Bob Evans Farms, Inc. - Donkey Wars Part IV A New Hope
CrazyBull and Donkey just won’t let me be.
It all started last week when I was just sitting at my computer researching stocks. My Skype icon began to blink, and I thought it might be Donkey since he doesn’t have a phone.
“What’s the Bull been telling you about Bob Evans Farms?” an angry voice queried.
“Nothing”, I replied. “I haven’t spoken to CrazyBull all week.”
“Well, the words all over the net that the Bull’s gonna be pumping Bob Evans Farms next. What do you know about that those boys?”
“Well, they are a mid-sized restaurant chain out of the mid-west. They operate about 569 sit-down family restaurants under the Bob Evans Farms brand name. These are casual dining shops with waitress service that dish up comfort food with a down-home twist. I know they serve catfish for example, and they’re big on sausage. They also bought a chain called Mimi’s a few years back, which is a little more upscale with a French Cuisine inspired menu. They got about 146 of those. I’d say the things that make them stand out to me are that they are regional – mostly in the Midwest and Southwest – and also that they manufacture with about a half-dozen plants that produce some of their signature line dishes both for the restaurants and for supermarkets.”
“Good job! I see you’ve been doing you homework. But I’ve heard nothing yet that will make you Bull-proof. Yank up the yahoo chart and max it out for me.”
“It looks good,” I said.
“Good? That’s Bull-talk! That chart looks like Dick Cheney’s cardiogram. If you need a restaurant, why the hell don’t buy Mickey-D’s? They’ve got a chart so smooth you could ski on it.”
“Well, the right end of the chart is a lot higher than the left end.”
“Oh, I can see CrazyBull is going to have no trouble with you. Those seven sausage factories you’re all so fired proud of. There unionized you know. And what is Donkey holy investment commandment number ten?”
“Don’t buy any stock unless it has twenty consecutive years of raising its dividend?”
“No! Don’t invest in any company with a unionized labor force!”
“Donkey, are you sure you have these commandments written down? They seem to change every time I talk to you.”
“Look, let’s cut to the chase. The economy is in the dumpster. You have a sit-down restaurant chain that is a discretionary luxury to most people. Unemployed people are going to eat at home or maybe do a McDonalds or Burgher King and not go to a place where you have to tip. You have QE-screw that did nothing to fix the economy but sent commodity prices flying. Is this the time to be investing in a commodity intensive, labor intensive business that offers a service that people can do without?”
“Well, when you put it that way, no. But take a look at these divy’s. Isn’t that something? And it has always been known as a good divvy grower. Donkey Likee, No?
Bob Evans Farms
Annual Dividend – last five years
Donkee likee not at all. Divy’s are the desert. Earnings are the main course. Let’s look at those – and let’s project our into the future a little bit.
Bob Evans Farms
Annual Earnings Per Share – last five years
If you look at the actuals, it was at $2.10 in 2008 and it is still at $2.10 in 2010. So it’s gone nowhere in two years. But the projections aren’t much better. There’s a call for $2.30 in 2011 but they were at $2.28 already in 2009 so that’s two years accreting at a penny a year. That puts the crazy back into CrazyBull if you ask me.
“But $2.50 for 2012.”
“Sure, if they make it. But right now, it’s all pie in the sky – and not even all that much pie either - $.20 on $2.30.
“But don’t they usually? Usually make it I mean. I mean, look at the chart. They’ve been a good grower all these years of share price, earnings and the divy. They’ve definitely had their ups and downs, but if it’s been beta-mania up there it’s also been just as much alpha-mania, no?”
“Yeah, yeah. As far as it goes, you’re right. If you bought them twenty years ago, you’re probably pretty happy. But go ahead and throw the Mickie-D chart on top of the Boob, excuse me BOBE chart and you’ll see more less the exact same Alpha with none of the ups and downs. And if that’s so, where’s your argument for Boobie?”
“They’ve been strong lately, pushing up into the thirties.
“Yeah, well you buy on a pop and you’ve bought at the top.”
At this point, I was beginning to think the Donk was right. In a way, it seems a little unfair to compare any company to the McDonalds juggernaut, but it was there and trading on the exchange and you’ve got to buy into the better franchise. Donkey, sensing he was near victory, drove his point home with one final argument.
“And let me tell you something else. Bob Evans has a decent record. I might even say it is buyable at a price. But all that was run up under the Evan’s family. When the family was in charge, they threw up some good years. But those guys are all gone back to Petticoat Junction to retire or worse. Now they’ve got a fast food crew in from YUM that probably doesn’t even understand the casual dining world. These guys are promising nice dough, but are an unproven commodity. What I do know is BOBE deworsified into a Mexican chain a few years back and lost their shirt and as soon as they managed to get out of it they bought into Mimi’s which is looking weak.”
That did it for me. “You know Donkey, I think you’re right. I won’t let CrazyBull talk me into buying any Bob Evans Farms.”
“Terrific!” Donkey was pretty charged. “My work here is nearly done. But before I go, what’s my recommended allocation?”
The Donkey Allocation. That was another thing that seemed to change all the time. But I was almost done, so I took a stab at it. “Fifty percent tips, twenty percent gold royalty companies, five percent junior minors and twenty-five percent blue chip stocks that have raised their dividend each year for at least twenty years.”
“And”, he demanded?
“And a cash reserve of course.”
“Outstanding! Now, stop bothering me and let me go make some money.”
The pop-up containing Donkey’s image collapsed, and for the moment I was left alone with my thoughts. But not for long I thought. The weekend was coming up, so CrazyBull might call me at any time. As I think you have guessed, CrazyBull is Donkey’s great rival. They are perfect opposites in every way. CrazyBull is a palm-castor for one of the big investment houses and he does hold part of my portfolio, so it is not at all unusual that he might call me about buying some Bob Evans. But Donkey’s motive is rather mysterious since he doesn’t manage my money or anyone else’s except his own. He spends quite a bit of time on that, and in face many people think he doesn’t even have any other job. But more on that for next time.
Anyway, Crazy, the Donk and I were all great friends since elementary school, but Donkey and CrazyBull had a great falling out in our Junior year in High School. I think CrazyBull said that Roger Moore could take Sean Connery in a fair fight, and then it took three line backers to hold Donkey down. But it was all so long ago, I don’t really remember anymore. Anyway, at that moment the phone bleeped.
“I don’t want any Bob Evans Farms” was my greeting.
“Ha, ha. I dare say the Donkey has been at you old sport. Quite right too, don’t you know. Our research department put out a conviction buy on good old Bob Evans, and they’re the best on the street if you want my opinion. But it’s up a couple of bucks recently. You might of got in cheaper last week, I did you know. I buy everything on our top ten list. But really, you are much better off buying into an uptrend. I would have held off myself, but I don’t like advising anyone to buy something I don’t own myself.”
“Donkey says that if you buy on a pop you buy at the top.”
“Well my firm says buy high, sell higher.”
“Donkey says Bob Evans is no good. He says if you want a chop house, why don’t you buy McDonalds. Also, he says there’s no more Evans at Bob Evans and they brought in a new crew that from YUM that doesn’t know sit down. And he says Mimi’s sucks”.
“First of all, Donkey wouldn’t have bought Manhattan from the Iroquois for $24 bucks. Second of all, those statements are all over-simplifications. McDonalds is a great stock, and I can tell you I own a hell of a lot more McDonalds than I do Bob Evans, but Bob Evans is a great story too. So unless you only want to only own McDonalds in your portfolio, we think you might want to take a look at Bob Evans. It’s true that if you look at the latest historical results you would have got just as much growth from McDonalds as from BOBE without so much volatility, but for most of the time over the past twenty years or so, BOBE would have looked like a faster grower. And now that the BOBE management is projecting strongly, I think that longer term trend might reassert itself and BOBE might grow a bit faster in the future – as you would expect a small cap to out pace a blue chip.
As far as the management goes, it is true that the Evans family did a wonderful job with the company. They took it from one cash register to a great chain, and they made plenty of people money along the way. But unless Donkey proposes that we go to a one hundred percent nepotism management selection model, new blood eventually has to be brought in. The Chairman of the Board and CEO is a man named Steve Davis. He is out of YUM. He was President of Long Johns and President of A&W and he was also with Kraft for nine years which is important since Bob Evans has a grocery line. The Chief Operating Officer is a man named Harvey Brownlee and he’s out of Kentucky Fried Chicken and Pizza Hut. With those backgrounds, I do think I can forgive the both of them if their last names are not Evans.
About the other chains. They did have a Mexican chain that they were unhappy with and they got out of it. But that is how you do things in retail. You put new concepts out there and then expand them if they are good and close them down if they don’t work out. Mimi’s is a little slow right now because it is more upscale than the regular Bob Evans Farms restaurants and so it is suffering more from the recession. However, when the economic cycle turns more favorable it may spring back strongly. The world needs upscale restaurants too, you know. If Donkey had been out on a date since Space 1999 went off the air he might agree”.
“But Donkey says they have unions in their factories and they are labor intensive and they have to buy all these commodities that ran up under QE2.”
“Well, the fact is that Bob Evans Farms is like all the other companies in the United States, they’ve been working like crazy to keep labor costs under control and in fact labor costs were down in the last quarter. So he can state his theory but at some point he is going to have to back it up with facts. Also, an interesting note on commodity prices is that Bob Evans stores tend to be in commodity producing regions of the country like the mid-west and southwest so I am not so sure they don’t benefit from higher agricultural and energy prices.”
“That’s an interesting thought. It’s kind of like a lot of the grey-beards are honking these bugtussle S&L’s out in the boondocks as a clever play on rising grain prices. What you’re saying is, after Jed hits the bank he might pull in for a plate of catfish.”
“Well, we are getting a little speculative now. Let’s just put it like this. Bob Evans Farms has a fine long-term record and has built earnings, dividends and share price over the years. It has had a couple of tough years like nearly every business. The last year was still weak but the last quarter was stronger including slightly better same store sales in the flagship Bob Evans Farm restaurants. Management is projecting half-way decent earnings growth of 7 – 10 percent going forward and they seem like a reasonable experienced management team that could reasonable be expected to pull that off. The stock is in a recent uptrend. They promise no more Mimi’s stores for the foreseeable future and even for the flagship Bob Evans stores they plan to close more poor performers than open new ones. They are planning to remodel close to ten percent of the Bob Evans restaurants however, and we recall that re-modeling existing stores played a big role in the McDonalds turnaround of a few years back. On the downside, you are getting a 2.5% - 3% dividend and the payout ratio is only 33% so that isn’t likely to be cut and debt as a percent of equity is less than 15% so it’s unlikely to go out of business. In the end, you have to consider that these cookie-cutter retail concepts which are working in one place and can be replicated across the country are proven wealth builders. Can you see why I’m in?”
“Only 15% debt? Even the Donk ought to like that!”
Yes, and another thing, old Donk loves his hard assets, doesn’t he? Well BOBE is tuffed with real estate like a thanksgiving turkey. They own a ton of nice store sites. That’s nice if commercial real estate goes strong, that’s nice if we get Donkey’s off predicted inflation and that’s nice even if you just don’t like shelling out for a lot of rent. That’s why the got them in the first place. The Evan’s family liked to run a tight ship. But you might be able to unlock a lot of value putting those on the block and renting back. And a related point, come to think of it, the company is under-franchised for the same reason. There could be some big money collecting franchise fees. The managers work a lot harder when they own the shop. Can you see yourself pulling the trigger on a baby like this?”
I said that I could, and our conversation turned to our plans for the weekend, which is what he really called about. After he rang-off, I thought to myself that I was probably more with CrazyBull than Donkey on this one. But I might try their dividend reinvestment plan so that I can dollar-cost into it. That might be the way to play it if you were confident about the long haul but thought it might be looking a little toppy for the short-term...
But there are so many arguments to consider on both sides. Sometime I wish CrazyBull and Donkey would just leave me alone!
My skype icon started blinking. I knew I shouldn’t, but I clicked on it.
"What’s the Bull been telling you about SCANA?” and angry voice cried.
Next month – South Carolina Gas and Electric – Donkey Wars Episode V, The Donkey Strikes Back!