BOBE: Ugly Is Beautiful

BOBE remains on the Hedgeye Best Ideas list as a long.


It was a disastrous quarter, and year, for Bob Evans Farms and its management team.  The reality is we don’t like the company for what it is, but rather for what it could be.  Activist investor Sandell Asset Management has been working tirelessly to unlock this hidden value.  If BOBE reports another quarter similar to the one it just did, we won’t have to wait much longer.  Management consistently referred to the company’s FY14 performance as an aberration and gave an optimistic outlook for FY15 – too optimistic, in our view.  But we think the street will see right through this and estimates will come in below guidance.  This company is a mess and first quarter trends are uninspiring.  But sometimes ugly can be beautiful.  We believe it’s only a matter of time before Sandell gets their way.  You can review our full bullish thesis here.


Limping out of 4QF14

4QF14 revenues and EPS declined -17% and 32%, respectively, on a year-over-year basis.  Management rattled off a long list of excuses for the poor performance during this morning’s call including severe winter weather, plant startup inefficiencies, high sausage material (sow and trim) costs, unforeseen supplier issues, an ongoing proxy contest and efforts to strengthen internal controls.  FY14 and 4QF14 same-store sales decreased -2.1% and -4.1%, respectively.  Management attributed 3.4% of the 4Q same-store sales underperformance to severe winter weather.  Adjusted, this implies that same-store sales were only down -0.7% in the quarter.  We have a difficult time giving credence to this, considering that same-store sales were down -2.7% in April.  Mind you, this is with pleasant weather and a refreshed asset base!


FY15 Guidance

Management brought down FY15 EPS guidance from $2.80-3.00 to $1.90-2.20 and guided to a full-year SSS gain of +1.5-2.5%.  Most notably, this SSS guidance assumes a negative comp in 1Q, a flattish comp in 2Q and a high-single digit comp in both 3Q and 4Q.  Following a disastrous FY14 and a slow start to FY15, we believe this guidance is outlandish.  When pressed on this issue during the call, management cited a renovated store base, the Broasted Chicken rollout, an expectation for improved weather, increased marketing spend (including the “Get in on Something Good” advertising campaign) and stronger executional focus as the key same-store sales drivers.  While these may be feasible SSS drivers on the margin, this company will not drive high-single digit increase in 2HF15.  We simply don’t see how they will get there.


Management guided to eight new restaurant openings in FY15 and has finalized deals for four new Bob Evans Express units (two airport locations, two mall locations).  They also expect to license up to ten Bob Evans Express locations during the fiscal year.


Words of Caution

Despite the aggressive guidance, management listed a number of current impediments to the company’s operations including macroeconomic headwinds, health care costs, a struggling core (lower and middle income consumers) market, commodity cost pressures and an increasingly competitive environment.


Commentary on Recent M&A Activity

Management was specifically asked about the high multiples currently being awarded in the packaged foods business.  In fact, one investor pressed management on what they’d do if they received a HSH-like multiple for BEF Foods.  Alas, management steered clear of that question.  They did, however, reinforce their commitment to the foods business noting that an aberrative 2014 is behind them.  On that front, they pointed to transformational investments (which have resulted in a lower cost structure), brand synergies, their insourcing strategy and their desire to continue to grow the business as reasons to hold on to BEF Foods.  To be fair, they did note that if they received an offer for the foods business they’d look at it, but the overwhelming sense from day one is that management has no intention of selling this segment.  Sandell appears adamant on making this happen and we think shareholders should be too.


Recent Notes

06/13/14  BOBE: Reiterating Best Idea Long

05/27/14  BOBE: M&A Activity Heating Up In The Food Business

05/15/14  BOBE: Asset-Light Is Right

05/02/14  New Best Idea: Long BOBE


BOBE: Ugly Is Beautiful - chart1


BOBE: Ugly Is Beautiful - chart2


Call with questions.


Howard Penney

Managing Director


Fred Masotta


BOBE: Adding Bob Evans Restaurants to Investing Ideas

Takeaway: We are adding BOBE to Investing Ideas.

Restaurants Sector Head Howard Penney is adding Bob Evans Restaurants (BOBE) to Hedgeye's Investing Ideas. 


Stay tuned for a full report detailing our bullish case on BOBE.

BOBE: Adding Bob Evans Restaurants to Investing Ideas - bobevans

We Liked Gold At the Beginning of 2014 and We (Still) Like It Here

Editor's note: This is a brief excerpt from Hedgeye morning research. Click here for more information on how you can subscribe.


GOLD has been rock solid amidst US domestic growth style factors going haywire; It's up another +0.3% this morning to +10% year-to-date.


We Liked Gold At the Beginning of 2014 and We (Still) Like It Here - mrt


We’ll walk through why Down Dollar, Up Gold remains one of our better Macro ideas on Friday’s institutional Q3 Macro Themes call.


Ping if you would like more information and access to the call.

Early Look

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Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H

Takeaway: Natural gas broke through its key $4.58 @Hedgeye TREND Level of support of $4.58 and may see further downside.

On June 25th natural gas broke through its BULLISH TREND resistance level and confirmed a BEARISH TREND on June 30th.


TREND = duration of 3 months or more

TAIL = duration of 3 years or less


With inflation accelerating and growth slowing, the commodities complex faces upward pressure in 2H. Despite USD-devaluation induced inflationary pressures driving prices, natural gas may have more room to fall without an unpredictable geopolitical catalyst. Instead we'll stick to the multi-duration risk signals for confirmation. We highlighted the downside risk after breaking through its TREND level of support.


It has since sold-off nearly 9%... 


Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H - Price Volume Graph


The long-term TAIL support Line of $4.20 is under pressure this week, and further downside risk looms without confirmatory long-conviction at $4.20. Spot contracts are down -5.2% this week on NYMEX, so we're watching this level:

  • WTD: -5.2%
  • 1-Week: -6.2%
  • 3-Week: -9.7% 


After breaking out in January, $4.20 has been tested twice. The supply disruption risk has certainly been priced out of markets for the back half of the year.


Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H - Sep Jan Basis Graph


Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H - CFTC Positions


Natural Gas: Follow the Signals For Alpha on the Short-Side in 2H - Implied Vol


Barring a geopolitical catalyst, a break through the TAIL Line of resistance would signal further downside risk, making the likelihood of re-testing year-to-date highs more extreme. 


Eustream AS penned an agreement with Ukraine on April 28 to supply about 10bcm/year through 2019 via the Vojany pipeline. The pipeline is on track to be fully functioning by September. Vojany, which has been closed for 15 years, would satisfy an estimated 20% of Ukraine’s annual demand. With the capacity of smaller pipelines from Hungary and Poland, Ukraine has the potential to satisfy about 2/3rds of its annual demand directly from countries outside of Russia.


Alternatives aside, the source of this flow is Russian-dependent, but it forces Moscow to involve other European countries without targeting Ukraine in isolation. Putin’s strategy throughout the conflict has been consistent in providing support for pro-Russian separatists while at the same time cooperating with the international community just enough to warrant plausible deniability.


We believe Moscow’s likely goal is likely to maintain and expand its influence in Ukraine's eastern provinces, keeping it weak and vulnerable with existing in the global spotlight. The EIA estimates that Oil and Gas make-up 70% of total annual exports ($515Bn). U.S. and EU-induced sanctions (which have just recently warned of financial and energy sector targeting) would provide further downside for the Russian economy.


Ben Ryan




Video: How This Trend Will Impact Certain Tech Stocks This Summer

Cartoon of the Day: Blowing Bubbles

Here’s the handiwork of our unelected, unaccountable central planners.


Cartoon of the Day: Blowing Bubbles - Fed bubbles cartoon 07.09.2 14



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