Biglari Holdings (BH): When the Investment Portfolio Holds the Company's Own Stock

Biglari Holdings reported a $37.5 million net loss in fiscal year 2025. Before concluding anything from that number, it helps to understand what the Lion Funds own.

The Lion Funds—Lion Fund, L.P. and Lion Fund II, L.P.—are investment partnerships managed by Sardar Biglari through Biglari Capital Corp. Biglari Holdings holds interests in both funds. BH's proportionate share of its own common stock held within those funds had a fair value of $618 million as of December 31, 2025 [SEC] 10-K Note 3 .

That circularity is the gap.

Coverage Gap

When Biglari Holdings accounts for its interest in the Lion Funds under the equity method, gains BH's proportionate share of the funds earns on BH's own stock are eliminated—treated similarly to a treasury stock purchase rather than recognized as income. In FY2025, BH's interests in the Lion Funds gained $83.2 million overall. But $150.2 million of those gains came from BH stock appreciation, and those gains were fully eliminated from the income statement [SEC] 10-K Note 3 .

What the recorded partnership line captures is the actual performance of BH's fund interests' non-BH holdings only. In FY2025, those non-BH holdings lost $67.0 million pre-tax—the figure that appears on BH's income statement as the investment partnership line. After a $15 million tax benefit, the after-tax contribution to net earnings was -$52 million [SEC] 10-K Note 3 . That loss on third-party holdings is real. What is invisible to the income statement is the $150.2 million gain on BH stock within the funds—gains that existed but were fully eliminated because accounting treats intra-company circular holdings this way. An investor reading -$67 million in investment results sees a fund losing money on third-party investments. The underlying reality: a portfolio whose total value increased $83.2 million, with the BH stock gains invisible to the income statement.

Beyond the accounting, the conglomerate structure itself fragments coverage. Biglari Holdings' four segments span restaurants, property-casualty insurance, oil and gas production, and brand licensing—an unusual combination that rarely falls within any single analyst mandate. Investors should also consider the alternative explanation: that the combination of governance concentration (>50% beneficial ownership, no nominating committee), an adverse ICFR opinion, and a fixed management fee that rose as earnings fell represents rational avoidance rather than analytical oversight. The coverage gap itself does not answer that question.

Business

Biglari Holdings operates four segments, each distinct in economics and risk profile:

Restaurants. Steak 'n Shake has 404 units as of December 31, 2025—131 company-operated, 179 franchise-partner, and 94 traditional franchise. Western Sizzlin adds 31 units (3 company-operated, 28 franchise). The franchise-partner model requires operators to invest $10,000, pay up to 15% of sales plus 50% of profits, and run the unit as an owner-operator [SEC] 10-K Item 1 . Same-store sales at company-operated and franchise-partner restaurants grew 10.2% in FY2025. The restaurant segment contributed $23.1 million in pre-tax operating earnings [SEC] 10-K Item 7 .

Insurance. The insurance segment—First Guard Insurance Company, Southern Pioneer Insurance, and Biglari Reinsurance Ltd.—writes commercial trucking and other property-casualty coverage. The segment contributed $12.7 million in pre-tax operating earnings in FY2025 [SEC] 10-K Item 7 .

Oil and Gas. Southern Oil Company and Abraxas Petroleum produce oil and gas in the U.S. The segment reported $12.9 million in pre-tax earnings in FY2025, but $11.9 million of that came from property sale gains [SEC] 10-K Item 7 . These gains have appeared each year (FY2023 $13.6M, FY2024 $16.7M, FY2025 $11.9M)—recurring asset disposals that have obscured a deteriorating production business. Recurring oil and gas earnings were approximately $1 million in FY2025.

Brand Licensing. The maxim brand license contributed a $1.9 million pre-tax operating loss in FY2025 [SEC] 10-K Item 7 .

Moat / Mispricing

The accounting distortion is structural, not cyclical. The equity method treatment of Lion Fund interests, combined with the fund's large circular BH position, will produce this accounting pattern as long as the fund holds BH stock. No company event changes the treatment—it is baked into the ownership structure.

Operating cash flow remained positive in every year of the five-year period, ranging from $50 million (FY2024) to $229 million (FY2021), while GAAP net income swung from +$55 million to -$37 million in the same window [SEC] 10-K Statement of Cash Flows; FY2021–FY2022 from SEC XBRL . One significant caveat: FY2025's $107 million OCF includes $56 million in distributions from the investment partnerships—cash that reflects fund activity rather than the operating businesses. Excluding that amount, operating-business cash generation was approximately $51 million. The chart shows reported OCF; the divergence from GAAP net income reflects the accounting treatment of the circular investment.

The Steak 'n Shake franchise-partner model is the clearest operational positive in the current picture. By requiring operators to invest their own capital and share in profits, the model aligns incentives at the unit level in ways traditional franchise royalty arrangements often do not. The 10.2% same-store sales growth in FY2025 continued into Q1 2026, with domestic same-store sales up 10.0% and franchise-partner same-store sales up approximately 13%, even as company-operated net sales declined on a smaller direct-operated footprint [SEC] Q1 2026 10-Q . The SSS trend indicates the franchise-partner model is working at the unit level, even as total company operating earnings have declined.

Capital Allocation

Sardar Biglari serves simultaneously as CEO of Biglari Holdings and as investment manager through Biglari Capital Corp. The compensation structure has two disclosed components:

• Business services fee: $11.4 million paid to Biglari Enterprises (an entity owned by Mr. Biglari, alongside Biglari Capital Corp, together the "Biglari Entities") in 2025, up from $9.9 million in 2024. This fee is fixed by a rolling five-year agreement and does not vary with performance [SEC] 10-K Note 13 .
• Incentive arrangements: Two separate mechanisms. First, as general partner of the Lion Funds, Biglari Capital receives 25% of net profits above a 6% hurdle rate over a high-water mark. Second, a separate incentive agreement entitles Biglari to 25% of incremental equity attributable to operating businesses above the same hurdle structure. Neither triggered in FY2025 [SEC] 10-K Note 13 .

The $14.2 million total after-tax operating earnings is the 10-K's "Total operating businesses" figure—it takes the four segments' pre-tax earnings, deducts interest expense, the business services fee, other corporate overhead, and taxes. The $11.4 million business services fee (a pre-tax expense, already deducted in reaching this total) is equivalent in scale to total after-tax operating earnings for the year. Its increase in 2024–25 came during a period when total after-tax operating earnings fell 41% year-over-year. Sardar Biglari beneficially owns over 50% of outstanding voting stock [SEC] 10-K Item 1A Risk Factors , making the fee structure effectively self-reinforcing. The company does not maintain a governance and nominating committee [SEC] 10-K Item 1A .

Risks

Operating earnings decline. Total after-tax operating earnings were $39.2 million in FY2023, $24.1 million in FY2024, and $14.2 million in FY2025—a 64% decline over two years [SEC] 10-K Item 7 . Interest expense increased approximately 12× over the same period, from approximately $681,000 in FY2023 to $8.2 million in FY2025 [SEC] 10-K Item 7 . The FY2025 figure reflects three months of interest on the Steak 'n Shake note payable obtained September 30, 2025. The note carries $223.9 million at 8.8%, implying annualized interest of approximately $19.7 million pre-tax—a fixed annual burden that alone exceeds FY2025's $14.2 million in total after-tax operating earnings. Whether this trajectory represents a trough or a structural decline is the central question the accounting structure makes particularly difficult to answer.

Oil and gas earnings quality. The oil and gas segment's $12.9 million pre-tax contribution in FY2025 included $11.9 million in property sale gains—a recurring feature of the segment (FY2023 $13.6M, FY2024 $16.7M, FY2025 $11.9M). Excluding these gains, segment pre-tax earnings have declined sharply: approximately $12.2 million in FY2023, $3.1 million in FY2024, and $1.0 million in FY2025 [SEC] 10-K Item 7 . The segment is also exposed to commodity prices the company does not control, and producing reserves deplete without reinvestment.

Governance concentration. Sardar Biglari beneficially owns over 50% of outstanding voting shares [SEC] 10-K Item 1A . This means Biglari effectively votes on the compensation arrangement that benefits him. There is no practical mechanism for outside shareholders to override fee or capital allocation decisions.

Key-man concentration. Investment decisions, capital allocation, and the Lion Fund general partnership are all the responsibility of Sardar Biglari personally, as disclosed in the 10-K. There is no disclosed succession plan. Departure, incapacity, or a change in Biglari's relationship to the funds would remove the central organizing logic of the entire structure.

Internal controls. Management and the independent auditor concluded that internal control over financial reporting was not effective as of December 31, 2025. Four of five FY2024 material weaknesses were remediated; the remaining weakness covers controls related to the review and approval of insurance losses—directly affecting the segment that contributed $12.7 million in pre-tax earnings [SEC] 10-K Item 9A . Investors who rely on the accounting to understand the circular-ownership structure are doing so while the company's ICFR carries an adverse opinion.

Leverage and dilution. As of December 31, 2025, Steak 'n Shake carried approximately $223.9 million in note payable debt at 8.8% interest, plus $27.3 million in revolving credit. The company has registered up to $500 million of common stock for sale through an at-the-market offering [SEC] 10-K Item 1A , and the offering was already underway: approximately $15.1 million had been sold by February 24, 2026 [SEC] 10-K Note 18 . At current prices, $500 million would represent a substantial dilution relative to the $508 million implied market cap on an EPS-denominator basis.

Investment portfolio concentration. The Lion Funds hold a large, concentrated portfolio. To the extent the non-BH portion of the portfolio performs poorly, the accounting impact on BH's consolidated results is further complicated: losses on the third-party investments would be additive to whatever circular-ownership effect is running in that period.

Franchise-partner model durability. The 179 franchise-partner units are a relatively recent structure. Long-term unit economics at scale are not yet established over a full consumer cycle, and the current same-store sales momentum reflects a specific operating environment.

Technology and competitive change. The restaurant industry is subject to digital ordering, third-party delivery platforms, and pricing transparency that did not exist a decade ago. The 10-K identifies competition and technology as potential drivers of lower earnings. Whether the franchise-partner model is resilient to delivery-channel disruption—where the unit operator, not the brand, absorbs the delivery fee economics—is not yet fully tested.

Valuation

BH (Class B, no voting rights, with 1/5th the economic value of BH.A) and BH.A (Class A, 1 vote per share) together carry a combined market capitalization of approximately $1.225 billion [FMP] FMP market data . Applying a P/E multiple to GAAP earnings produces no meaningful result. The relevant comparison is between market capitalization and the total after-tax operating earnings base of $14.2 million. At the full economic market cap, that is approximately 86× after-tax earnings. Because approximately $618 million of BH's own stock is held within the Lion Funds and treated as treasury stock in EPS calculations, the 10-K EPS-denominator share count is approximately 261,000 Class A equivalent shares [SEC] 10-K Note 1 —roughly 58% lower than the economic count. On that basis, the implied market cap is approximately $508 million, or roughly 36× after-tax earnings. Both figures are high relative to the operating business alone. In addition, the company has registered up to $500 million in common stock for at-the-market sale, which is not reflected in either market-cap figure.

BH's interests in the Lion Funds had a gross fair value of approximately $772.6 million as of year-end, of which $618 million represents BH's own common stock [SEC] 10-K Note 3 . Separately, BH holds $69 million in marketable securities outside the funds [SEC] 10-K Note 4 . BH's equity method carrying value for its fund interests is approximately $154 million—equal to the gross fair value after excluding the BH stock portion treated as treasury stock. After the related $20 million deferred tax liability, the net balance sheet figure is approximately $134 million [SEC] 10-K Note 3 . The $223.9 million Steak 'n Shake note payable at 8.8% interest adds to the enterprise-value calculation for the operating businesses [SEC] 10-K Item 7 .

Conventional sum-of-parts analysis faces a fundamental obstacle: the boundary between the operating businesses and the investment portfolio runs through BH's own shares, and the accounting is designed to eliminate rather than expose that boundary.

Re-rating Catalyst

Sustained Steak 'n Shake same-store sales growth, if it persists through different demand environments, would demonstrate that the franchise-partner model has structural staying power rather than cyclical momentum. A reversal in the operating earnings decline—particularly if interest expense stabilizes and oil and gas recurring earnings recover—would provide evidence that the FY2023-to-FY2025 trend is a trough.

Clarification or simplification of the compensation structure—specifically the business services fee, which rose as operating earnings fell—would reduce whatever governance discount investors apply to the stock. Whether Biglari would agree to that reduction, given the voting control that makes it unnecessary for him to do so, is the open question.

The accounting structure that creates the coverage gap will not change while the Lion Funds hold BH stock. Re-rating from the operating side requires investors willing to work through the accounting to find what is underneath it.