Farmer Brothers (FARM) is expected to report first quarter sales of $123 million and earnings of .06 when filing its 10 Q, the week of Nov. 5th. Although the sales results deliver just a 1.4% sales gain, earnings of 6 cents would be a vast improvement over the previous 6 cent loss. In fact, it could qualify as a milestone event, as it would go into the record books as its first profitable quarter in years. The positive change in earnings estimates are mostly attributable to reduction in payroll costs, and a substantial drop in the price of raw coffee beans.
In the first quarter of last year, gross profit margin was only 32.7%, where FARM's most recent earnings report (4th quarter) generated a much more palatable gross profit margin of 37.5%. In addition, last year's first quarter carried selling expenses of 29.4% and G&A costs of 7.14% (lower than fiscal year's 2012 fourth quarter of 34% and 8.16%).
I am not sure how the estimate was derived in the first place, because I am "in the dark", if it is an "consensus estimate" or just Roth Capital's opinion (their initial report was released on 6/5/12). I called the company to verify which analyst(s) are actively providing research coverage but did not get a call back. It is possible that Wedbush Securites and or Sidotti & Co. also had a hand in the number crunching.
Earnings estimates slashed: In the last 30 days, FARM's first quarter forecast has dropped 55% from 11 cents to 6 cents. One thing for sure, earnings estimate reductions can be scary, especially if they are derived from unflattering statistics uncovered from analyst channel checks. On the other hand, the lowering of estimates can actually be a good thing, as lower estimates are easier to surpass (I am a big fan of the under promise, over deliver mentality). My guess is, FARM will barely miss earnings estimates by producing a bottom line of 4 cents (due to new business start up costs) but will surpass sales expectations, by reaching the $125 million mark. Even though it could miss on earnings, the "street" should be giddy enough about the sales beat, to reward the shares. That is precisely why I am filling my portfolio to the rim, with this very thinly traded coffee producer.
Other developments/potential catalysts: (1) it appears that Wedbush Securities has initiated research coverage on this 100 year old coffee purveyor, due to the fact that FARM management is scheduled to present at their California Dreamin Consumer Conference on 12/12/12 (their lucky day?). I would imagine, Wedbush has started FARM with a positive slant, or else they would not of been included at their conference in the first place. (2) Mitch Sacks, of Grand Slam Asset Management LLC wrote a very thorough and glowing SA piece. He went as far as to include a pseudo spread sheet, highlighting the profit and sales possibilities of a rumored McDonald's (MCD) supply contract coming to fruition. If Farmer Brothers actually began shipping arabica coffee to McDonald's, would FARM shares gain on the news or has the rumor already been baked in? In other words will this revelation become a "buy the rumor, sell the news" moment or prompt a serious upside move? (3) the company just revealed its new artisan line, featuring 14 varieties of specialty gourmet coffees. (4) its annual shareholder meeting will be held at its corporate headquarters the first week of December.
Bottom line: Although the shares have risen nearly 40% in the last three months, their upside picture remains intact and Roth's $11 price target is realistic. I would take advantage of the company's momentum and stay the course, as its turnaround plan continues to progress. Future land mines include a rise in coffee prices, higher fuel costs or a meltdown in the equity markets.