7/12/2011

FARM: Arbitrage Opportunity ??

if you believe there exists a potential value catch up with peers and long overdue profits based on growing diversified customer revenues of 451.67 million. FARM did generate CFFO of 34,449,000  and FCF of 10,245,000  for the prior 12 months. This was based on the reported accounting loss of (52,975,000).

I don't want to make too much of this but value guru Michael Price reported during Q1 2011 the addition of 27,260 shares of FARM to increase his stake to 259,209. The average price during this period  based on the daily closing prices from January 1 to March 31 2011 was 13.06  also including a regular quarterly dividend. FARM paid out 6,490,00 in dividends in during the prior 12 month period . Farmer Bros. has paid a dividend in every year since 1953. The modest positive insider activity over 2010 and 2011 doesn't hurt .
The clean capital structure, high insider ownership (57%), 100 year history, real estate, consistent dividend, 47% below 52 week high,  and ratios substantially below peers and market makes FARM a non glamorous stock idea with a margin of safety.
Long FARM as part of a highly diversified portfolio

8 comments:

Chris said...

Might the 25% drop in JVA's share price cast doubt on your arb thesis?

Anonymous said...

I'm not seeing how this could be considered an arbitrage play? If anything it would be an investment opportunity with a built-in margin of safety due to the reasons outlined in the last paragraph.

ShadowStock said...

Thanks for the comments. I was out of JVA a while back ~ 12 but i was LUCKY to buy a nice position when it was introduced ~4. I thought it reached fair value and the concentration of customer revenue gave me the additional confidence to move on. JVA is a tiny entity compared to FARM.

Sorry about the arb comment. It was more off a way to say many of us value investors are looking for stocks trading what we believe is priced below fair value and hopefully that discrepancy between price and value presents us with an arbitrage like opportunity that will disappear over time just like other more traditional arbitrage situation mentioned in the financial press.

But I wasn't directly comparing to JVA as that has become a momentum stock and FARM is the opposite trading down 30% over the past year versus JVA still up 357% over the same period.

FARM has historical P/S valuation at .40, P/CF = 4.6, P/B = 1.3 and many of those assets such as real estate and even coffee inventory is below market value based on the accounting treatment for inventory, LCM (Lower of cost of market value).
FARM has a diversified customer base selling into all 48 contiguous states. I just thought there may be a discrepancy between price and value. My portfolio is highly diversified and hopefully like JVA it will reach what i guess is fair value.

Good Luck
John

ShadowStock said...

margin of safety.. okay but doesnt arbitage sound more sexy ?? (LOL).

but the value versus price potential difference could be considered an arb like opportunity. i get your point, thanks for the comment.

John

Chris said...

The MOS doesn't seem as strong to me unless you're assuming that you would lose only say half your principal in a liquidation scenario.

Have you ever done any research or seen any literature related to the histories and futures of most nano/microcaps? Rationally speaking, it doesn't make sense in my mind for most of these companies to be public due to the additional costs involved. From that perspective they've always worked me as actual investments because it seems like the perfect vehicle to fleece naive investors. Do companies IPO as nano/micros or do they lapse into that bracket because of decay? What percentage of the nano/micro universe graduates to the larger capitalizations? What about vice-versa? How mobile is it?

ShadowStock said...

Chris

I clicked on your name and found the following wise statement..."disruptions exist in the short-term, allowing the disciplined value investor to profit." Hence my comment about arbitrage opportunities to capture these differences.

I've owned many nanocap/micro that have returned significant money to shareholders in many forms. going private, take over, special dividends, stock price increase to full value,

Take for example a few companies i wrote about on seekingaplha...or check out the blog. Thanks John

Exploiting Market Anomalies with Neglected Illiquid Stocks

http://seekingalpha.com/article/117964-exploiting-market-anomalies-with-neglected-illiquid-stocks

http://seekingalpha.com/article/113168-datawatch-a-microcap-value-stock

http://seekingalpha.com/article/169029-immucell-corporation-stampeding-forward

http://seekingalpha.com/article/119470-syms-hidden-values-buried-on-balance-sheet

http://seekingalpha.com/article/248049-datawatch-a-potential-overlooked-catalyst

http://seekingalpha.com/article/116472-ark-restaurants-corp-an-enviable-economic-moat

http://seekingalpha.com/article/248049-datawatch-a-potential-overlooked-catalyst

http://seekingalpha.com/article/115252-u-s-physical-therapy-recession-resistant

http://seekingalpha.com/article/116472-ark-restaurants-corp-an-enviable-economic-moat

http://seekingalpha.com/article/117964-exploi

XM said...

(1) great blog.

(2) i just read the last 10K and 10Q on FARM. As I see it, this company has had operating losses for the last 3.75 years. The FCF you state (CFO - CAPEX) comes the liquidation of working capital. cash earnings is negative YTD. I also like the P/S multiple, long history, owned real estate, inside ownership, etc....but the operating losses make me nervous. Interesting potential, but I don't see the margin of safety. Any thoughts?

ShadowStock said...

thanks for the comments! one main factor contributing to the margin of safety is the large stable and diversified revenue sources and others like the 57% insider ownership.

but from a cash producing view CFFO from 2006 to the TTM were
2006-06 13,614,000:2007-06 48,791,000: 2008-06 27,496,000: 2009-06 87,244,000: 2010-06 -(1,047,000):TTM 34,449,000

good luck
John