco Bell?) but he nailed another one of his calls. CMG shares are falling $30 today after the company reported a disappointing quarter last night. The stock now sits just above $250, down from a high of $442 hit in April of this year.

Chipotle stock long surpassed any level that I consider a good value, but as its recent descent continues, it makes sense to at least pinpoint a price at which it might warrant consideration on the long side. After all, the company still has a very attractive longer term unit growth outlook, is likely to remain very popular with consumers, and the company sports one of the highest operating margins I have ever seen generated by a restaurant company (27% unit-level operating margins).

The reasons for the stock’s decline lately are completely justified even though they don’t really impact the long-term business outlook for the company. The valuation was crazy before (at $442 per share it traded at a 50 forward P/E ratio) and comp sales growth of high single digits or more was definitely not sustainable. Yesterday the company offered 2013 guidance of 12% unit growth and indicated comps could be flat. While such an outlook will hurt shares short term, longer term it is not terribly worrisome.

With the stock now down more than 40% from its high, I do not think it is far off from a fair price, though it is not quite there yet. If the shares fell to around the $225 level, which equates to about 12 times cash flow, I would start to get interested. This is definitely one growth company to watch, as negative business momentum short term could very well send the stock down to value territory if investors’ disappointment continues.

Kudos to David Einhorn for another timely call. I would never suggest investors’ blindly follow any investor, but Einhorn is clearly one of the best around right now and it worth paying attention to when he gives public presentations. We can all learn a lot from him.

Full Disclosure: No position in any of the companies mentioned at the time of writing, but positions may change at any time

Chipotle: A Lesson in High P/E Investing

Shares of Chipotle Mexican Grill (CMG) are falling more than 90 dollars today after reporting second quarter earnings last night. Revenue rose 21%, with earnings soaring 61%, beating estimates of $2.30 per share by an impressive 26 cents. However, light sales figures (same store sales of 8% versus expectations of double digits) are causing a huge sell-off today. This is a perfect example of what can go wrong when investors rush into stocks that are very expensive relative to their overall profitability. Any hiccup results in a violent decline. And this really isn’t a hiccup except relative to lofty expectations. If you simply read the press release and ignored the analyst estimates, you would conclude the company is absolutely printing money at its restaurants. Unit-level margins approaching 30% are pretty much unheard of in the industry.

The problem is that prior to today’s drop, CMG stock traded for a stunning 59 times trailing earnings. Even using this year’s projections gets you to a P/E of 45x, more than 3x the S&P 500 multiple. Even a meaningful earnings beat can’t help investors with the bar set so high. Today could very well be a buying opportunity if one believes in the long term growth story at CMG, however, with the P/E still sitting around 34 on 2012 earnings, it is definitely not cheap enough for value investors to get interested.


Full Disclosure: No position in CMG at the time of writing, but positions may change at any time

As U.S. Stock Market Rises, Growth Stock Premium Widens Over Blue Chips

With the S&P 500 piercing through the 1,400 level for the first time since the recession, it is getting harder for value investors to find bargains. Consumer-oriented growth stocks, in particular, have seen their share prices and valuations soar during the current bull market. Restaurants like Chipotle Mexican Grill (CMG) and Panera Bread (PNRA) as well as clothing companies like Lululemon (LULU) and UnderArmour (UA) have become market darlings, with P/E ratios stretching into the 30’s, 40’s and even 50’s. Bargain seekers need to dig deeper to find attractive stocks if they want to avoid paying 2-3 times market multiples for their stocks.

An interesting dichotomy has arisen in the beverage space, which to me is a great illustration of how the bull market has played out in recent months. A blue chip beverage company like Dr Pepper Snapple Group (DPS) has lagged in the recent market rally, whereas the smaller, faster growing Monster Beverage Corp (MNST) has soared. In fact, despite being three times the size of Monster in terms of sales, Dr Pepper Snapple is actually valued at more than $2 billion less on the public market. Below is an interesting comparison of the two companies and their stocks.

Now, given that MNST is a smaller company and as a result is growing faster, I would not argue it should not trade at a premium to DPS, but this much of a premium seems a bit out of whack. If I was investing in a set of brands, I would choose DPS in a heartbeat. And the fact that I could get three times the revenue for a cheaper price would be icing on the cake.

In this current market, I suspect MNST shares are overvalued and DPS is undervalued. The energy drink market is growing faster and is more of an exciting growth story for investors, whereas the DPS brands, while prolific, only grow at the rate of GDP globally. As I try to find bargains in an overbought (my personal view) stock market, I am gravitating towards stocks like DPS. Not only do they look fairly inexpensive on a valuation and brand equity basis, but the value is even more apparent when they are compared with some of today’s hottest consumer companies.

Full Disclosure: Long DPS and no positions in CMG, MNST, LULU, PNRA, or UA at the time of writing, but positions may change at any time