Income Investing Made Easy
Income investing isn’t easy with yields approaching record lows, which means searching for turnaround could be the last source of value in this market.
Case in point: Bob Evans Farms Inc (NASDAQ:BOBE). The company may be a work in progress, but it’s already started to turn a corner after a disappointing 2015 and tumultuous 2016. In June, the company’s share price took a hit when its fourth-quarter results missed expectations. This wasn’t a huge surprise when you consider the broader restaurant industry is heading for a recession.
To prevent this from happening at Bob Evans, the company has taken strides to restore sales growth and profitability.
On the corporate side, this includes streamlining operations by closing underperforming stores, significantly cutting costs, and paying down $112.0 million in debt. To help boost restaurant sales, the company made progress during the fourth quarter with redesigning its menu and improving core menu items.
These steps are paying off. In the first quarter of fiscal 2017, Bob Evans reported strong earning-per-share (EPS) growth and raised its fiscal 2017 EPS guidance. All the while, the company continues to have an active stock repurchase plan and generous dividend payout. In fiscal 2016, the company purchased $172.0 million in shares.
About Bob Evans Farms, Inc.
The pastoral-sounding Bob Evans Farms Inc is a leading full-service restaurant company with more than 650 locations primarily in the Midwest, Mid-Atlantic, and Southeast regions of the U.S. (Source: “Our Company,” Bob Evans Farms Inc, last accessed October 24, 2016.)
The company operates under the names Bob Evans and Mimi’s Café. Its namesake chain includes about 565 family-style restaurants in 20 states that are best known for breakfast items such as bacon, eggs, hotcakes, and sausage products. Its Mimi’s Café is a casual dining chain, operated through subsidiary SWH Corporation.
In addition to its restaurants, Bob Evans Farms (BEF) markets its own sausage and bacon products along with refrigerated side dishes and frozen food products under the “Bob Evans” and “Owens” brands at supermarkets and other grocery retailers.
For those of us in the income investing business, this stock is a standout. Bob Evans also provides an annual dividend of 3.36%, or $1.36 per share. The company has raised its annual dividend for the last 10 consecutive years. In 2006, it paid an annual dividend of $0.50 per share; this represents a 10-year increase of 172%. (Source: “Bob Evans Farms, Inc. Dividend Date & History,” NASDAQ, last accessed October 24, 2016.)
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On August 31, Bob Evans announces its financial results for the first quarter of fiscal 2017, ended July 29, 2016. The company announced that first-quarter net income increased 114% year-over-year to $9.2 million, or $0.46 per share. (Source: “Bob Evans Reports Fiscal 2017 First-Quarter Results and Raises Fiscal 2017 EPS Guidance,” Bob Evans Farms Inc, August 31, 2016.)
The net sales of Bob Evans’ restaurants segment was $220.4 million, a 7.7%, or $18.3 million, decrease. In the first quarter of fiscal 2016, net sales were $238.7 million. Same-store sales dropped 4.3% as a result of five restaurant closures and zero openings over the course of the quarter. BEF Foods had net sales of $85.9 million, up 3.5%, or $2.9 million, in comparison to $83.0 million in the same period a year prior.
“BEF Foods began fiscal 2017 with continued strong volume growth during the first quarter,” said Saed Mohseni, president and chief executive officer of Bob Evans Farms Inc. “While Bob Evans Restaurant sales remained challenged during the first quarter, we are encouraged by the moderating sales trend that began in July and continued into the second quarter, with quarter-to-date same-store sales of -2.0 percent through August 29.”
Looking forward, the company increased its GAAP diluted EPS guidance range to $2.00 to $2.17 from $1.95 to $2.12. Likewise, the company’s non-GAAP diluted EPS guidance range has been raised to $2.05 to $2.20 from $2.00 to $2.15.
“At Bob Evans Restaurants, we continue to expect full-year negative low-single digit to flat same-store sales and a neutral to slightly positive commodity cost environment. Additionally, we will continue to invest in improving the guest experience to drive sales. As for BEF Foods, we have lowered our sow cost forecast to reflect current expectations for the remainder of the fiscal year,” Mohseni added. “At the corporate level, we have lowered our interest expense guidance to reflect a lower than anticipated interest rate environment this year and we will maintain our focus on lowering corporate and other costs required to support our businesses.”
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This Stock Has Long-Term Potential
Bob Evans Farms is a work in progress with tremendous long-term upside potential. The company’s share price took a hit in June after reporting weaker-than-expected fourth quarter results, but has had solid momentum since then.
This stock isn’t just for income investing; it has room for capital appreciation too. Currently trading near $40.60, the company’s share price has advanced 15% since hitting a tested support level near $36.00 in early July. Currently, Bob Evans’ share price has resistance at $46.00 and $49.00.
To help boost restaurant sales, the company made progress during the fourth quarter with redesigning its menu and improving core menu items. At the corporate level, it completed its previously announced real estate monetization initiatives with the completion of a $197.0-million sale-leaseback transaction of 143 restaurant properties. It also completed the $52.0-million sale-leaseback of two BFF Foods production facilities. (Source: “Bob Evans Reports Fiscal 2016 Fourth-Quarter and Full-Year Results; Provides Fiscal Year 2017 Outlook,” Bob Evans Farms Inc, June 14, 2016.)
Both of these transactions have helped support the company’s nearly $500.0 million of capital returned to shareholders through share repurchases and dividends over the last three years.
“With these significant financial transactions behind us, our focus in fiscal 2017 is to profitably grow both BEF Foods and Bob Evans Restaurants while continuing to improve the efficiency at all levels of our company,” Mohseni said.
The bottom line is that income investing today isn’t easy, but turnaround situations like Bob Evans Farms Inc could be the last source of value around.