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Down Home Profits with Bob Evans Farms

December 01, 2009 | About:
Bob Evans Farms, Inc. is a growing family of regional brands. The $1.75 billion company owns and operates 713 full-service restaurants and a complete line of retail food products under the Bob Evans and Owens names. The Bob Evans Restaurants are located in 18 states with a heavy concentration in the Midwest. Mimi’s Cafés are in 24 states with nearly one-half of the units located in California. Restaurants generate about 82% of revenues and 85% of profits.


Despite weakness in restaurant sales earnings for FY 2010 (ends April 2010) are expected to be about $2.27 versus FY 2009’s $2.10 /share. Zacks see modest growth to $2.39 for FY 2011.


BOBE trades this morning at $25.18 or just 11.1x this year’s estimate and< 10.6x next year’s projections. They recently raised the dividend to a quarterly rate of $0.18 making the current yield a decent 2.86%.


Finances are reasonable with total interest coverage of > 8x. Value Line and S&P each rate BOBE’s financial strength as B+ or better.


Here are the per share from continuing operations as reported by Value Line:
























































FY*


Sales


C/F


EPS


Div.


Ave. Yield


Ave. P/E


2005


41.24


2.93


1.04


0.48


1.9%


24.3x


2006


43.98


3.35


1.34


0.48


1.9%


18.5x


2007


47.08


3.75


1.58


0.56


1.7%


20.3x


2008


56.74


4.53


1.84


0.56


1.8%


17.0x


2009


57.00


4.76


2.10


0.60


2.5%


11.4x


* FYs end April 30th





Today’s quote makes these shares look very cheap based on P/E and yield compared with all the years profiled above. In fact, expecting the past year’s action, both the multiple and current yield are the best values in about fifteen years.


The 10-year median P/E has been 14x and the past 5 years saw an average multiple of > 18x. A rebound to even 13 times the $2.27 estimate for the FY ending in April would bring BOBE shares back up to $29.50 or 17.2% above today’s price. These shares go ex-dividend tomorrow (Dec. 2) for the latest 18 cent payout.


If you look out about 18 months a 13 multiple would lead to a $31.10 price target and a total return of > 25% on this relatively conservative holding (Beta = 0.9).


Here’s a nice seven-month play that works out well even if these shares do absolutely nothing from now until June 18, 2010.




























Cash Outlay


Cash Inflow


Buy 1000 BOBE @$25.18 /share


$25,180




Sell 10 Jun. $25 Calls @$2.80 /share




$2,800


Sell 10 Jun. $25 Puts @$2.60 /share




$2,600


Net Cash Out-of-Pocket


$19,780







If Bob Evans merely remains above $25 (as it is today) through Jun. 18, 2010:


· The $25 calls will be exercised.


· You will sell your shares for $25,000.


· The $25 puts will expire worthless.


· You will likely have collected $540 in dividends.


· You will have no further option obligations.


· You will hold no shares and $25,540 in cash.


That best-case scenario would be a total return of $5,760/$19,780 or + 29% cash-on-cash achieved in about 7.5 months on shares that did not need to go up at all.





What’s the risk?


If Bob Evan shares finish below $25 on June 18, 2010:


· The $25 calls will expire worthless.


· The $25 puts will be exercised.


· You will be forced to buy another 1000 BOBE shares.


· You will need to lay out a additional $25,000 in cash.


· You will have no further option obligations.


· You will likely have collected $540 in dividends.


· You will end up with 2000 BOBE shares.


What’s the break-even on the whole trade?


On the original 1000 shares it’s their $25 .18 purchase price less the $2.80 /share call premium = $22.38 /share.


On the ‘put’ shares it’s the $25 strike price less the $2.60 /share put premium = $22.40 /share.


Your overall break-even point would be $22.39 /share (ignoring yield). BOBE could fall by as much as $2.79 /share (-11%) without causing a loss on this trade.



Summary:


Bob Evan Farms looks to be somewhat undervalued by historical standards and has an above average yield, decent financials and a low Beta. Outright purchase could see respectable total returns over the coming 6 – 18 months.


Buying BOBE and writing at-the-money calls and puts would allow for almost a 30% total return over the next 7.5 months even if the shares just mark time.


The buy/write also provides a 11% margin of safety in case things don’t go as expected.





Disclosure: Author is long BOBE shares and short BOBE options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.5/5 (6 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago




Value Bob Evans Farms Inc. By: Tracey Ryniec of ZACKS

February 01, 2010

BOBE’s food products business is boosting the bottom line as consumers stay home to eat.

Bob Evans Farms Inc. (BOBE - Snapshot Report) increased its dividend in Nov 2009 by 12.5% and also announced further stock repurchases of up to million shares as the company felt confident in its financial strategy going into 2010. The company is expected to report fiscal third quarter 2010 results on Feb 9.

Bob Evans Farms operates restaurants under the Bob Evan’s and Mimi Cafe brands across the country. It also distributes pork sausage products under the Bob Evans and Owen brands.

Since I last reviewed the company in June 2009, it has surprised on estimates the next two quarters and now has a surprise streak of 4 beats in a row.

The company is being hit hard as consumers pull back on eating out. In the fiscal second-quarter 2010, reported in early Nov 2009, restaurant net sales fell 3.3% compared to the year ago quarter with same-store sales at Bob Evans restaurants down 2.8% and at Mimi’s Cafe they fell 6.8%.

However, the company saw a jump in its food product segment as more consumers ate at home. Sales rose 1.6% as pounds sold of comparable products increased 10% compared to the year ago quarter (sales were impacted by promotional discounts to retailers relative to the increase in the pounds sold.)

This increase helped offset the losses on the restaurant side of the business.

“Despite the challenges in our restaurant segment, our strong performance in the food products segment and effective cost management gives us the confidence to reaffirm our operating income outlook for the 2010 fiscal year,” said Steve Davis, CEO.

Zacks Consensus Estimates Rise

The third quarter Zacks Consensus Estimate is up 1 cent to 61 cents in the last 60 days. The fiscal 2010 Zacks Consensus has also climbed a penny to $2.28 in that same time period. Analysts expect earnings growth of 8.41%.

Bob Evans is a Zacks #2 Rank (buy) stock. It still has attractive value characteristics. The company is trading with a forward P/E of 12.4 and a price-to-book ratio of 1.39. Bob Evans also has a 1-year return on equity (ROE) of 11.76%.

The company’s dividend is currently yielding 2.50%.

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