Bob Evans Farms – Down Home Value for Buy/Write Fans

Bob Evans Farms, Inc. [NDQ:BOBE] $27.49 – 5/25/10:  is a growing family of regional brands. The $1.75 billion company owns and operates 715 full-service restaurants and a complete line of retail food products under the Bob Evans and Owens names. The Bob Evans Restaurants are located in 18 states with a heavy concentration in the Midwest. Mimi’s Cafés are in 24 states with nearly one-half of the units located in California.

The slow economic conditions hurt the growth rate but failed to keep BOBE from equaling all-time high EPS of $2.10 in FY 2009 (ended April 30, 2009). FY 2010 likely finished with even better results of about $2.23 /share.

The consensus view for the current FY is for 4% growth to $2.32 – not too bad considering the state of the American economy. BOBE now trades for only 12.3x last year’s and under 11.9x forward earnings versus a 10-year median P/E of 14x.

Their recently raised quarterly dividend of $0.18 represents a generous and well-covered current yield of 2.62%. That’s one of the highest yields ever for this company’s shareholders.

If BOBE merely rebounds to a fourteen multiple on the current year’s estimate we’ll see a share price of over $32 over the coming 12 months. That leaves room for an 18% appreciation on top of the 2.6% yield.

Why not buy some shares while selling some December puts and calls?

Here’s a nice trade for the next 7 months:

If BOBE raises to $30 or higher [+ 9.2%] by Dec. 18, 2010:

• The $30 calls will be exercised.
• You will sell your shares for $30,000.
• The $30 puts will expire worthless.
• You will likely have received $540 in dividend payments.
• You will have no further option obligations.
• You will end up with no shares and $30,540 in cash.

That’s a best-case scenario profit of $30,540 – $20,990 = $9,550

$9,550/$20,990 =  45.4% cash-on-cash for the less than 7-month trade period on shares that only needed to rise by 9.2% or more.

If BOBE remains below $30 on Dec. 18, 2010:

• The $30 calls will expire worthless.
• The $30 puts will be exercised.
• You will be forced to buy another 1000 BOBE shares.
• You will need to lay out an additional $30,000 in cash.
• You will likely have received $540 in dividend payments.
• You will have no further option obligations.
• You will end up with 2000 shares and $540 in cash.

What’s the break-even on the whole trade?

• On the original 1000 shares it’s their $27.49 cost basis less the $1.90 /share call premium = $25.59 /share (excluding dividends).
• On the ‘put’ shares it’s the $30 strike price less the $4.60 /share put premium = $25.40 /share (excluding yield).
• Your overall break-even would be $25.50 /share ignoring dividends or $25.23 /share including the yield.
• BOBE could fall by up to (-8.2%) without causing a loss on this trade.

Summary:  Bob Evans is a relatively conservative choice with a low P/E and a decent yield. Those who buy shares while writing December $30 calls and puts could see total returns of up to 45% while maintaining an 8.2% margin of safety if things don’t go as expected.

Dr. Paul Price for

 www.BeatingBuffett.com

May 26, 2010

Disclosure: Author is short BOBE puts.