Farmer Brothers Co. (FARM)

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.