Bob Evans' Weak Fiscal Year Means an Activist Overhaul, Possible Spinoffs

Tickers in this article: BOBE

NEW YORK ( TheStreet) -- Shareholders of Bob Evans headed for the exits after a poor full-year earnings report and soft guidance. While the results were mediocre and estimates are coming in well below analysts' targets, investors will want to stick around to see how a battle between Bob Evans and Sandell Asset Management plays out.

Sandell Asset Management began its pressure on Bob Evans back in September 2013. The company, which acquired a 5%-plus stake in Bob Evans, pressured the company to make changes to resurrect the undervalued company. Essentially, Sandell wanted Bob Evans to spin off its retail food product brand and also sell its real estate. The plan was to maximize shareholder value. Sandell put a price target of $73 to $84 on shares if the plan was followed.

The recent fourth quarter provided ample ammo for Sandell in its fight to make changes and control the board of directors at Bob Evans. Same-store sales declined 4.1% in the fourth quarter, with the winter weather to blame. The full year saw a same-store sales decline of 2.1%.

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Despite the weakness at Bob Evans' 561 restaurants in 19 states, its BEF Foods retail division continues to shine. The unit saw pricing and supply issues, but managed to grow revenue 3.4% in the fourth quarter and 6.6% for the full year.

BEF Foods produces items under the sausage, refrigerated-sides, frozen and food-service categories with the Bob Evans name. The products are available in over 30,000 retail stores across the country. Bob Evans expects this number to hit 40,000 by 2018.

Spinning off BEF Foods appears to be the easiest play for Bob Evans to please Sandell and reward shareholders. The unit is seeing strong growth and represented only 28% of Bob Evans' full-year sales. For fiscal 2015, Bob Evans has forecasted BEF Foods to post revenue growth of 16% to 18%.

What better time to spin off this division than now -- when it is in high growth mode?

With recent merger and acquisition activity in the food sector, the spun off BEF Foods could even be acquired shortly after hitting the open market.

A divesture of the retail division would allow Bob Evans the ability to focus on its restaurants. It could concentrate on its Bob Evans Express brand, which it is currently licensing for airports and malls. The core Bob Evans company would be able to provide a consistent dividend and trade in-line with market peers.

Over the last five years, shareholders have seen Bob Evans shares rise 58% to current levels. Despite this nice return, shares are trading down 28% from their 52-week high. Shares are also trading at 67% less than the value Sandell envisions. Investors should consider following along with Bob Evans for the ride.