Description

Introduction

• Farmer Brothers has been written up a handful of times on VIC. The write-ups and accompanying comments provide great background information on the company, industry and how it got to where it is today.
• This write-up will serve to highlight recent events and how the stock has become an attractive risk / reward today.
• Note: the market cap is small, sub $100M, so this may be just for small funds and PAs.

Recent Events

After recent events highlighted below, today, the company trades at .25x sales, .8x gross profit and ~2.5x potentially normalized ebitda. I’m not going to highlight all the events over the last couple years, just the ones I think are important to understand the dynamics today.

• 10/31/22: Farmer Bros. Co. announces board refresh and cooperation agreement with stockholders JCP Investment Management and 22NW
  • This comes after several years of operational missteps and poor management execution amidst a difficult operating environment
  • Worth noting, Board Chair Chris Mottern announces he’ll roll off the board in coming months
• 6/7/23: TreeHouse Foods to acquire Farmer Brothers' Northlake, Texas coffee facility and non-direct store delivery coffee business for ~$100M
  • The deal de-levers the company and rids it of a division that had been a persistent drag on profitability, particularly post pandemic
• 9/6/23: Farmer Brothers announce departure of CEO Deverl Maserang, effective 30-Sep-23; appoint VP & Head of Coffee John Moore as interim CEO, effective 1-Oct-23
• 10/16/23: Farmer Brothers holders 22NW and JCP enter into group agreement, deliver letter nominating three to the board
  • On 13-Oct-23, JCP Partnership delivered a letter to the company nominating Troy A. Ellis, Emily K. Keeton and David R. Tresko for election to the board at the Annual Meeting.
  • Worth noting, prior AGMs have been in Dec and Jan

So, long story short, there have been a lot of moving pieces here, at both the management level and the board level. I get the sense certain members of the management team and board operated with little urgency and were not in favor of more impactful steps to accelerate the company’s turnaround that stalled out post pandemic. Additionally, two reasonably active investors have maintained large shareholdings throughout all of this. Taken together, I think the fact pattern here suggests that the remaining shareholders and updated slate of board members (that are being pushed by the activists and voted on next AGM) are likely to be pushing the company to a sale. That said, I have little concrete intel around the potential timing of a such an event, and I’m not necessarily sure I would view one as imminent.

Until then, what is left of the company trades at a very cheap valuation. And the remaining business, which is the DSD business only, looks a lot like the Farmer Brothers of old before the Direct Ship business and plant expansion efforts taken in 2019 began to weigh heavily on profitability.

TODAY’S FARM

• Targets ~$360M in FY24 sales.
• GM was 32.5% last quarter. Management is targeting 40% in the near term, but something closer to mid 30s next year. In the past, this business has supported mid 40s GMs, and seems like it could again do so in time. Prior GMs at this level produced 9% ebitda margins, and management has endorsed that this could again be achievable, in time.
• Management conveyed the company would be ebitda positive after the coming quarter is completed, given a lot of the moving parts associated with managing the network post the TreeHouse sale.  
• There are minimal capex needs, so management believes they can be FCF+ a quarter or two after achieving ebitda positive results.
• Exiting 4Q 23, FARM had total debt of $23M, no near-term maturities and $36M of availability on its revolver. The pension is a ~$19M liability. $134M and $173 federal and state NOLs were largely retained post the DS business / plant sale.
• New management has installed an AI based pricing tool, Bubo AI which has produced some promising early results as it relates to managing inventory and forcing reps to price products at more profitable levels, more consistently.
• Both outgoing and incoming management were enthusiastic about the SHOOT business which is a New Zealand based syrup provider where the company has an exclusive distribution arrangement. Old management suggested this could produce $1-200M in sales for the company, (but I don’t think I’ll hold my breath on that one).
• The operating environment seems to no longer be producing gale force headwinds
  • Coffee pricing is favorably coming in
  • End market customer demand patterns are improving
  • New management which has good operational experience (CEO John Moore is a coffee industry lifer) is likely an improvement over old management

VALUATION

• 8% ebitda margins on ~$375M of sales suggests the company could produce $30M of ebitda, which foots fairly reasonably to prior periods of the company’s DSD only operations. 6x ebitda would equate to ~$6.60 per share.

RISKS

• Operational missteps.
• Balance sheet.

Catalyst

• Successful earnings reports.
• Sale of company.