Biglari Holdings Goes Crackers

By Will Ashworth | October 11, 2012 AAA
Sardar Biglari, CEO of Biglari Holdings (NYSE:BH), has taken his latest proxy fight (the second in two years) to a new low, accusing Cracker Barrel Old Country Store (Nasdaq:CBRL) of misrepresenting incoming Chairman James Bradford's corporate experience. More specifically, as the owner of 17.3% of Cracker Barrel's shares, Biglari feels that existing management claimed on several occasions that Bradford was the former CEO of a New York Stock Exchange company, when in fact he was CEO after it became a private company in 1988.

The insinuation was delivered October 8 in a letter addressed to the Cracker Barrel board of directors. While not as voluminous as Biglari's 10-page opus from November 2011, it nonetheless reeks of desperation. Biglari shareholders be warned - this man's ego will ultimately be his undoing. Here's why.

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Stock Performance
How has Biglari's stock done so far in 2012? It's up 1.83% compared to a gain of 34% for Cracker Barrel. In a September 21 article in Restaurant Finance Monitor, the author, Jonathan Maze, quotes Biglari: "We believe that positive changes implemented by the company would not have occurred without our involvement."

That's a pretty brazen thing to say. Cracker Barrel's long-term track record has been one of delivering solid value to shareholders. Since Biglari became CEO of Biglari Holdings on Aug. 7, 2008, its stock is up 159%, compared to 171% for Cracker Barrel over the same period.

In my Investopedia article from September 2011, I mentioned the Homestead Small Company Stock Fund and its long-term ownership of Cracker Barrel stock. A shareholder since 2001, Homestead now owns 141,600 shares of the company, an increase of 10,000 since the publication of my article last fall. Given a four-star rating by Morningstar, its three portfolio managers have been running the fund since 1999. Obviously, Mark Ashton and the other managers at Homestead see significant intrinsic value in Cracker Barrel.

Share Prices Follow Earnings
As part of Biglari's September 20 proxy filing with the SEC, it makes the following argument: "In fiscal 2012 (excluding the impact of the 53rd week) Cracker Barrel increased its operating income per diluted share by 9.5% from $7.07 to $7.74, but its market price moved up by over 40% in fiscal 2012. Clearly, the Company's stock outperformed its underlying business. We believe this divergence cannot continue."

Biglari is absolutely correct when it asserts that share prices follow earnings. However, it uses an arbitrary one-year period to make its argument that Cracker Barrel's share price has run away from reality. If you expand the period of time under the microscope to one decade (fiscal 2002-2012), Cracker Barrel's operating income per diluted share grew 6.68% on an annualized basis from $2.66 in 2002 to $7.74 in 2012. At the same time, its stock had an annualized total return of 13.24%, a 656-point difference. I hardly would characterize the differential as meaningful or in some way detached from reality. Sardar Biglari inadvertently makes Cracker Barrel's case.

Civil Penalty
It's interesting that Biglari would accuse Cracker Barrel of fudging James Bradford's experience when in September it was fined $850,000 by the Department of Justice, on behalf of the Federal Trade Commission, for violating the Hart-Scott-Rodino Antitrust Improvements Act in June 2011. Biglari acquired more than $66 million in Cracker Barrel stock between May 24, 2011, and June 13, 2011; had it not requested two seats on the board and an in-person meeting to discuss how to increase shareholder value, it's likely that the FTC would have upheld the "passive investment" exemption under 10%. Biglari had to have known about this rule. He either didn't want to tip his hand too early or simply didn't care. Whatever the reason, this was the first complaint by the FTC involving the passive investment exemption since 2004.

The Bottom Line
Sardar Biglari is often compared to Warren Buffett of Berkshire Hathaway (NYSE:BRK-A, BRK-B) fame. Biglari's a cheap imitation. gives Biglari a 17% approval rating for his running of its Steak n Shake subsidiary. That's not surprising, given his comment at the Biglari Holdings annual meeting that Cracker Barrel wastes space at its restaurants by providing employees with their own restroom. Frankly, I don't want to have to compete with employees just to use the bathroom. There's sensible and then there's just plain cheap. At 34 years of age, Biglari has yet to learn a thing or two about humility and decency. His ego will get the best of him soon enough. Shareholders proceed with caution.

At the time of writing, Will Ashworth did not own shares in any company mentioned in this article.

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