Sardar Biglari, CEO of Steak 'n Shake (NYSE:SNS) restaurants, has already begun moving ahead on his plan to make over the company into a holding company. The company engineered a reverse stock split and is planning to change its name to Biglari Holdings.Will the newly-constructed company eventually successfully join the ranks of Warren Buffett's Berkshire Hathaway (NYSE:BRK.A, BRK.B)?
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Steak 'n Shake, The Restaurant
First things first. Biglari, a former hedge fund manager, has already performed a superb operational turnaround on the restaurant chain, Steak 'n Shake. Steak 'n Shake's recent quarter continued the startling momentum with a fourth quarter profit of $5.5 million, compared with a loss of $3.4 million, in the year ago quarter. The EPS was $3.82, versus a loss of $2.43 a share. The company also posted $312 million in investment gains.
Steak 'n Shake, The Holding Company
As a capital deployment company, Biglari has attempted to buy Freemont Michigan Insurance Corp., but has been rebuffed, and has folded Western Sizzlin', a steak house, into his holdings. The move to turn Steak 'n Shake into a holding company is a controversial one. Investors have criticized Biglari as a "Buffett wannabe" and have cringed at his heavy-handed style already. Biglari does have his defenders, claiming his methods are usual and necessary for such a conversion of a company. Even some earlier critics are backing off, taking a wait-and-see approach.
The Real Berkshire
Warren Buffett's legendary Berkshire Hathaway evolved into the holding company it now is over many decades. Buffett and Charlie Munger invested in many undervalued stocks, and with Berkshire's insurance holdings, utilize the cash thrown off to invest in still more holdings. The success of Berkshire has been historic. Still, even legends are scrutinized. Berkshire received a recent analyst's downgrade, while on the other hand, Larry Coats Jr., senior portfolio manager for Oak Value Capital Management, says his fund is "all in on Berkshire."
A Daunting Task
Biglari won't be the first to try to emulate Buffett's successful approach. Edward Lampert, CEO of Sears Holdings (NYSE:SHLD) has tried to turn Sears/K-Mart into a platform for capital allocation. Sears, however, has performed poorly and is not a popular stock in the investment world, though it too finds its defenders. Likewise, Lampert is not accorded the oracle or even curmudgeon status of Buffett, though again, some applaud him. Sears Holdings has performed nothing like a Berkshire, however.
The private equity giant Blackstone (NYSE:BX), have found a mini-nightmare with one of its holdings, Sea World, where one of the whale trainers was tragically killed recently. For holding companies with far-flung stakes in all kinds of businesses, it's an extreme reminder there's always a risk of unforeseen, even bizarre, troubles in completely unexpected areas. Blackstone certainly can weather this, but what happens if even one of the initial Biglari investments simply goes bad? There is not the Berkshire or Blackstone cushion of billions of dollars of retained capital to smooth this out.
The Bottom Line
Sardar Biglari may well succeed wildly with his classic intrinsic value approach. Still, an investment right now in the stock about to become Biglari Holdings is more like an act of faith in the new approach. Biglari has a solid investment track record, but Steak 'n Shake, as of yet, doesn't. Buying shares now is certainly getting ahead of the fundamentals of the new direction of the company, an irony that starkly stands in contrast to what the new mission will be. Investors will be funding the venture first, then they'll have to wait for the fundamental results later. We concur with the assessment that investors should take a wait-and-see approach is more than fair. Visible results first, invest later. (More than 70 years after his death, this man remains one of the great figures of Wall Street. To learn about the historical icon, read J.D. Rockefeller: From Oil Baron To Billionaire.)
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