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Bob Evans Farms, Inc. (NASDAQ:BOBE) 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 traded Tuesday 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 Wednesday (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.
Source: Bob Evans Farms: Down Home Profits