Bob Evans Likely to Suffer from Sector Troubles

Increasing mortgage payments, higher transportation costs, higher prices for natural gas to heat and cool your home, and many losing their jobs as unemployment increases. Just as with my call on theupdown.com for CBRL (CBRL), which is down 7.8% in the last eight days, Bob Evans Farms (BOBE) looks destined for a large miss.

When inflation hits, the first thing that consumers cut back on is eating out. If they have to eat out, they swing through McDonald's (MCD) and hit their value meal (nothing hits the spot like a double cheeseburger for a dollar, when you are broke). When you can't pay your bills, it becomes a great time to start a diet, which means quit eating lunch all together or feed the kids before you go out. No matter how you look at it this sector will suffer along with all of the groups that are not necessities.

The second thing that will hit this group is higher food costs. The problem with higher commodity pricing, it is very difficult for restaurants to pass on the expense when the consumer is already strapped. The fear of losing a customer they need so badly, will further crush margins that are already thin.

The current environment will not hurt the cheaper or fast food establishments, it will probably not affect fine dining, but everything in the middle will have it tough creating a barbell affect. Another problem is that many people are canceling trips as with Memorial Day. This will also hurt restaurants as people eat out when they go on vacation, and now many just can't afford it. 12% cancelled their trips as per the Deloitte and Touche survey. There is also the 3 million share buyback that was announced on May 21st. This is usually announced before earnings when they are going to miss. They figure to get some good news before their stock is crushed.

There is also negativity with respect to their chart, which is in a trend that looks to be heading to $23. The chart seems to point to a fall of around $25 on a miss, but there could be incredible upside if they do meet earnings expectations. My guess is they will continue their current trend, and will for some time.

Current earnings estimates have them declining by 2.4% year over year when the industry is estimated to be down 44.9% for the quarter. This year's rise of 11.4% while the industry looks to decline 41.1% over the same time frame leaves me skeptical. I also don't believe that in this environment that they can beat the first quarter of last year's revenues by 5.5% as the analysts are guessing. This quarter's estimates have been revised downward over the last 90 days from $.43 to $.41 per share.

All of this points to this sector heading lower and it should for the rest of the year as inflation continues to be a problem in the short term. We have to put up with some of these issues for a while as we first tackle the credit crisis and then go after the fast increase in the price of oil. No doomsday, but I do believe it will be a tough year for this stock.

Disclosure: None

Comments

[John Gordon:]

In addition to the comments above, the company's core markets are in the Mid-West (Ohio, IN, PA) where population growth has slowed, the population is older and gasoline issues always have had a large impact, even back to the 1980s, when we first started in this business !

2008 Jun 03 12:54 PM

[User 25814:]

Reasonable analysis. Maybe the reason it turned out to be so wrong is the "Wal*Mart effect". The poor economy is causing Wal*Mart to pick up a lot of business that would have ordinarily gone to higher-end retailers. Maybe some people are having dinner at Bob Evans now, that would go to a steakhouse if their budgets weren't so tight.

2008 Jun 04 12:06 PM

[secmaven:]

BOBE beat the artifically low WS earnings estimates this morning and the stock was up nearly 20%. WS analysts play this game all the time. Establish bogus targets knowing the company will not hit them and then tell their trading desks ahead of time which way to bet. WS analysts are scam artists. You missed this one big time.

2008 Jun 04 12:09 PM

[tom mustric:]

The analysis on BOBE, presented by FILLOON, a typical analysist, suggested that BOBE in trends may be headed to 25, but adds that if BOBE meets its projection targets, which it underestimates and outperforms, to advance Q up, went up 5, is a steady 30 plus.
Plus BOBE's buy back of shares in front of reporting helps investors in BOBE, supports any profit takers, and money manager's equity.

The analysis, in my opinion, may rather be that new MIMIs are becoming a hit; expanding is planned; perhaps a future spin off may be directed; and, my trips to MIMIs sees that it's popular! This may not suggest inside accounting profits shifted to BOBE but the future is bright:
BOBE has a following of loyal customers, especially investor customers, and good predictible menu value for predictable service and food.
The serving that Bush dishes out for any America's depression will be managed soon by a new president. As Bush leaves, he may have gotton one over on the American people, who made fun of him, to get the "last laugh." When interviewed during his father's presidency to be asked what he thinks of the office of president, he commented, "Well, it is a good job." Don't sell America short!
The next president should do a great job, and BOBE will benefit. Next BOBE may vertically integrate its supply, do night pizza considerations at convert BOBE to mini Mimi, perhaps franchise.
BOBE is well managed now with leadership things may happen!

2008 Jun 06 01:51 PM

[legmaker:]

Tommustric, I still dont like this stock and it should be shorted on poor slowing economy, sure do love the whole depression thing, guess we will have 25% unemployment before it is all said and done too. Nice try, but that kindof slant is just a little to political for me. Look at the stock and current sectors as there are better ones to be in, if you want to push Barrack's election do it somewhere it is fitting.

2008 Jun 17 10:28 AM