Farmer Brothers Co. (NASDAQ:FARM)

CAPS Rating: 2 out of 5

The Company is a manufacturer, wholesaler and distributor of coffee and allied products through direct and brokered sales to restaurants, hotels and hospitals as well as retailers such as convenience stores, coffee houses and grocery stores.

Recs

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Player Avatar NetscribeConsGds (98.65) Submitted: 2/2/2007 7:07:25 AM : Underperform Start Price: $18.90 FARM Score: -11.08

Farmer Brothers manufactures and distributes coffee and spices to the institutional food service segment. Its product line includes roasted coffee and coffee related products such as coffee filters, sugar, and creamers; assorted teas, cocoa, spices, soup and beverage bases. The company primarily offers its products to restaurants and other institutional food service establishments including hotels, hospitals, convenience stores, and fast food outlets.

Competition in the industry is intense and Farmer brother is in a race with players like P and G, Kraft foods, Sysco and Boyd Coffee. Business is seasonal in nature and sales generally gain momentum during winter. However, the company has not delivered a spectacular performance for the past few quarters. Green coffee is the principal raw material for the company and price of green arabica beans is showing a rising trend, which could add more pressure to the margins of the company. Also, top line could suffer, as the roasted coffee products comprise approximately half of their total sales. Coffee crop production is expected to decline in Brazil in ‘07 and ‘08, which could pose threat to the industry due to the supply concerns.

The overall financial performance of the company has not been exciting with hardly any rise in the revenues in the past two years. Farmer Brothers has not been able to leverage its operating expenses, which could be seen in the deteriorating operating margins. Looking ahead, management has no initiatives in line that could drive revenues ahead. Also, price to earnings multiple of the company is much higher as compared to the industry’s. In the light of all these factors, Farmer Brothers does not provoke any bullish sentiments.

Member Avatar NetscribeConsGds (98.65) Submitted: 4/20/2007 6:14:01 AM
Recs: 0

Farmer brothers (FARM) is likely to face a tough situation ahead. Intense competition from large players like Kraft foods and P&G is putting a wet blanket on the growth prospects of this coffee manufacturer. FARM looks pretty adamant when it comes to delivering an impressive revenue growth. The company posted a negligible revenue growth in the first quarter of fiscal ’07 owing to lackluster coffee sales. Operating margins have been deteriorating for quite some time and the rise in coffee brewing equipment costs added further woes.

Company is facing input costs pressure from the surging prices of green arabica beans. The pressure is expected to continue as Brazil, the world’s largest coffee producer is expected to trim the production in 2007. This would tighten the supplies and negatively impact the gross margins of the company in the near future. Going ahead, FARM has no major action plan to drag itself out of these doldrums.

On the initiatives front, company plans to implement changes in the information systems to bring operational efficiencies. Also, the company has expanded its line of canned coffees and would continue to focus on packaging to stimulate revenues. However, taking a broad note, not much looks brewing in Farmer Brothers and it is wise to stay away from the scrip.

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