According to Marketwatch, the Dow Jones U.S. Restaurant and Bars Index is up 33.5% in the past 52 weeks to within 1% of a 52-week high. Buffalo Wild Wings (Nasdaq:BWLD), Chipotle Mexican Grill (NYSE:CMG) and Domino's Pizza (NYSE:DPZ) have all increased by 60% or more in the past year with further gains on tap in 2012. One company that's outperforming so far in 2012 is Bob Evans Farms (Nasdaq:BOBE), up 11.2% year to date, 400 basis points higher than restaurant stocks as a whole. Within 5% of a five-year high, I'll explain three reasons why now is a good time to buy.
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Since 2010, Bob Evans has been on a remodeling campaign that began with 31 restaurants in Dayton, Ohio and moved on to Toledo, Detroit, Cincinnati and Columbus. By the end of the campaign sometime in 2015, it will have renovated over 500 locations. More importantly, the effort will have rejuvenated the brand and reinvigorated profits. According to CEO Steve Davis, renovated locations are outperforming on a same-store sales basis by approximately five percentage points. The customer experience ultimately drives growth in business, and newly remodeled stores will certainly help its cause.
Its third quarter earnings to the end of January were 69 cents a share, 9 cents higher than the analyst consensus estimate and 35% better than the same quarter in fiscal 2011. While its 145 Mimi's Cafes out west experienced negative same-store sales in the quarter, its 564 Bob Evans locations in the eastern half of the country saw same-store sales growth, in part due to those store renovations mentioned earlier. Gross margins were slightly lower due to higher commodity costs, but the bottom line was strong due to lower wage costs in the quarter. Most importantly, in February's third quarter earnings announcement, the company raised its full-year earnings per share guidance for fiscal 2012 to between $2.38 and $2.44. This prompted analysts to raise their fiscal 2013 earnings per share estimate to $2.64. Long term, management sees it delivering earnings growth of 7 to 10% annually. If only it could get its Mimi's Cafe's generating same-store sales growth, this would be a growth story rather than a value one.
Since 2000, Bob Evans has increased its dividend by a compound annual rate of 9%. In September 2011, it increased the quarterly dividend by 25% to 25 cents a share. At the March 23 closing price of $37.06, it's currently yielding 2.7%, which is higher than many of its peers. In the past 15 years, it's achieved an annual total return of 8.2%, 240 basis points higher than the S&P 500. Approximately 22% of its total return was produced through dividends with capital appreciation accounting for the rest. Bob Evans is what they call a dividend challenger in that it's increased its annual dividend in six consecutive years. In order to become a dividend achiever, it needs to increase the annual dividend for 10 consecutive years. I look for it to join the all-important membership in 2015. Income investors should definitely take a look at this stock because it provides a good combination of dividend income and capital appreciation.
The Bottom Line
In recent years, Bob Evans has done a good job controlling and reducing operating expenses while its overall revenue growth has been flat. With the remodel program going well at its Bob Evans locations, revenues will start to pick up in future quarters leading to bigger and better dividends. With an enterprise value that's less than six times EBITDA, you're definitely getting its stock at a reasonable price. Buy now while you still can get it below $40.