Follow Biglari Into the Middle East

NEW YORK (TheStreet) -- Biglari (BH) has been called a miniature Berkshire Hathaway (BRK.A). But the company is now operating in a way that makes it much closer to restaurant conglomerates such as Darden (DRI) and Yum Brands (YUM). Biglari's strong turnaround of the Steak 'n Shake brand and continued international expansion should reward investors.

Back in 2008, Biglari took control of Steak 'n Shake, a chain of 24-hour restaurants offering cheap burgers and shakes. There were 524 Steak 'n Shake locations at the end of the 2013 fiscal year. Two big new initiatives by this chain should have investors lined up to follow Biglari's plans for the restaurant's continued turnaround.

In its annual letter to shareholders, Biglari said it's going to grow the Steak 'n Shake brand around the world by focusing on a franchise-based model. The company describes it as "a non-capital-intensive strategy that generates high-return, annuity-like cash flow."

Steak 'n Shake opened its first international location in Dubai during the 2013 year. This first store is part of a 40-location franchise agreement signed in October 2012 with Saleh Bin Lahaj. Saleh Bin Lahaj has had success franchising American brands such as Chili's and Macaroni Grill in the Middle East.

Last week, Steak 'n Shake signed a new deal for 50 locations to be built in Saudi Arabia in coming years. The deal, with AB Holdings, takes the total agreement to 90 restaurants in the Middle East. Steak 'n Shake will also open its first European location in 2014, the product of a new office in Monaco that aims to connect Steak 'n Shake to Europe.

Steak 'n Shake's shift to franchising should reward investors, as it requires less capital investment and brings in strong annual earnings. Of the company's 524 locations, only 106 were franchised. This is up from the 71 franchised locations in 2010, when Biglari started really focusing on franchising.

With the new international locations, that number will steadily climb and represent a greater overall percentage of the total. There are more than 170 units signed to franchise agreements. Total revenue for Steak 'n Shake restaurants was $737.1 million in fiscal 2013. Franchise revenue was $8.7 million in fiscal 2013, and the company believes it will grow to more than $12 million in fiscal 2014.

Franchise numbers should also increase with a new, more universal restaurant location plan. Biglari has recognized that Steak 'n Shake locations can be inside airports, gas stations and shopping malls. This should take the number of domestic restaurants higher as well. CEO Biglair said, "As an agile and adaptable organization, we will go where the customers want or need to be."

Biglari's other brand is Western Sizzlin'. There were 84 Western Sizzlin' locations at the end of the fiscal year. Unlike Steak' 'n Shake, Western Sizzlin' has the majority of its locations franchised, with only three locations owned by the company. With Biglari's increasing presence in Europe and the Middle East, Western Sizzlin' could see strong expansion with existing franchise partners.

Beyond the company's own brands is a partial ownership stake in restaurant chain Cracker Barrel (CBRL) The ownership of 20% of Cracker Barrel shares has been in the news several times as Biglari's CEO Sardar Biglari continues to fight Cracker Barrel management for a $20 special dividend and a spot on the board.

Biglari has been unsuccessful in this fight and as recently as last week received an offer from Cracker Barrel to buy out his stake. Although I don't believe Biglari will sell soon or give up his fight, investors should be happy as they have been pleasantly rewarded. Biglari Holdings paid $241 million for its 20% stake in Cracker Barrel. At the end of the 2013 fiscal year, that stake was worth $485. Along the way, Biglari has also collected $18.4 million in dividends.

Biglari's earnings are also complicated as they can only recognize what is paid out in dividends by several of its investments. In 2013, Steak 'n Shake had earnings of $28.4 million, while Western Sizzlin' represented only $511,000. The Lion Fund, which includes several investments, had earnings of $128.2 million, representing the majority of the company's fiscal earnings.

Biglari Holdings has a complicated ownership structure with assets shifted between the company and holding companies such as The Lion Fund I & II. However, past all of the structure is great growth and asset value that investors might be undervaluing.

Shares of the company trade in the triple digits, but there is a limited number of shares outstanding. This company, valued at less than $1 billion, should see steady growth with its continued Cracker Barrel fight and the expansion of its own brands, particularly in the Middle East.

Biglari's shares were recently trading at $506.62.

At the time of publication, the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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