Farmer
Brothers (FARM, $34.25): “Brewing Up Something Good”
By: Patrick
Wade, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Farmer Brothers (NASDAQ:FARM) is a national coffee roaster,
wholesaler, and distributor of coffee, culinary products, tea, and other
products. One hundred percent of their revenue is generated in the United
States. Their primary customers are restaurants, grocery retailers, drugstore
chains, convenience stores, and independent coffee houses.
• Richard Farmer, a member of the
founding family member, sent a letter to management, which outlined his support
for the Company’s Board of Directors
• All Three proxy advisory firms
ISS, Glass Lewis, and Egan-Jones recommend that stockholders vote for the
Farmer Brothers director nominees.
• Save Farmer Brothers delivered
a letter to shareholders regarding a discrepancy in the qualifications of
Christopher Mottern, the Director and Audit Committee Chair.
Key
points: Richard Farmer sent Farmer Brothers a letter describing where
he stands in regards to Farmer Brothers and the Save Famer Bros. Group. Being a
member of the founding family, one would think he would support the Save Farmer
Bros Group., however, he states in the letter that Save Farmer Bros. “does not
represent all members of the Farmer family, nor does this group represent the
views of most of the trusts for which Carol claims to speak.”
Obviously, there
is a strong misunderstanding in regards to the how many people actually support
the Save Farmer Bros. Group. Richard then goes on to say how he fully supports
the decisions made by Michael Keown and the entire management team. Richard
Farmer currently owns approximately 16.77% of the shares outstanding.
In addition to Richard Farmer’s
support of the recommended director nominees, all three proxy advisory firms
agreed with Farmer Brothers’ decision. Institutional Shareholder Services
(ISS), Glass Lewis & Co., and Egan-Jones Proxy Services have suggested that
stockholders vote for nominees on the GOLD proxy card. In all three of the
statements, Michael Keown was mentioned directly as being the main driver
behind the turnaround and the subsequent appreciation of the company’s stock.
Since he’s been in office, the company’s stock has appreciated from $11.83 in
2012 to $34.10 in 2016. Concerning the Save Farmer Bros’ nominees, there was an
overwhelming opinion that they lack relevant experience and their interests
aren’t aligned with the majority of shareholder’s.
One interesting occurrence Save
Farmer Bros. has going in their favor is a discrepancy found in the
qualifications of Christopher Mottern, the Director and Audit Committee Chair.
Mottern had that he is a certified public accountant listed in his
qualifications, and after further review, Save Farmer Bros. found it to be
untrue.
They described the occurrence as being “deeply disturbing”, which seems
to be incredibly dramatic seeing as though he’s had previous experience as a
CEO, had leadership experience in the food service industry, and held his CPA
designation for a period of time.
What
has the stock done lately?
Since the beginning of the year,
the price of the stock has risen slowly by 5.42%. Farmer Brothers reported
their Q1 2017 results on November 7, 2016, and they missed analyst estimates.
The average estimate for EPS was 25 cents, and adjusted EPS came in at 21 cents
per share. Additionally, revenue was expected to be $136.3 M, but it ended up
being $130.5M. Because these weren’t material differences, there wasn’t a large
market reaction.
Past
Year Performance: FARM has seen an increase of about 15.5% in the
past year. Regardless of the aggressive price appreciation, FARM still has an
upside of approximately 32.5%. Additionally, FARM had the largest amount of
capital expenditures they’ve ever seen in the past year due to their
headquarter relocation program. It’s expected to save FARM a lot in terms of
expenses and increase their overall margins.
Source: FactSet
My
Takeaway
Although FARM missed their EPS and revenue expectations, I
believe they will see a great amount of price appreciation in the coming
periods. The fact that all three proxy firms supported the candidates on the
Gold card means there will be a better chance of having an experienced management
team. Additionally, there hasn’t been any changes in the drivers since FARM was
originally pitched in October.
The only changes have been a decrease in risk
due to the Save Farmer Bros. group being shot down whenever they try to make an
argument. In addition, the new facility will expand margins considerably
leading to greater EPS. I believe all of these factors will lead Farmer
Brothers into continued success for the coming periods.
