Biglari Holdings (NYSE:BH), the personal fiefdom of CEO Sardar Biglari, is best known for its activist investment in Cracker Barrel Old Country Store (Nasdaq:CBRL). Biglari picked up 9.7% in June 2011. His company now owns 20% of Cracker Barrel. What ultimately happens in this tug of war is anybody's guess. If Biglari's first-quarter earnings are any indication, however, he should be worrying more about his own operations, which were mediocre at best. You'll want to avoid Biglari's stock. Here's why.

SEE: How To Analyze Restaurant Stocks

Steak 'n Shake
Sardar Biglari thinks he can run Cracker Barrel better than current management can. He's spent 20 months accumulating a significant position in Cracker Barrel, yet his restaurant operations aren't exactly performing like a house on fire. Steak 'n Shake's 2013 first-quarter same-store sales (ending Dec. 19, 2012) increased 1.3% on a 1.6% increase in traffic. That's not horrible but it's not any better than Cracker Barrel, whose same-store sales in its 2013 first quarter (ending Nov. 2, 2012) increased 3.3% on a 0.8% increase in traffic. Cracker Barrel produced twice as much increased revenue as Steak 'n Shake at restaurants open at least a year despite a lower increase in traffic. In fact, it was Cracker Barrel's fourth consecutive quarter of positive comps for traffic, restaurant sales and retail sales. Mr. Biglari might have managed to pull Steak 'n Shake from the wreckage in 2009, but that doesn't mean he knows what's best for a restaurant chain that's outperforming his own. Perhaps Cracker Barrel CEO Sandra Cochran should give Biglari a tip or two instead.

SEE: A Guide To Investing In Consumer Staples

Stock Performance
Since Biglari announced its 9.7% interest in Cracker Barrel on June 3, 2011, Cracker Barrel's stock has gained approximately 50% compared with about 1% for Biglari and 30% for PowerShares' Dynamic Leisure and Entertainment Portfolio (ARCA:PEJ). I mention this particular exchange traded fund because Cracker Barrel is a 2.63% weighting and one of 11 restaurant companies in the fund's portfolio. While a stock's performance doesn't always tell a good company from bad, the fact that Biglari itself has benefited from Cracker Barrel's exemplary performance is ironic given that its CEO isn't just content to own a good investment, but wants to force changes where it appears none are required. In the past year, Cracker Barrel's board has twice upped its quarterly dividend to 50 cents providing shareholders with $2 per share in annual payments, a yield that is higher than 3% despite a big run-up in its stock. Meanwhile, Biglari's stock pays no such dividend and has delivered nowhere near the capital appreciation. Mr. Biglari should follow his supposed idol Warren Buffett's example and leave the operations to people who have real experience running restaurants.

SEE: Foods With The Biggest Price Increases

Biglari's first-quarter earnings before income taxes were $5.9 million, 60% less than in the first quarter of 2012. So what exactly prompted the decline in pretax earnings? That would be its restaurant operations, which declined by 37% year over year to $8.8 million thanks in part to higher food costs and restaurant operating costs. This was despite a 1.4% increase in net revenues. Making matters worse, its pretax income would have been significantly lower if not for the $2.5 million in dividend income it received from Cracker Barrel. It seems to me that Biglari wants to get his hands on Cracker Barrel not because he can make it better, but because it generates so much more cash flow than either of his own restaurant operations. That's a great investment thesis for Biglari; not so good for Cracker Barrel. Hence why they've initiated a poison pill to keep Biglari from gaining a control position.

SEE: 5 Grocery Staples That Are Going Up In Price

The Bottom Line
As if Sardar Biglari's ego isn't big enough, he's managed to convince the board that his last name has real value; should he be pushed aside through a change of control or some other involuntary termination, he would receive from the company a royalty of 2.5% on all revenues generated from products and services bearing his name for a minimum of five years. It's not enough that shareholders have been seriously let down by his financial machinations, but now he wants an additional perk in case he's shown the door.

This man is the anti-Buffett. Owning its stock will continue to be a major disappointment.

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

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Investing Basics

    Top Tips for Diversifying with Exotic Currencies

    Is there an opportunity in exotic currencies right now, or are you safer sticking to the major ones?
  6. Mutual Funds & ETFs

    The 3 Biggest Mutual Fund Companies in the US

    Compare and contrast the rise of America's big three institutional asset managers: BlackRock Funds, The Vanguard Group and State Street Global Advisors.
  7. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  8. Professionals

    5 Top-Rated Funds for Your Retirement Portfolio

    Mutual funds are a good choice for emotional investors. Here are five popular funds to consider.
  9. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  10. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!