Company Overview

Biglari Holdings Inc. (NYSE:BH.A) is a diversified holding company with a wide range of business interests, including restaurant operations, insurance, brand licensing, and oil and gas. Over the past decades, the company has demonstrated resilience and adaptability as it navigates through various industry dynamics and market conditions.

Historical Background

Founded in 1923 as a small restaurant chain called Steak 'n Shake, the company has grown significantly over the decades, expanding its footprint across the United States. In 2008, Sardar Biglari took control of the company and began to transform it into a diversified holding company. Under Biglari's leadership, the company has strategically expanded its reach beyond the restaurant industry.

In 2011, Biglari Holdings acquired Western Sizzlin, a steak-focused restaurant chain, further solidifying its presence in the food service sector. The company then branched out into new industries, acquiring First Guard Insurance Company in 2013 and Maxim magazine in 2014. These acquisitions marked Biglari Holdings' entry into the insurance and media industries, respectively.

Challenges and Adaptations

The company's journey has not been without challenges. In the early 2010s, Steak 'n Shake faced declining sales and profitability. In response, Biglari implemented a turnaround plan that involved refranchising company-owned stores and focusing on cost-cutting measures. These efforts helped return the restaurant division to profitability.

The year 2020 brought another significant challenge with the COVID-19 pandemic, which impacted various divisions of Biglari Holdings, including restaurants, insurance, and media. Despite these disruptions, the company was able to continue operating throughout the pandemic, demonstrating its resilience in the face of unprecedented circumstances.

Financials

The company's financial performance has been marked by both successes and challenges. In the fiscal year ended December 31, 2023, Biglari Holdings reported annual revenue of $365.32 million and a net income of $54.95 million. The company generated an operating cash flow of $73.00 million and a free cash flow of $49.60 million for the year. However, the preceding year, the company experienced a net loss of $32.02 million, primarily due to the impact of the COVID-19 pandemic on its restaurant operations.

In the most recent quarter (Q3 2024), Biglari Holdings reported revenue of $90.41 million, a slight decrease of 0.58% compared to Q3 2023. Net income for the quarter was $32.13 million, representing a 43.19% decrease year-over-year. Operating cash flow decreased by 27.42% to $10.76 million, while free cash flow declined by 29.79% to $3.69 million. The decrease in financial performance was primarily attributed to lower performance in the restaurant operations segment.

Business Model and Strategy

Biglari Holdings' diversified business model has contributed to its resilience. The company's insurance operations, which include property and casualty insurance, have provided a stable revenue stream, helping to offset volatility in other segments. Similarly, the Maxim brand has expanded its licensing and media activities, adding to the company's revenue diversity.

One of the key strengths of Biglari Holdings is its dynamic capital allocation strategy. Under Sardar Biglari's leadership, the company has made strategic investments and acquisitions to enhance its competitive position and drive long-term growth. This approach has included the acquisition of majority stakes in investment partnerships, which have generated significant investment gains and losses over the years.

Risks and Volatility

However, Biglari Holdings' reliance on investment partnership gains and losses has also introduced volatility in its financial results. These investment gains and losses, which are typically driven by market fluctuations, can have a material impact on the company's quarterly and annual earnings.

The company's restaurant operations, which include both company-owned and franchise locations, have faced their own set of challenges. The COVID-19 pandemic disrupted the industry, leading to temporary restaurant closures and changes in consumer behavior. Biglari Holdings has worked to adapt its operations, including transitioning more locations to the franchise model, in an effort to improve profitability and operational efficiency.

Recent Performance

In the company's latest quarterly report, Biglari Holdings highlighted the continued recovery of its restaurant segment, with increased same-store sales and improved margins. The insurance operations also demonstrated strong performance, with underwriting gains from both First Guard and Southern Pioneer.

Future Outlook

Looking ahead, Biglari Holdings remains focused on leveraging its diversified business model to navigate the evolving market landscape. The company's management team has emphasized the importance of prudent capital allocation, disciplined cost management, and strategic investments to drive long-term shareholder value.

Liquidity

Despite the challenges faced by the company, Biglari Holdings' shareholders have seen notable returns over the past five years, with the stock generating a 59% return during this period. The company's ability to adapt and capitalize on new opportunities will be crucial as it continues to navigate the dynamic business environments across its various industries.

As of September 30, 2024, Biglari Holdings maintained a strong liquidity position with low debt levels. The company reported cash and cash equivalents of $29.89 million. Its debt-to-equity ratio stood at a low 0.015, indicating a conservative capital structure. The company has a line of credit that was amended on September 13, 2024, to increase the available line to $35 million. As of September 30, 2024, the balance on the line of credit was $9 million. The current ratio of 1.47 and quick ratio of 1.44 further demonstrate the company's solid short-term liquidity position.

Segment Analysis

Restaurants Segment Biglari Holdings' largest operating subsidiaries are involved in the franchising and operating of restaurants, primarily through its Steak n Shake and Western Sizzlin brands. As of September 30, 2024, the company had 468 total restaurant locations, including 143 Steak n Shake company-operated stores, 177 Steak n Shake franchise partner stores, 116 Steak n Shake traditional franchise stores, and 32 Western Sizzlin restaurants (3 company-operated and 29 franchise stores).

Restaurant operations revenue totaled $62.38 million in Q3 2024 and $188.85 million in the first nine months of 2024, representing slight increases of 0.8% and 0.7% respectively compared to the same periods in 2023. The increase was primarily driven by a 5.4% increase in Steak n Shake same-store sales during Q3 2024.

Cost of food at Steak n Shake's company-operated restaurants was 30.8% of net sales in Q3 2024, relatively consistent with 30.3% in Q3 2023. Labor costs increased from 31.1% of net sales in Q3 2023 to 33.2% in Q3 2024, mainly due to higher store-level manager headcount. Restaurant-level earnings before income taxes were $6.51 million in Q3 2024 and $17.16 million in the first nine months of 2024, down from $3.75 million and $20.78 million, respectively, in the comparable prior-year periods.

The company continues to transition Steak n Shake from a company-operated to a franchise model, with the number of franchise partner stores decreasing slightly from 181 as of September 30, 2023, to 177 as of September 30, 2024.

Insurance Segment Biglari Holdings' insurance operations consist of First Guard Insurance Company, Southern Pioneer Property Casualty Insurance Company, and Biglari Reinsurance Ltd. These subsidiaries primarily underwrite commercial insurance products such as commercial truck insurance, garage liability, and commercial property insurance.

In Q3 2024, the insurance segment generated $18.25 million in premiums and other revenue, up from $16.62 million in Q3 2023. Pre-tax underwriting gain was $2.28 million in Q3 2024, compared to $2.20 million in the prior-year quarter. For the first nine months of 2024, premiums and other revenue was $53.67 million, and pre-tax underwriting gain was $3.68 million, compared to $50.40 million and $6.65 million, respectively, in the first nine months of 2023.

First Guard Insurance's underwriting performance declined in 2024 compared to 2023, with a pre-tax underwriting gain of $1.37 million in Q3 2024 versus $2.36 million in Q3 2023. Southern Pioneer Property Casualty Insurance reported a pre-tax underwriting gain of $912,000 in Q3 2024, compared to $166,000 in Q3 2023, as its loss ratio improved.

The insurance segment also generated investment income of $816,000 in Q3 2024 and $2.69 million in the first nine months of 2024.

Oil and Gas Segment Biglari Holdings' oil and gas operations are conducted through its Abraxas Petroleum and Southern Oil subsidiaries. Abraxas Petroleum operates in the Permian Basin of West Texas, while Southern Oil primarily operates offshore properties in the shallow waters of the Gulf of Mexico.

Oil and gas revenues were $9.57 million in Q3 2024, down from $12.16 million in Q3 2023, and $27.75 million in the first nine months of 2024, down from $35.12 million in the first nine months of 2023. The decrease was primarily due to lower natural gas prices and production declines during 2024.

Abraxas Petroleum recorded earnings before income taxes of $696,000 in Q3 2024, down from $17.99 million in Q3 2023. For the first nine months of 2024, Abraxas Petroleum's earnings before income taxes were $19.50 million, compared to $21.04 million in the first nine months of 2023.

Southern Oil reported earnings before income taxes of $16,000 in Q3 2024, compared to $963,000 in Q3 2023. For the first nine months of 2024, Southern Oil's earnings before income taxes were $32,000, down from $2.90 million in the first nine months of 2023.

Despite lower earnings, the oil and gas segment generated significant cash flow, with Abraxas Petroleum recording a $16.70 million gain on the sale of undeveloped reserves during the first nine months of 2024.

Brand Licensing Segment Biglari Holdings' brand licensing and media segment is operated through its Maxim subsidiary. In Q3 2024, Maxim's revenue was $202,000, down from $268,000 in Q3 2023. For the first nine months of 2024, revenue was $715,000, compared to $1.62 million in the first nine months of 2023.

Maxim's earnings before income taxes were $267,000 in Q3 2024, compared to $239,000 in Q3 2023. For the first nine months of 2024, Maxim's earnings before income taxes were $876,000, up from $91,000 in the first nine months of 2023, primarily due to lower licensing and media costs.

Conclusion

In conclusion, Biglari Holdings Inc. is a diversified conglomerate that has demonstrated resilience and adaptability in the face of evolving market conditions. With its diversified business model, strategic capital allocation, and experienced management team, the company remains well-positioned to capitalize on future growth opportunities and create value for its shareholders. While facing challenges in certain segments, particularly in restaurant operations, the company's insurance and oil and gas segments continue to contribute to its overall financial performance. Biglari Holdings' focus on transitioning to a franchise model in its restaurant segment and its ability to generate cash flow from various operations demonstrate its commitment to long-term value creation and adaptability in changing market conditions.