Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Bob Evans Farms (BOBE) plummeted on Wednesday after the company reported disappointing third quarter earnings and announced that it would not be separating its food business from the rest of the company. As of noon, shares were down more than 22%.
So what: Bob Evans reported revenue of $357 million, up 5% year-over-year but shy of analyst estimates by about $2 million. Non-GAAP net income of $0.60 per share also came up short of analyst expectations, missing by ten cents.
Bob Evans has two main segments: BEF Foods, which produces and distributes packaged food products, and Bob Evans Restaurants. The restaurant segment accounted for 70% of Bob Evans' sales during the third quarter, with same-store sales rising 3.8%.
Activist investor Sandell Asset Management, which holds a 9.2% stake in the company, has been pushing Bob Evans toward separating its restaurant business and its food business. Sandell believes that Bob Evans Restaurant's real estate assets alone are worth $900 million, nearly all of the company current market capitalization.
Now what: Bob Evans didn't rule out a separation entirely, stating that it would not be pursuing the option at this time. This leaves the door open for a future deal, and the company has retained JP Morgan to assist with evaluating strategic alternatives.
Bob Evans stock has been rising since last September, and the decline today only brings the stock price back to where it was before the rise. The lack of a deal today was a major disappointment for investors, given how hard the stock has fallen, but I suspect Bob Evans will eventually separate into two businesses. There doesn't appear to be any real advantage in having both businesses under one roof, and Sandell is likely correct about such a deal unlocking shareholder value.