Be Careful Betting On The Action At Bob Evans Farms

| About: Bob Evans (BOBE)
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Bob Evans Farms had a poor financial performance in its latest fiscal year, including a sharp drop in operating profitability.

The company's performance has led to a sagging stock price.

Sustainable profit growth may be hard to achieve, providing little momentum for a higher market valuation.

Restaurant operator and packaged food manufacturer Bob Evans Farms (NASDAQ: BOBE) has had its fair share of media attention lately, thanks to an acrimonious public relations battle with major shareholder Sandell Asset Management, who is trying to gain control of the board through the ballot box. The attention, though, hasn't done much for the company's share price, which has performed relatively poorly, dropping roughly 4% over the past year, thanks to weak overall profit growth, highlighted by a 39.2% operating income decline in its latest fiscal quarter.

However, with Sandell Asset Management poised to potentially capture some board seats, due in part to some support from proxy advisory firms, perhaps a better share price performance is in the company's future. So, is it a good time to bet on Bob Evans Farms?

What's the value?

Bob Evans Farms is a major player in the value-priced dining space, operating a network of more than 560 restaurants around the country, mostly in the Midwest and southeast regions. The company has also extended its brand into the packaged food area, selling a variety of frozen and refrigerated products to more than 31,000 retail partners. While the brand extension should theoretically enhance the company's profitability, through more efficient use of its production facilities, things haven't exactly worked out that way, evidenced by a downward trajectory for its operating profitability over the past few years.

Its latest fiscal year was another poor showing for Bob Evans Farms, starting with flat overall top-line growth that was negatively impacted by a 2.1% comparable store sales decline at its restaurant unit. While the company's packaged foods segment had somewhat better sales growth than its restaurant segment, with revenues up 6.6%, the unit's profitability was hurt by higher production costs and a rise in the cost of commodity prices, especially for sows, which averaged $73.23 per hundredweight during the period compared to $53.87 per hundredweight in the prior year period. The net result for Bob Evans Farms was a steep decline in operating profitability, with its adjusted operating income falling 45.9%.

Looking for a reason to buy

Of course, profit declines generally aren't synonymous with rising market valuations, at least in this author's experience, so the question is whether there is hope for profit growth at Bob Evans Farms in the foreseeable future. On that score, there seems to be some potential good news, as the company's latest forecast projects FY2015 EPS of $1.90 to $2.20, a gain over the adjusted EPS of $1.68 earned in the latest fiscal year. Bob Evans Farms' forecast assumes a 1.5% to 2.5% increase in comparable store sales for its restaurant operation and solid double-digit sales growth for its packaged food business, estimated at 16% to 18%.

On the downside, it is unclear whether or not the company will actually be able to generate a FY2015 comparable store sales gain in its restaurant operation, the segment that accounts for more than 70% of its total revenues. While the company has touted positive comparable store sales impacts from its store redesign initiative and the rollout of its broasted chicken platform, its FY2015 forecast assumes restaurant segment sales of $950 to $960 million, roughly the same sales total that it generated in FY2014. In addition, with a P/E multiple of 22 to 25 times FY2015 estimated EPS, Bob Evans Farms' stock price seems to be trading at a premium level, given the company's poor track record of profit growth over the past few years and the uncertainty of its ability to deliver profit growth in the near future.

Also disconcerting is the fading top-line growth of some of Bob Evans Farms' competitors. Cracker Barrel Old Country Store (NASDAQ: CBRL), for one, has had difficulty adding to its customer base lately, reporting a 2.9% decrease in customer traffic volumes in its latest fiscal quarter that was mostly responsible for a negative comparable store sales performance during the period, down 0.6%. More importantly, with management forecasting a marginally positive comparable gain for the full year, it doesn't appear that the trend is going to demonstrably improve anytime soon. Meanwhile, Red Robin Gourmet Burgers (NASDAQ: RRGB) has posted similar results to Cracker Barrel Old Country Store, reporting a 2.5% decrease in customer traffic volumes in its latest fiscal quarter. While the company managed to eke out a comparable store sales gain for the period, up 1.2%, management toned down expectations for the remainder of the year, which has had a negative impact on its stock price.

The bottom line

Bob Evans Farms is an intriguing story, given the presence of an activist investor who is attempting to create a sense of urgency on the part of management and create shareholder value. However, with sales growth forecasted to remain muted over the next year, up an estimated 4.5%, the company seems to be relying quite a bit on margin expansion in order to meet its profit goal. Given the company's recent lack of success in the margin expansion department, investors might want to wait for the company to start delivering on its forecast prior to placing a bet with their hard-earned money.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.