Banking & Finance and Investing and Restaurants and Retail and Real Estate & Retail

Steak n Shake’s value menu isn’t all that looks cheap

March 23, 2013

Sardar Biglari’s unconventional ways aren’t getting a lot of respect on Wall Street. A handful of analysts believe that’s providing a juicy opportunity for investors to buy shares of his publicly traded company, Biglari Holdings Inc., on the cheap.

The San Antonio entrepreneur made a splash in Indianapolis six years ago by scooping up shares of locally based Steak n Shake Co., waging a campaign against existing management, and installing himself as CEO.

He soon rechristened the company Biglari Holdings and proposed a hedge-fund-style compensation system for himself—moves that fed into perceptions on Wall Street that the cocksure businessman, who is only 35, was out for himself.

Adding to the unease was his distaste for traditional public company metrics, such as revenue and profit, in favor of less-understood measures, such as intrinsic value. And not everyone was comfortable with his investment philosophy, which led him to plow Biglari Holdings’ cash into everything from insurers to other restaurant chains.
 

Sardar Biglari mug Biglari

On the surface, the results of his efforts look unimpressive. Shares of San Antonio-based Biglari Holdings are down 7 percent over the past 24 months, a span when the S&P 500 surged 20 percent.

But dig a little deeper, and it’s hard to grasp why the shares aren’t fetching more. Biglari Holdings two years ago began loading up on shares of Tennessee-based Cracker Barrel Old Country Store Inc. and now holds a nearly 20-percent stake worth $378 million.

Biglari Holdings’ overall stock market value is just $553 million. That suggests investors are assigning a value of just $175 million to the 501-unit Steak n Shake chain and the company’s other holdings.

It’s not as if Steak n Shake, which remains Indianapolis-based, has been a laggard under Biglari. Over the last four years, guest counts have increased 32 percent, with many diners drawn in by his value-pricing strategy, which includes four meals under $4. Though the average check size has fallen $1 during that span, relentless cost-cutting and higher customer traffic have swelled Steak n Shake’s operating profit from $11.5 million to $45.6 million.

“We now estimate BH could be worth almost $570 per share on a sum-of-the-parts basis,” CL King analyst Michael Gallo said in a report late last year. That’s nearly 50 percent higher than its current price, $384.

Gallo is bullish in part because he thinks the chain is a sliver of what it could become. Biglari, ever stingy about deploying his own capital, has shifted Steak n Shake from opening its own restaurants to franchising.

As of the end of the year, it had 414 company-owned stores, 87 franchised locations and another 171 in the franchising pipeline. Its franchising deals include one to open 40 stores throughout the United Arab Emirates.

Biglari doesn’t talk to the press. But in a December letter to shareholders, he said: “By pursuing a franchising strategy, we are teaming up with partners in our determination to become a global brand. I have always believed that Steak n Shake is a brand that can be ubiquitous.”

Such ambitious plans carry risks, of course. But Gallo is a believer. He sees the potential to expand Steak n Shake to 1,500 locations.

Bring on the 7X7

Steak n Shake never has been the first choice of the healthy-eating crowd. But the company’s new AllNighter menu might give even the most carnivorous diner pause.

Most decadent is the 7X7 Steakburger, which features seven beef patties and seven slices of American cheese in a towering one-pound burger. The stats: 1,330 calories and 98 grams of fat for $7.77.

Biglari hasn’t carried on the commitment to providing healthier options that was a hallmark of his predecessor, Peter Dunn. Menu items debuting under Dunn included grilled chicken sandwiches and an array of yogurt milkshakes.

Dunn’s strategy was to make Steak n Shake more of a regular dining destination rather than an occasional treat. He also wanted to avoid having one family member who preferred healthier fare vetoing the restaurant because of the lack of lower-calorie offerings.

Biglari, though, ditched the yogurt shakes and the healthier-option advertising. While he kept the grilled chicken, the chain’s menu has 11 items with more than 1,000 calories.

Dunn—who now is CEO of Activate Healthcare, which operates workplace-based clinics—wouldn’t discuss the menu’s changes under Biglari.•
 

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