Sunday, May 6, 2018

A current AIM Program Small Cap Equity Holding: Farmer Bros. Inc. (FARM) by: Tommy Borin. "Avocados Aren't Toast Yet"

Farmer Bros. Inc. (FARM, $28.95): “Avocados Aren’t Toast Yet”

By: Tommy Borin, 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 Bros. Inc. (NASDAQ: FARM) engages in the marketing, manufacturing and distribution of coffee, tea, and other culinary products. The company produces a wide range of coffee related products as well as assorted teas, spices, puddings, soup, and sauce mixes. Its services also include beverage equipment service and menu solutions. The company is headquarter in North Lake, TX.

• Acquisition of Boyd Coffee in 2017 drove top line growth of 20.4% in 2Q18

• Margins may continue to decrease with continued integration of Direct Store Delivery (DSD) program and direct shipping.

• New Northlake, TX facility will add 100m pounds of roasting capacity  

• The YTD stock price change for Farmer Bros. has been  - 9.95%

Key points: In August of 2017 FARM acquired Boyd Coffee for roughly $56.6M. The company is 6 months into a 12-18 month integration process. This acquisition grew revenues by 20.4% in in the second quarter of 2018. Revenue increased from $139.1M in 2Q17 to $167.4M in 2Q18. Of this $28.3M increases in sales, $26.3M of it was from Boyd. Without the acquisition net sales only increased 1.5%. This is a relatively low organic growth rate, however an increase of 20.4% YOY is still encouraging.

FARM has been working to integrate a Direct Store Delivery (DSD) program to target larger corporate clients and improve channel sales. However, this direct shipping method has lower margins that method used in the past. This means that when FARM lands large corporate account a large revenue increase will take place but so will a significant decrease in gross margin. 

FARM has been transitioning to a new headquarters in North Lake, TX that will house corporate offices, labs, roasting facilities, and distribution. This facility is projected to increase roasting capacity by 100M. The transition to the new facility has hurt margins but is expected to provide roughly $20M in savings once the transition has been completed. The facility also recently received the Safety Quality Food (SQF) certificate. This certificate is needed by many major food companies and will allow FARM to expand its customer base in the future.

What has the stock done lately?

FARM is down 9.95% YTD, underperforming the benchmark Russel 2000, which is up .55% YTD.  The company reported 4Q 2017 earnings of ($1.08) per share, underperforming consensus estimates due to a tax expense from the newly implemented tax legislation.

Past Year Performance:
CVGW has decreased 17.76% in value of the past year, and there are few signs the company will reverse this trend. The decrease has been due to shrinking margins and low organic growth rates. However, the company is set to increase capacity with the new facility in Northlake, TX, giving FARM the ability to handle higher volume in the future.

Source: FactSet

My Takeaway
FARM has seen a significant decrease in the last year. The company needs to work on improving margins in order to reverse this negative trend. This process will take time to turnaround and may not provide the upside needed for the stock to become profitable for the AIM fund. It is for these reason I believe that FARM needs to be sold from the AIM fund.