Bob Evans Farms (NASDAQ:BOBE) recently appointed four new members to its board, all of them nominees of activist investor Sandell Asset Management. Sandell has been pushing for change at Bob Evans for nearly a year, owning over 6% of the restaurant. Activism is alive and well, with the likes of Carl Icahn blazing a trail for others. In its campaign, Sandell has pushed for getting Bob Evans to spin off its non-core packaged foods business, as well as its real estate.
The new board could be a big win for frustrated shareholders. Shares are up just 8% over the last two years. The idea being that new board members will be able to influence other board directors. The recent board win for Sandell gives the firm control of two-thirds of the board of directors.
What is Bob Evans?
Bob Evans Farms is a chain of family restaurants built on comfort foods. Its market cap is right at $1 billion, with almost 600 restaurants across 19 states. CEO Steve Davis was previously with Yum! Brands. But Sandell has accused the company of excessive and unnecessary expenditures, such as a $48 million new headquarter facility, not to mention the acquisition of a share in a private jet.
What Sandell wants
The company has already increased its share buyback plan in an effort to appease Sandell. That hasn't been enough. One of Sandell's keys is to get Bob Evans to sell or spin-off the segment that produces products, such as sausages and mashed potatoes for sale in supermarkets. That's because there are little synergies between that business and the restaurants it operates.
Unlike the typical restaurant company, Bob Evans doesn't lease its locations, but owns the real estate. Is it a hidden real estate play? Part of what Sandell wants is for the company to sell and lease back its restaurants. Sandell believes that its real estate value could be worth between $800 million to $1 billion - versus its $1.5 billion enterprise value.
Joshua Zamir of Capstone Equities also pegged the value of each of its real estate holdings at between $1.5 million to $2 million back in 2011.
But beyond real estate, Sandell wants the company to reduce SG&A expenses. That's because Bob Evans has significantly higher costs than its competitors, according to Sandell.
The investment thesis
It has been seven straight quarters since the company reported y/y earnings growth. It has actually reported lower y/y revenue figures for seven of the past nine quarters. Its operating profits are way down and same-store sales are on the decline. Its operating margin is just 1.6% over the TTM and its return on invested capital is less than 3%. However, the company does offer an above average dividend yield of around 2.7%, but that's a near 100% payout of its earnings.
The restaurant industry will be one of the biggest benefactors of a rebounding economy. However, there's a lot of uncertainty with the company. We saw a similar play with Capstone Equities nearly four years ago, but management remained steadfast then as well. Shares also trade at over 17x forward earnings, making it a bit more expensive than the other small-cap restaurant operators. There's little in the way of barriers to entry for the industry and little differentiation between brands. Although we're fans of Sandell, and take the new board members as a step in the right direction, we remain cautious and wait for a more concrete plan.
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