Why Bob Evans deserves your money
Posted
Aug 13 2009, 02:11 PM
by
Louis Navellier
Rating:
Gravity does not pull all things to earth. When markets rise over an extended period, it is not necessarily true that they will eventually fall. Yet here we are several months and significantly higher than lows hit in March, and every so-called expert is predicting that we are way long overdue for a pullback.
I don't agree.
Bing: More on Restaurant Stocks
It is way too simplistic to suggest that stocks will drop because they have gone up too far too fast. In fact, it has been my experience that once stocks exhibit positive momentum, such momentum is likely to continue much longer than anyone expects.
One stock that has proven it can not only withstand the recession, but thrive, is Bob Evans (BOBE).
Bob Evans just reported fiscal first quarter earnings that were quite solid. The company generated a profit of $.52 per share, in line with Wall Street estimates. Sales in the quarter were $429.5 million, down from the $435.9 million generated a year ago. Like many business, BOBE benefited from aggressive cost-cutting.
Given the state of the economy, BOBE maintained guidance of 2010 fiscal year operating income of $110 to $115 million. The too far too fast crowd was not impressed. Shares fell hard in the first day of trading after the report when an analyst downgraded the company suggesting that current estimates for 2010 were too high.
BOBE has been on fire of late, so the reduced valuation is not surprising. The stock is still some $6 higher than where it was at the start of the year, a healthy gain considering the single-digit moves higher for the rest of the market.
I would use the selling in shares as an opportunity to establish a position at a lower valuation.
I rate BOBE a B or Buy. Here are some of the reasons why.[readmore]
Reason #1 - Positive Stock and Earnings Momentum
Even though shares of BOBE are down on the earnings news, the stock has been moving impressively higher since bottoming last November. In fact, the stock has doubled in value since that time and now trades for a higher valuation since before the stock began declining in September.
During that period BOBE earnings for the quarters ending in October, January and April were $.35, $.56 and $.69 per share respectively. Not bad considering the country was in a deep recession during that time. Historically, I have had great success owning stocks with such multiple quarters of impressive earnings growth. With annual revenues under $2 billion per share, there is still plenty of room for this stock to grow.
Reason #2 - Affordable Menu
The recession may be ending, but don't expect consumer behavior to dramatically change. All of us were reminded, and some of us not so kindly, of the value of thrift. Budgets that were tightened due the weakness in the economy or commodity inflation will remain tight. That sets up just fine for BOBE.
The company is in the sweet spot of thrift with a value menu that is attractive for consumers no matter the budget. BOBE offers 30 different meals for under $5.99 and family meal deals that will feed 3-4 for $10.99. These are not just cheap cuts of meat either. It is that quality at a high price that will drive revenues and profits for the near future.
Reason #3 - Valuation
With the stock down more than 7% after the release of first quarter earnings, BOBE is attractive from a valuation perspective. In many cases, companies that are growing or trading with momentum do so for premium valuations. That is not the case here.
In the current fiscal year ending in April, 2010, analysts expect BOBE to earn $2.27 per share. At the current price of just over $26 per share the company is valued for just 11.5 expected earnings. At the moment, those earnings are expected to grow by less than 10% in the next year, but expect those numbers to improve as time goes by.
Typically at the end of a recession, earnings estimates are too low. When conditions improve, companies tend to easily beat expectations. I expect the earnings multiple for BOBE to expand as this process progresses. Add on that the fact that shares trade for half of revenues and only 1.45 times book value, and this growing company looks more like a value play instead of a high flying momentum play. That is an opportunity in my book.
See more about why Bob Evans is one of my favorite restaurant stocks to buy now.
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At the time of publication, Louis Navellier did not hold a position in BOBE.
