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FARM: Second Quarter Will Surprise To The Upside!

|Includes:Farmer Brothers Company (FARM)

FARM is expected to earn 20 cents on revenues of $132 million. That seems way too low, when considering FARM put up sales of $131.8 million the prior year's 4th quarter. What? Absolutely no sales growth after the inclusion of the McDonald's, Walgreen and Treehouse Foods business? That does not seem right. Apparently Wall Street is assuming that whatever new business FARM won, it lost the same amount of business from other accounts..I don't buy this thesis. I think it kept its existing business and also nabbed the new. The fact is, second quarter started on October 1st, just about the same time as FARM began shipping to MCD and Walgreen warehouses, so the bulk of that business will be included in FARM's second quarter results.

I am looking for a 6% rise in sales to $140 million (not much when consider all the new wins) a 620 basis point improvement in gross profit margin to 40% from 33.8% ( represents a 200 bp sequential improvement) and a also a 37% operating expense rate (a 100 bp reduction). Subtract out $400,000 for interest expense and leave out income taxes (the company has a loss carryover to cover that) and WAHLA!!!! you get net income of 25 cents representing a 5 cent beat on a 6% rise in revenues (also equating to a 6% beat on revenue expectations). I know my expectations are high, but remember the drastic drop in green coffee input prices will be fully felt for the first time, in the second quarter.

sales of $140 x gpm of 40%=$56 m

operating exp of 37% x $140=$51.8 m

profit before income tax and int exp=$4.2 m

interest expense: $400,000

net income of $3,800,000 divided by 15,490,000 shares=25 cents

I am not including any non recurring charges or gains ( represented on FARM's income statement as "other income") such as derivative or real estate transactions.

Disclosure: I am long FARM.

Stocks: FARM