I just can't seem to get off the topic of restaurants, but with good reason; there's a lot happening within the sector.
We found out yesterday that the party was not quite over for Bob Evans Farms Inc. (BOBE) , which sold its restaurant business earlier this year to Golden Gate Capital for $565 million and bought a potato company. Both moves were designed to help it focus on its prepared food business. Once those deals were done, it paid a special $7.50 dividend to shareholders; those who had been in the stock over the past year saw it more than double over that time frame. It was a special situation that paid off handsomely.
I, for one, was pleased with the outcome. I thought valuations of the new BOBE were getting a bit stretched and closed the position in late June in the $72 range. From there, the stock gave back 10 points by late August, then regained steam. Yesterday, Post Holdings Inc. (POST) agreed to acquire Bob Evans for $77 a share, or about $1.5 billion; hats off to shareholders who hung on for that last bit of payoff. I certainly did not see that coming.
Elsewhere, Mediterranean fast casual name Zoe's Kitchen Inc. (ZOES) , which has fallen back to earth over the past couple years as the growth crowd became inpatient, announced yesterday after market close that chief operating officer Jeremy Hartley, age 57, will be leaving the company next month to "focus on personal interests." It is unclear what this means for ZOES or why exactly Hartley is exiting, but it has been a rough run for the company, which is trying to make its mark, grow, and achieve sustainable profitability in a crowded and difficult restaurant environment.
Last but not least, DineEquity Inc. (DIN) , purveyor of Applebee's and IHOP, is starting to look intriguing. Down nearly 50% year to date and out of favor, it is one of the cheapest restaurant names available. DineEquity is trading at just under nine times next year's consensus earnings estimates, its dividend yields a whopping 9.8% and it has been buying back stock. The market clearly is questioning the sustainability of that dividend and the company is more leveraged than I typically like to see, with $1.4 billion in debt. However, it is also highly profitable, with net profit margins in excess of 15% last year. Higher margins are one of the benefits of franchising; indeed, the company owns just a handful of the restaurants under its banner.
Buying the cheapest names in a troubled sector does not guarantee success, but this one may be worth a look and is on my radar.