Farmer Brothers: Brewing Potential

While the stock market is going strong right now, I'm not as hopeful about its prospects as this year moves forward. I think we're starting to see what will be serious fallout from the sub-prime market collapse.

That said, I have been researching and searching for unique opportunities in 2007 where we can find undervalued companies serving niche markets that won't dip -- even with a market dip. What sectors are less impacted? How about things like institutional coffee?

Hotels still need to offer it, delis will still sell it, offices supply it. This is why when there seems to be rocky times ahead, I look to companies like Farmer Brothers Co. (FARM) to make a buck.

An institutional coffee roaster that sells a variety of coffee, spices, flavored drinks, soup bases and related products like filters, creamers, teas, and cups to restaurants, hotel/motels, convenience stores, health care facilities, and offices in 28 states, Farmer Brothers is family run and has been around since 1912. It knows its business inside and out, and 60% of it comes from coffee sales. When the economy takes a hit, people may tighten their wallets in terms of high-end coffee purchases --perhaps the $4 lattes will go -- but institutions still need to provide the requisite thermos of coffee with the accompanying creamers and cups. While Farmer has been underperforming of late, it has hired a new COO, Roger M. Laverty III, and is investing in a big brand-awareness push this year.

In April, FARM bought Coffee Bean International (CBI), a specialty coffee roaster in Oregon, for about $22 million in cash, with promised near-term investments to ramp up CBI's production. CBI will continue to be a separate company under its current management, but its synergistic overlap with FARM will allow it to improve its margins while retaining an artisan feel. This is a smart purchase in my opinion, one that allows FARM greater growth and improves its reach, pushing it into the fastest growing segment in the coffee market -- that of specialty coffees -- while at the margins enjoyed by its larger scale production and distribution mechanisms of its institutional, traditional coffee sales.

Of course, I like a dividend, too. Farmer Brothers has paid a dividend to its shareholders every year since 1953.

Type of stock: A small-cap niche stock in the food manufacturing industry, FARM dreives 60% of its revenues from coffee sales to institutional outfits, and recently bought specialty coffee roaster, Coffee Bean International.

Stock Price: Currently trading at $21.14, with solid fundamentals, I don't think FARM will be negatively affected by any market dip. Hotels and hospitals still need to offer coffee, after all. We could see this one hit $30 by year's end.

FARM 1-yr chart:

Comments

[Charter Holder:]

Wow - I don't see this one. Terrible ROA/ROE, outrageous PE multiple, slow growth industry ... what am I missing?

2007 Jun 26 09:14 AM

[Josh Stern:]

Ms. Kramer didn't mention that half of the market cap is cash (no debt) and coffee the commodity is weak, while McDonald's new coffee focus may induce institutions to spend up for more/better coffee. That said, this is a pretty generic business, and I wouldn't consider a stock like this unless I had some analysis saying it was either very cheap (it isn't) or it was improving its competitive position (dunno this market).

2007 Jun 26 10:23 AM

[penwise:]

Ms. Kramer does not know this company. Having attended their annual shareholder's meetings the last couple years I can tell you that FARM has a long way to go. Her price target is way off. FARM has a few problems, some which are: 1. management that is behind the times (except R. Laverty), 2. Product line is out dated, 3. Roasting facilities are in need of replacement, 4. ESOP (union and employee's sway over shareholders).
Yes, FARM is undervalued (no debt, owns their real estate and alot of cash), and they do possess a great foot print to expand product distribution from (i.e. Coffee Bean purchase), however they have missed the near-term chance and the required changes necessary will be difficult to realize because of their ownership structure and dated management.
If you have plenty of time and nothing better to do with your money, then go ahead and buy FARM, but I can think of better coffee plays with better long-term prospects (SBUX) than this outfit.

2007 Jun 27 07:30 PM

[Andrew Heilman:]

It looks like this company has some naked short sellers. According to Yahoo, insiders own 120% of the company!? I do not know about anyone else, but naked hsorting can be very tough to get rid of.

2007 Jun 29 10:30 AM