Bob Evans Farms  has under-performed peers Denny's and DineEquity  over the past month. Bob Evans saw its stock sell off 8.2% while Denny's and DineEquity have enjoyed stock appreciations of 1.8% and 11.9%, respectively. However, short-term stock performance doesn't always equate to long-term potential.

In fact, if you go back to the early summer, Bob Evans reported a 3% increase in its average check size year over year, which primarily stemmed from bundled meals, such as a three-course dinner for $9.99, as well as increased volume for Farmer's Choice Breakfasts. Furthermore, carryout sales improved 8%, bakery sales jumped 32%, and catering sales grew at a 20% clip.

It's evident that potential exists, as Bob Evans appears to be focusing on the highest-potential areas of its business. At the same time, this doesn't guarantee that Bob Evans is likely to be a quality long-term investment.


In the rearview mirror
Investors didn't like Bob Evans missing its second-quarter expectations, with earnings per share coming in at $0.35 on $332.6 million in revenue versus an analyst consensus of $0.74 on $358.16 in revenue. That's a substantial miss, which led to a significant sell-off in the stock. However, cooler heads prevail.

Peering through the windshield
Bob Evans owns and operates 561 family restaurants across 19 states, with most of its locations being found in the Midwest, Mid-Atlantic, and Southeast. It also has its Bob Evans Farms segment, which produces and distributes refrigerated side dishes, frozen foods, and pork sausage. Fortunately, Bob Evans is likely to see significant improvements in both segments in the future ... but not the near future. 

In FY 2014, comps for Bob Evans restaurants are expected to come in flat to up 1%. This isn't going to lead to much excitement. On the other hand, you might want to make a note that the real strength is expected to occur in the second half of the fiscal year, which the company attributes to the full impact of its Farm Fresh remodels and value platforms.

There's another key selling point for the second half of the year. In FY 2014, there should be approximately 1,400 closed restaurant days, a 67-day increase over FY 2013. The majority of these closings are expected to take place in the first half of the year, which will affect sales. On the other hand, it should make the second half of the year look impressive on a comparative basis. Additionally, Bob Evans has announced a $50 million expansion to its share buyback (now $225 million), which should help aid an inconsistent bottom line. 

If you're looking for nearer-term improvements, you might find them, but they're not likely to be as significant. Bob Evans restaurants being opened on Thanksgiving Day is expected to aid third-quarter results. And fourth-quarter comps are expected to be strong based on a weak fourth quarter in FY 2013.

Sticking with the potential-improvement theme, Bob Evans restaurants plans on opening four new restaurants in FY 2014. This number appears to be responsible, as the company is looking to grow at a pace it can handle. Three of the four new restaurants will feature new designs, which should maximize potential. For FY 2014, cost of sales is anticipated to increase 2%-3% due to commodity inflation, but increased pricing should offset these costs. 

On the Bob Evans Farms side, FY 2014 sales are expected to increase 10%-15% thanks to raised prices on sausages. At the same time, three facilities will close, which should to lead to a 2.5% margin improvement. Once again, the majority of the improvement is likely to be seen in the second half of FY 2014.

Bob Evans vs. Denny's vs. DineEquity
Denny's saw its domestic comps improve 1.2% in the third quarter, with franchise comps improving 1.3% and company-owned comps improving 0.7%. Denny's attributes this success to offering an everyday low value and products that meet current consumer desires.

But that's the past. What matters most for Denny's is that it's growing its international footprint. It now has 100 international locations, which are being marketed as America's Diner. If this geographic expansion proves to be successful for Denny's, then the potential is extraordinary. However, Denny's must still contend with a tepid consumer in a highly competitive domestic market.

As far DineEquity is concerned, while domestic IHOP comps improved 3.6% in the third quarter, domestic Applebee's comps slid 0.4%. However, DineEquity manages to drive consistent free cash flow, which it uses to reward its shareholders.

For instance, DineEquity bought back $10.2 million worth of shares in the third quarter, and it currently yields 3.6%. This is higher than Bob Evans, which yields 2.2%. Denny's doesn't offer any yield. On the other hand, DineEquity has a debt-to-equity ratio of 4.5, whereas Bob Evans and Denny's have debt-to-equity ratios of 0.37 and 0.45, respectively. 

Looking ahead, DineEquity expects FY 2013 comps at IHOP to increase 2%-3%, which is impressive considering the current economic environment. Domestic comps at Applebee's are expected to come in at negative 0.5% to positive 0.5%. This stems from IHOP offering a more unique experience than Applebee's. In other words, there's much less competition. 

The most potential
If you're strictly looking for potential, then you might want to considering Denny's first based on its international expansion and a likelihood of consumer demand for an American brand. If you're looking for yield, then you might want to consider DineEquity. If debt gets out of hand, divestments are always a possibility.

When it comes to Bob Evans, upside potential outweighs downside risk, but that doesn't appear to be the case right now. Bob Evans looks like ideal watch-list material, as the most significant improvements are likely to occur in the second half of FY 2014. 

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The article Bob Evans Is Confident In Its Future Prospects originally appeared on Fool.com.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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