NASDAQ:FARM FARMER BROS. CO
Sector financial performance:
This company has been grouped in Coffee (roast/ground) /Tea sector of food industry.
It seems that the growth in demand for roasted coffee and thus unroasted green bean has been accelerating in 2018 after a few years of moderate growth (average unit sales growth of 12-17% in 2018 VS 3-4% between 2016 and 2017).
Green bean price presented huge volatility in the past several years. The large fluctuations in price of green coffee in the past three years (around +/- 80%) not only makes huge uncertainties in the price of those companies’ products and also direct impact on their margins and profitability.
We think that the organic demands for coffees will be consistent or even beyond the average growth of food and non-alcoholic beverages. Since the demand is strongly related with sales price and thus with commodity price of green coffee we expect the pace for growth in this sector may be accelerating as global commodity’s price move down. However, individual company’s profitability may depend on their abilities to effectively make the fluctuation in green coffee’s price passed on to roast coffee products. It seems, as reflected by the margin and profitability, many companies’ operation has been stocked in previously contracts of green bean when green bean price was high. The typical gross margins are 34% for roasted coffee companies and 16% for unroasted coffee companies.
Demand for roast and ground coffee seems to have been strong in the past several years as indicated by continuingly increasing unit sales. It seems that the demand is accelerating in 2018 (more than 10% annual growth with flat or increased price).
For the first months of fiscal 2019 compared with the same period of 2018 (ended 20180930)
Net sales increased 12% due to increase of 10.5% in unit sales and increase of 1.2% in price. Unit sales of coffee products increased 10%.
For fiscal 2018 compared with 2017 (ended 20180630)
Net sales increased 12% due to increase of 12.5% in unit sales offset by decrease of 0.5% in price. Unit sales of coffee products increased 12.5%.
For fiscal 2017 compared with 2016 (ended 20170630)
Net sales decreased 0.5% due to decrease of 1.3% in unit sales offset by increase of 0.9% in price. Unit sales of coffee products increased 5%.
Unit sales increased by 5% and 3.6% in the first 9 months of fiscal 2017 and in 2016 but offset by the decrease in the average sales price during the same period of time. While there basically is no increase in unit sales in 2015, the 3.5% increase in the average sales price in that period of time help lift net sales by 3.4%.
This company had been able to maintain its gross margin at relative high level (36% - 40%) between 2014 and 2017. There were light fluctuations in its gross margins as the swing of the cost of green coffee. Relatively higher selling cost dragged down its profitability. However, it seems that the gross margin has been gradually declining since 2017 probably due to the declining selling price. Its current gross margin is about 34% with 33% SG&A% resulting in a operating margin of below 1%.
This company has been working well in managing its debts and working capital. And it seems this company realized that it should more efficiently use the CAPEX to lower its depreciation gradually in the next several years.
Our valuation methods and analysis indicate that this stock is currently relatively fairly by the market with an enterprise price/EBI of 180 and enterprise price/sales of 0.85 considering the potential growth in demand and decreasing green bean price.
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