FARM - Farmer Brothers Company

[ragnarisapirate]

Here is one that I have owned shares of for a little more than a month and finally got around to posting about:

 

http://ragnarisapirate.blogspot.com/2011/12/farmer-brothers-coffee-stock-that-was.html

 

To sum up: it's a turnaround play on a coffee company with inventory that is drastically understated on the books, as well as a glut of real estate... The HQ alone is on the tax rolls for ~1/3 of the market cap of the company, but is on the books for a whole lot less than than. For those of you that like Sear's because it is heavily shorted and has a low float and a lot of insider ownership, there is even that with FARM!

[Aberhound]

Interesting idea. Does anyone use the office K cup service and can comment on the coffee?

 

http://www.customcoffeeplan.com/index.cfm

[Kraven]

Interesting idea. Does anyone use the office K cup service and can comment on the coffee?

 

http://www.customcoffeeplan.com/index.cfm

 

Personally I find all the single service coffee products to be rather disgusting.  I love my coffee and in every office I was ever in whenever they brought out the single service products it never tasted right to me (and many others).  It has an artificial taste to it and doesn't have that nice brewed flavor of "real" coffee.  In most offices there was a choice between the single service and they still had brewed coffee and most of the people I saw still went for the brewed.  While I would drink the single service if there was nothing else, I wouldn't do it if there was a choice.  Thought it was absolutely terrible.

[oddballstocks]

Yes, I'm VERY familiar with the office single serving machine.  As I type this I can hear that someone just got another cup..

 

The office goes through these things like water, so from a purchase perspective that's good.  On a quality perspective they're terrible.  I think the coffee tastes good to people who like Folgers and don't have good coffee taste.  I will have a cup here and there if I need a pick up, but I always veer towards the strongest stuff it seems to have the best taste.  The regular and light taste awful, like brown tinted water.

 

I'd say the machine probably cranks out 50 cups a day, this is for a company of 100+ people but only about 20-30 are in the office at once.  On days the office is full the machine is running non-stop.  I've worked here about four years and it's been the same machine the entire time, it's only been repaired once.

[twacowfca]

this value trap goes way way back. best of luck.  8)

 

Why so?  A company with a brand name should have some sort of moat?  Inventory that's understated because of a LIFO reserve.  What's wrong?

[ragnarisapirate]

this value trap goes way way back. best of luck.  8)

 

Why so?  A company with a brand name should have some sort of moat?  Inventory that's understated because of a LIFO reserve.  What's wrong?

 

yeah, I am confused here as well... how is this a value trap? It isn't like it's just a LIFO Reserve either, it also has some pretty nice real estate. This is a business that deals in a commodity; if the price of coffee slumps, FARM should do well. If you go across the commodity spectrum, if gold slumps, a ton of miners go bankrupt. Seems like a winner to me.

 

Sincerely, I would like to know what's wrong here. I am always up to discuss how my ideas could be totally wrong... That's kind of why I posted it on this board. :)

[Guest Hester]

this value trap goes way way back. best of luck.  8)

 

Why so?  A company with a brand name should have some sort of moat?  Inventory that's understated because of a LIFO reserve.  What's wrong?

 

yeah, I am confused here as well... how is this a value trap? It isn't like it's just a LIFO Reserve either, it also has some pretty nice real estate. This is a business that deals in a commodity; if the price of coffee slumps, FARM should do well. If you go across the commodity spectrum, if gold slumps, a ton of miners go bankrupt. Seems like a winner to me.

 

Sincerely, I would like to know what's wrong here. I am always up to discuss how my ideas could be totally wrong... That's kind of why I posted it on this board. :)

 

The last time the company made an operating profit (after adjusting for the LIFO adjustment) John Kerry was running for president.

 

The company has burned over $70 million in operating losses over the last 3 years, again, after you reverse the negative effects of the LIFO adjustment.

 

Since 2007 they've done over $70 million in acquisitions.

 

At the end of 2007 they had over $170 million in cash on the balance sheet. Now they have about $20 million.

 

All this for a $120 million market cap company.

 

If the cost of coffee doesn't crater this is at best a melting ice cube and at worst a very nasty value trap.

[ragnarisapirate]

My rebuttal:

 

Until recently, managements shortcomings were not factored into the share price; now, I believe that they are more than adequately factored in. In regards to the cash, a bit of it has gone to replacing expensive coffee beans. If coffee prices stabilize/go down, we should see cash swell. They have also put some hedges into place to protect them from rising prices.

 

It is true that they really bothed up their las couple of acquisitions, and, if I was a shareholder when they did them, I would be pissed. However, I bought in at a depressed price because they screwed up in the past. Now, their EBITDA is getting better, which is nice; a year ago, they were hemorrhaging... Plus, they don't have the money to do another acquisition (which, is kind of the double edged sword of bad capital allocation)... so, they are backed up against a wall until they can get their present operations under control.

 

If they manage to go insolvent, I think that it would be a situation similar to Syms, where the shareholders would have a recovery.

 

All this said, I am willing to partner with a sub par business or management if I feel that I get the right deal (which I realize isn't the most popular thing to do on this board)... but, if I do it, it has to be a special situation. Not the sort of thing that I want to do every day.

[Green King]

My rebuttal:

 

Until recently, managements shortcomings were not factored into the share price; now, I believe that they are more than adequately factored in. In regards to the cash, a bit of it has gone to replacing expensive coffee beans. If coffee prices stabilize/go down, we should see cash swell. They have also put some hedges into place to protect them from rising prices.

 

It is true that they really bothed up their las couple of acquisitions, and, if I was a shareholder when they did them, I would be pissed. However, I bought in at a depressed price because they screwed up in the past. Now, their EBITDA is getting better, which is nice; a year ago, they were hemorrhaging... Plus, they don't have the money to do another acquisition (which, is kind of the double edged sword of bad capital allocation)... so, they are backed up against a wall until they can get their present operations under control.

 

If they manage to go insolvent, I think that it would be a situation similar to Syms, where the shareholders would have a recovery.

 

All this said, I am willing to partner with a sub par business or management if I feel that I get the right deal (which I realize isn't the most popular thing to do on this board)... but, if I do it, it has to be a special situation. Not the sort of thing that I want to do every day.

 

how much are you getting paid for this catastrophe risk ?

What if you don't see you money again ?

what are you talking about a 20 cent dollar or a 50 cent dollar ?

[ragnarisapirate]

My rebuttal:

 

Until recently, managements shortcomings were not factored into the share price; now, I believe that they are more than adequately factored in. In regards to the cash, a bit of it has gone to replacing expensive coffee beans. If coffee prices stabilize/go down, we should see cash swell. They have also put some hedges into place to protect them from rising prices.

 

It is true that they really bothed up their las couple of acquisitions, and, if I was a shareholder when they did them, I would be pissed. However, I bought in at a depressed price because they screwed up in the past. Now, their EBITDA is getting better, which is nice; a year ago, they were hemorrhaging... Plus, they don't have the money to do another acquisition (which, is kind of the double edged sword of bad capital allocation)... so, they are backed up against a wall until they can get their present operations under control.

 

If they manage to go insolvent, I think that it would be a situation similar to Syms, where the shareholders would have a recovery.

 

All this said, I am willing to partner with a sub par business or management if I feel that I get the right deal (which I realize isn't the most popular thing to do on this board)... but, if I do it, it has to be a special situation. Not the sort of thing that I want to do every day.

 

how much are you getting paid for this catastrophe risk ?

What if you don't see you money again ?

what are you talking about a 20 cent dollar or a 50 cent dollar ?

 

Due to the tangible (and, in my view, mis-understood) assets, I don't view management as being a "catastrophe risk." They are in a situation where they can't blow through money in another misguided acquisition. They can only blow through it by running the operating business in a terrible manner which, seems to be slowly getting better.

 

I won't go into exactly what I think a company is intrinsically worth, as I don't think it is an exact number that I can calculate, but rather just get an idea for, but I will say this: So far, they are turning the company around. If the turnaround doesn't end up working, I have a great degree of protection in a bankruptcy due to their assets. Plus, they are a controlled company, so, the majority owners shouldn't let it bleed forever and will fight for the money of the equity holders. If the turnaround works, then there is a ton of upside.

 

And, to be fair, there is less discrepancy between price and value there today than there was when I bought my shares... still though, it isn't unattractive to me at the moment.