Bob Evans Farms, Inc (NASDAQ:BOBE) was crashing hard Tuesday, with BOBE stock down some 22% following its earnings report, and more importantly, news that the company would no longer pursue the option of selling its BEF Foods division.
The question is: Is this a massive buying opportunity, or a sign of even worse things to come?
Bob Evans Earnings First
Bob Evans’ third-quarter earnings came in at 60 cents per share on an adjusted basis — roughly double what BOBE earned in the year-ago period, but well below the 70 cents Wall Street was expecting. On a GAAP basis, results didn’t look as good — earnings of 25 cents per share were only up by a penny.
Revenues of $357.2 million also were higher, by some 5% year-over-year, but also fell short of expectations. Meanwhile, same-store sales were up 3.8% for the quarter, but were driven in some part by higher discounting.
The last disappointing piece of news: Management provided an earnings outlook of $1.40 to $1.60 per share, much lower than its previous range of $1.90 to $1.20 and off the analyst mark of $1.97.
But the biggest news had nothing to do with quarterly numbers.
The Future of Bob Evans
In the earnings release, Bob Evans management also finally put to rest the idea that it would spin-off or sell its BEF Foods division. Bloomberg reported that “the company evaluated the possibility with investment bank Lazard and determined it wouldn’t enhance shareholder value, according to a statement on Tuesday.”
However, BOBE did say it would continue pursuing the idea of unlocking shareholder value through selling and leasing back its property locations, or by simply turning them into a REIT structure.
Most analysts believe the company will ultimately sell a portion of its high-value locations and lease the buildings, as opposed to forming a new REIT. This would infuse a large amount of cash to the company, which could be used to repurchase shares — something that Sandell Asset Management, an activist investor who owns 5% of the company, proposed two years ago.
In addition to changing Bob Evans property ownership format, Sandell has fought since late 2013 for BOBE management to sell or spin off BEF Foods, which produces bacon, sausage and other Bob Evans branded items in grocery stores nation-wide.
But as of September 2014, Sandell held four of the 12 BOBE board seats. That means the board, and therefore Sandell, agreed to this decision to no longer pursue the sale of the food division. While we don’t know if Sandell himself signed off on that move, it’s unlikely they didn’t or the company would not have announced the plan to no longer consider the idea.
This form of backtracking by an activist investor, who now has the inside track to Bob Evans’ performance, is not usually a good sign.
Investors who were hoping to ride BOBE stock higher as value was created by the spinoff no longer have that as a catalyst and might want to find the exit door. New money should just travel elsewhere.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities.
