FARM: Big Price Move Today but Still Reasonable Valuation

FARM: Farmer Brothers has been on my radar for some time but there was nothing too compelling other than small insider buying that was first mentioned in 2009. Profitablity has been poor and produced low returns on capital. Part of the struggle is the nature of the low margin industry of processed & packaged goods.

But  the step relative valuation discount from a company like JVA makes the stock look more interesting. FARM is much larger than JVA but both are closely held and with relatively small float with the high insider ownership.  FARM insider ownership is 57.26%. Value based institutions holding a  FARM position are Michael Price, Royce associates, Franklin Resources, Deprince Race & Zollo.

The balance sheet is sound but the income statement (profitability) has been horrible for some time. Price to sales (.32) is near the historical low. P/B (1.09) is also near lows.
2011 Insider purchase transaction:
Mar 14, 2011 WAHBA JEFFREY Officer 5,000 Direct Purchase at $11 per share for 55,000

"Farmer Brothers produces and sells coffee, spices, and various related products to restaurants, hotels, fast food outlets, convenience stores, and hospitals. Approximately 60% of the company's revenues are derived from its coffee sales, primarily in urban centers throughout the western United States. The company also sells related products, such as filters, cups, creamers, teas, spices, and soup bases. Farmer Brothers distributes more than 300 products in total."

Enterprise value = 153.84 million
Market Capitalization = 181 million
Annual Revenue = 451.67 million

Efficiencies have improved based on AR and Inventory outstanding days and the entire cash conversion cycle. These improvement will should help improve ROIC once profitable.
5  year price return: 8.59-28.49
52 week return: 8.59-18.93

Current dividend yield = 2.50%
The company was founded in 1913.

No comments: