Bob Evans Versus Sandell Asset Management

You log into your TD Ameritrade account and see that your Bob Evans Farms (NASDAQ: BOBE  ) investment is up 33.1% in the past year. If you're human, then this would likely make you happy. And this doesn't include a 2.2% yield.

Therefore, you might be wondering why Sandell Asset Management -- a 6.5% owner of the company -- is so determined to make changes. This relates to recent underlying business performance as well as the thought that Bob Evans should be worth $80 per share. At the time of this writing, it's trading at $52.17 per share. Let's take a look at this dramatic situation and see which side offers a stronger argument.

First blood
Earlier this year, Sandell Asset Management sent a letter to the Bob Evans' board demanding change. Sandell cited a history of inaction and failure to deliver value to shareholders. It also mentioned that the board was apathetic, which likely didn't go over too well. Furthermore, Sandell pointed out the failure of Mimi's Café, which was sold for a $133 million loss after nearly six years.

In order to increase shareholder value, Sandell presented several ideas, including the separation of Bob Evans Restaurants and Bob Evans Farms and a sale leaseback through a public real estate firm. Sandell awaited a response for three months, but it was only greeted with the faint chirping of crickets.

Adding salt
After not receiving a response, and its ideas seemingly having been dismissed, Sandell sent another letter. This time, Sandell was sure to point out poor second-quarter results, including a $0.23 earnings-per-share decline and a 1.5% comps decline year over year. Sandell also noted that similar restaurants had been growing their comps during the same time frame, with Cracker Barrel Old Country Store (NASDAQ: CBRL  ) growing comps 2.8%, Denny's (NASDAQ: DENN  ) delivering a 1.2% comps improvement, and DineEquity's (NYSE: DIN  ) showing a robust 3.6% improvement.

Since we're on the topic of peer comparisons, let's take a closer look at these other companies.

Bob Evans vs. peers
First let's consider top-line performance comparisons over the past year. Over this time frame, Cracker Barrel has seen its revenue increase 1%. Denny's, Bob Evans, and DineEquity have all suffered revenue declines of 2.5%, 8.3%, and 16.5%, respectively. Bob Evans might not be the top performer in the group, but it seems to be inline with industry trends.

Now consider stock performance comparisons over the past year. All four companies have delivered positive returns for their investors: Cracker Barrel 81.1%, Denny's 53.4%, DineEquity 39.5%, and Bob Evans 32.4%. While Bob Evans plays the caboose role here, it's still in positive territory.

Also keep in mind that Bob Evans yields 2.2%. While this isn't as generous as Cracker Barrel at 2.6% or DineEquity at 3.6%, it's more generous than Denny's, which doesn't pay a dividend. And Bob Evans' debt-to-equity ratio of 0.4 is the strongest in the group. Cracker Barrel, Denny's, and DineEquity, have debt-to-equity ratios of 0.8, 0.4, and 4.5, respectively. 

However, Bob Evans has lagged its peers when it comes to profit margin, which can indicate management effectiveness, or lack thereof. Bob Evans has a negative profit margin of 0.5%, whereas Cracker Barrel, Denny's, and DineEquity all sport positive profit margins of 4.4%, 5.8%, and 11.3%, respectively.

On the other hand, Bob Evans has generated $174.9 million in operating cash flow over the past year, less than Cracker Barrel at $208.5 million but more than Denny's and DineEquity at $59.9 million and $87.6 million, respectively. This cash flow allows Bob Evans to reinvest in its business and return capital to shareholders. For instance, it has bought back $225 million worth of shares this year, and, as stated above, it currently yields 2.2%.

In a Bob Evans response to Sandell, the company points out that a sales leaseback would lead to expensive financing and reduce flexibility for remodels and closures while also reducing cash flow. In regards to separating Bob Evans Restaurants and Bob Evans Farm Foods, the company wants to stay the course, which it expects will lead to sales synergies, margin expansion, and brand enhancement.

Bob Evans expects a 250 basis point expansion in FY 2015, and a 300-350 basis point improvement in FY 2018. Bob Evans also stands by its long-term goal of 8%-12% earnings-per-share growth.

What does it all mean?

The takeaway
Sandell likely has a valid point about increasing shareholder value in the near term. However, Bob Evans seems to be taking a poised approach to long-term growth. The company isn't performing well, but neither are the majority of companies throughout the industry.

Bob Evans has at least set itself up for future improvements, and based on company projections, there is reason for optimism. In the meantime, Bob Evans generates enough cash flow to please its investors via share buybacks and dividend payments. 

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