Bob Evans' Steady Growth Appetite

Casual dining restaurateur Bob Evans Farms Inc. (Nasdaq:BOBE) closed the door on its fiscal year on Tuesday, and though fourth-quarter profits fell below analyst projections, the market found management's forward guidance much more appetizing. Despite the subsequent share price rally, the earnings valuation is still quite reasonable and will be more so if the company can hit the high end of its growth targets over the next five years. TUTORIAL: Risk and Diversification

Full-Year Review
Total sales fell 2.9% to $1.7 billion. Restaurant sales made up 81% of the total top line and fell 3.8% as the last fiscal year included an extra week of sales, and same-store sales fell 2%. Bob Evans operates two restaurant concepts, including 556 of the namesake stores as well as 131 Mimi's Café locations. The namesake stores reported negative comparable sales of 1% while Mimi's came in weaker by reporting negative 4.5% comps.

Higher commodity costs sent gross margins down, though management was able to control operating wages, due in part to decreased insurance costs. However, other operating costs increased slightly and SG&A rose as percent of total sales. Interest and income tax expense did decrease, all of which resulted in a 23% decline in net income to $54.2 million. Fewer shares outstanding helped temper the per-share earnings decline a bit as earnings fell 22% to $1.78 per diluted share.

Outlook
For the coming year, management currently anticipates flat sales and total sales of $1.7 billion. Its current earnings guidance is in a range of $2.36 to $2.44. Looking out over the next five years, it projects annual earnings growth between 7% and 10%.

Bottom Line
Bob Evans reported results at the close of the market on Tuesday and saw its shares jump as much as 12% on Wednesday as the market was apparently impressed with the positive same store sales and upbeat outlook. With the share price rally, the forward earnings multiple rose to 13.5. This is a reasonable multiple if Bob Evans can manage to post annual earnings growth toward the high end of its five-year guidance range. With earnings growth of 10% and a current annual dividend of 2.7%, investors could garner low double-digit total returns over time.

The space that Bob Evans competes in is particularly crowded, with rivals that include Cracker Barrel (Nasdaq:CBRL), Frisch's Restaurants Inc. (NYSE:FRS) that operates the Frisch's Big Boy chains, and Denny's Corporation (Nasdaq:DENN). Mimi's Café also faces many rivals in the casual dining concept, including Brinker Restaurants Chili's concepts and Ruby Tuesday (NYSE:RT). But despite the competition and slow growing sales, Bob Evans as a whole has developed a loyal customer base and has been able to grow average annual profits in the double digits over the past five years. (For related reading, also take a look at Sinking Your Teeth Into Restaurant Stocks.)

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