- The No. 1 question Americans are asking right now.
- It has absolutely nothing to do with Trump.
- But it’s shaping the future for one industry in particular.
Every day, Americans ask themselves a question of critical importance.
No, it’s not political. It has nothing to do with Trump. Or the stock market. Or global warming.
The $50 billion question is: To eat it in or out?
Seriously.
According to the U.S. Census Bureau, Americans spent $54 billion out at restaurants and bars, compared with $52 billion on groceries, between 2015 and 2016.
For the first time in history, eating out beat cooking meals at home.
However, the trend quickly reversed.
Restaurants have endured painfully slumping sales over the last year — with no end in sight.
But as senior analyst Jonathan Rodriguez points out, one smart food services company just made a huge pivot that could line investors’ pockets with profits.
Shifting Sands… Shifting Profits
Pause, rewind, fast-forward.
The restaurant business is one of the toughest to be in these days.
Fixed costs — like food, labor and marketing — have all risen. Yet foot traffic has declined.
That’s not surprising, given persistently low inflation in grocery goods.
And with more than 620,000 restaurants operating around the nation, competition is stiffer than ever.
Many restaurants — even some of the biggest brand-name chains — are lucky to bag middle single-digit profit margins.
That’s not to say there isn’t money to be made in dining — for businesses and their investors.
The simple truth is that in the food services industry, it’s more profitable now to sell food to restaurants and grocers than it is to operate a dining establishment.
Bad news for restaurants, but great news for producers.
Bob Evans Farms Inc. (NASDAQ:BOBE) figured this out fast enough to not only survive the shift but also position itself favorably as a nimble small-cap firm in a growth industry.
Here’s how they’ve done it…
Going Lean to Make Green
Headquartered in New Albany, Ohio, Bob Evans has been in the food business for nearly seven decades.
The company got its start with full-service restaurants in the 1960s.
And over time, Bob Evans expanded and diversified into the packaged food industry — selling its signature sausages and sides to grocery retailers.
Unfortunately, over the last 10 years, the restaurants for which Bob Evans is well-known became the monkey on its back…
Restaurant revenue peaked in 2008 at $1.8 billion and has declined 2% in the last five years.
In fact, Bob Evans’ dining revenues have declined year over year in six of the last 10 years.
On the other hand, its packaged food line, BEF Foods, has shown incredible growth.
Since 2012, BEF Foods’ annual sales are up 24%.
Better still, the BEF segment is currently posting an 18% operating profit margin — five times higher than the restaurant end of the business.
So on intense activist pressure over declining sales and profits, it sold off the dining business for $565 million to private dine-in restaurant firm Golden Gate Capital in May.
It used the proceeds of the sale to pay down debt and will pay out a special dividend.
To beef up its packaged side-dish offerings, the company also acquired Pineland Farms Potato Co. for $115 million.
Now Bob Evans is poised for tangible growth.
Value, Value Everywhere
Much like its famous sausages, Bob Evans is chock-full of value…
Earnings per share are expected to fall this year with the various M&A and sale charges but are forecast to nearly double by the end of fiscal 2018.
Per the stock’s forward earnings multiple of 27, that implies upside of about 13% from its current level.
The stock also trades at a forward enterprise value-to-sales ratio of 3.6 — less than half the industry average.
And company carries far less debt than its peers. It has a debt-to-equity ratio of 1.5, compared with a whopping 6.3 for the industry.
Best of all, the stock sports a 2% yield with a free cash flow payout ratio of just 44%.
Speculators might even consider the slightly out-of-the-money December $72.50 call option trading around $5.45.
The option breaks even when the underlying shares rise to $77.95 and doubles in value around $83.50.
Bottom line: At more than $50 billion, the business of food is still booming. And Bob Evans’ pivot to profitable producer from cash-draining dining company offers small-cap investors a big opportunity.