As many here know, Jacob McDonough is the author of the book "Capital Allocation: The Financials of a New England Textile Mill 1955 - 1985" and a frequent commentator on Berkshire.

In a recent article, he makes the case that Biglari Holdings (BH) is selling below liquidation value, even though the performance of the business (not the stock) has been satisfactory over the last 15 odd years.

He compares it to purchase of Berkshire Hathaway stock by Mr. Buffett from 1962 to 1965, although the reasons BH's price is depressed are very different from the reasons Berkshire stock was depressed when Mr. Buffett started buying it. One possible reason, which if I recall correctly was discussed on the old TMF board on Berkshire Hathaway, is that the market thinks Mr. Biglari is a wolf in sheep's clothing.

Nevertheless, Mr. McDonough makes compelling case for BH (though he is not claiming that BH stock's results will mimic BRK's stock results going forward).

"Based on the Class A shares of stock, BH has $1,121 of investments per share against a stock price of $968 per share. Even though the company owns valuable operating businesses as subsidiaries, BH is trading below the value of its portfolio of stocks alone. BH has a book value of $2,105 per share, so the company is selling for 46% of book value. Pretax operating earnings per share amounted to $138 in 2023, so even if you ignore all of their cash and investments, BH is trading for less than 7 times pretax earnings of wholly-owned businesses.

This situation made me think back to the early days of Berkshire Hathaway. The stock price of Berkshire compounded at a rate of 29.2% from 1962 to 1985. Where exactly did the returns of Berkshire come from? The book value of Berkshire compounded at 19.3% per year over this time period. When Warren Buffett first invested, Berkshire was trading for 37% of book value. By 1985, Berkshire’s valuation was up to 166% of book value. I calculate that this multiple expansion added returns of 6.7% per year over this 23 year period. Share repurchases can probably account for the 3.2% of returns that are leftover. Basically, Buffett was able to leverage discounted capital, and turn it into equity capital that was fully valued. I am not saying that Biglari Holdings will match the results of Berkshire. I only use this example to illustrate how a low valuation can be a form of leverage if multiple expansion ever occurs. As the case with Berkshire showed, the leverage can be meaningful."

mcdinvestments.substack.com - Biglari holdings bh in defense of

Thoughts welcome.