Bob Evans Farms
Ticker: BOBE
Price: $22.75
Mkt Cap: 799 million
Enterprise Value: $1064 million
Dvd Yield: 2.1 %
Total Restaurants: 683
Owned Restaurants: 516 (includes property)

As I noted a few weeks back, one area we’ve started to research is restaurant chains that actually own their locations. These days, many lease their stores. In light of the recent Sears-Kmart deal, which was largely real-estate focused, and similar chatter about Toys R Us and even McDonald’s, we’ve got our eyes open for similar situations, albeit on a much smaller, “Cheap Stocks” kind of scale.

You’ve probably heard of Bob Evans Farms, a casual dining chain that owns and operates 591 Bob Evans Restaurants in 21 states in the Southeast, Midwest, and Mid-Atlantic. They also operate 92 Mimi’s café’s primarily in California and the west, and have a food products business as well. All Mimi’s locations are leased, but 516 Bob Evans Restaurants are owned by the company. That is where it may get interesting.

I’ve only been to Bob Evans once. It was somewhere in the middle of Pennsylvania, the day after our wedding, and my new bride and I were on our way to Philadelphia airport. The food was fine as I recall, although she was feeling sick, and didn’t eat much…..(I guess that’s what being married to your Cheap Stocks editor can do to a girl…) In any event, since then, I’ve passed many Bob Evans, and those that I’ve seen have mostly been near major highways.

Now, we don’t claim to know where each owned restaurant property is located, or what these properties are worth in their local markets. We just found it interesting that a $1 billion (enterprise value) chain owns so much real estate. In fact, if you divide enterprise value by owned restaurants, you get just over $2 million. Is each Bob Evans property worth $2 million? Probably not, but we really can’t say. Still, it’s an intriguing situation.

Fundamentals

It’s not a great story fundamentally, but the chain is profitable. Although total sales grew 21.9 percent to 1.46 billion in 2005, same store sales for Bob Evans Restaurants fell 3.6 percent. The company opened 37 new Bob Evans and 11 new Mimi’s during the year, accounting for the sales increase. The company earned $37 million in 2005 for a 2.5 percent net profit margin (not even close to McDonald-like margins), down from 2004’s $72 million and 6 percent net.



Operating Segments

The food products segment (Owens sausage, Bob Evans brand products) accounted for 18.5 percent, or $260.9 million in 2005 revenue, versus 20.7 percent, or $248.4 in 2004. Operating margins are not spectacular for either business, 4.7 percent for restaurants in 2005, and 3.4 percent for food products, versus 9.7 and 7 in 2004.

Costs

For restaurants, the number one cost of doing business is labor and benefits costs, which represented 40.9 percent of sales in 2005, and 39.6 percent in 2004 for Bob Evans. Next up is the cost of materials, which represented 25.9 percent in 2005, and 24.4 percent in 2004. The long and short is that rising labor costs, and growing materials costs (rising fuel costs don’t help matters) are not good for the restaurant industry. Throw in an economic slowdown, and people don’t eat out as often.

Expansion Plans

The company plans to open 20 new Bob Evans and 15 new Mimi’s in fiscal year 2006, along with plans to remodel 50 Bob Evans, and rebuild another 14.

Conclusions

We are not crazy about the restaurant sector right now. We also don’t see Bob Evans as a powerhouse brand in the industry. A niche player, maybe. A good marketing campaign might work wonders. What we do find intriguing, however, is the fact that this company is asset rich, and we of course, mean the real estate. We don’t currently have a position in Bob Evans, but will follow their progress.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.