Wednesday, December 21, 2016

A Current AIM Equity Holding: Farmer Brothers (FARM) by Patrick Wade. "Wake Up to Farmer Brothers"

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.


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.    

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