Biglari Holdings Inc (BH): How to Invest in Cracker Barrel Old Country Store, Inc. (CBRL) … the Smart Way

Despite its stock flying at multi-year highs and impressive earnings figures, Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) remains under attack by activist and takeover specialist Sardar Biglari of Biglari Holdings Inc (NYSE:BH). The company has resisted the investor’s efforts every step of the way, recently swallowing a poison pill to prevent his firm from obtaining more than 20% ownership. With the recent earnings release, minority shareholders may not be likely to vote in favor of change– ie. giving Biglari seats on the board. Still, some believe the investor holds solid suggestions for further enhancing shareholder value. With the most recent earnings in mind, and Biglari’s annual meeting on the horizon, is Cracker Barrel a smart pick?

Brief history
Biglari Holdings Inc (NYSE:BH) owns $358 million worth of Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL). That makes up all but $122 million on Biglari Holdings’ market cap. Why such a concentrated portfolio for a holdings company Biglari has a history of doing well with quick-service restaurant chains. The investor owns Steak n Shake, as well as Western Sizzlin’. Both were in deep trouble before Biglari began his activist stake, and since then, both have recovered — and even prospered.

The battle for Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) seems to be a bit different though, as the stock has gained 60% in two years, and more than 23% in the last three months. Using the typical measure of what is a successful investment, Biglari Holdings Inc (NYSE:BH) has already far passed the satisfactory mark for his company’s position in the roadside restaurant chain. So why are the two at such odds?

For one thing, Biglari believed, as recently as the third quarter of last year, that the company was misrepresenting its ROC for stores open less than one year — by a fat margin. While Cracker Barrel boasts more than 16% returns, Biglari thinks its closer to 3%. This would dictate a vast difference on key performance indicators for management. In a letter to shareholders from last October, Biglari writes,

The Board has spent nearly $700 million in capital over the past eight years, while over the same time span operating income has grown by an insufficient $12.4 million. New stores have been opened, but they shroud the decrease in unit profit.

It’s certainly an interesting point, given the stock’s performance in recent years, and shareholders’ adversity to Biglari Holdings Inc (NYSE:BH)’s quest.