Back to top

Analyst Blog

A strong first-quarter fiscal 2013 performance and incremental estimates aided Farmer Bros Co. (FARM - Snapshot Report) to attain a Zacks #1 Rank (Strong Buy) on December 25, 2012. Furthermore, the coffee company attained a 52-week high of $14.91 on December 24. The company also saw the Zacks Consensus Estimate for 2013 earnings soar 133% since the announcement of the first quarter results.

The Rank Drivers

Combination of a solid cost-control strategy, strong results and an upbeat outlook are the rank drivers for this stock.

On November 5, Farmer Bros reported first-quarter fiscal 2013 (ended September 30) earnings of 19 cents per share, largely beating the Zacks Consensus Estimate of breakeven. Earnings also rebounded from prior-year quarter’s loss of 50 cents as gross margin expansion and solid expense control made up for the lukewarm revenues. Top line declined 2% in the quarter to $119.2 million.

Gross margins improved 400 basis points to 37% in the quarter due to lower coffee costs. Adjusted EBITDA improved 157% year over year to $12.1 million driven by gross margin expansion and cost control. Going forward, the company believes that lower coffee costs will further improve the company’s financials.

Earnings Estimates Jumping

Over the last 60 days, the Zacks Consensus Estimate for 2013 has soared 133% to 42 cents, as 2 of 3 estimates were revised higher. This reflects a year-over-year increase of 122.2%. The Zacks Consensus Estimate for fiscal 2014 has risen almost 96% to 47 cents per share over the same time frame, reflecting a year-over-year increase of 11.9%.

Expensive Valuation

Framer Bros looks expensive at current levels. Farmer Bros currently trades at a forward price-to-earnings (P/E) of 34.10x, representing a premium of 65.6% to the peer group average of 20.59 x. On a price-to-book basis too, the stock is trading at a premium to the peer group. However, the shares trade at a discount of 23.0% to the peer group on a price-to-sales basis. Overall, the premium valuation looks justified given its strong fundamentals.

Based in Delaware, Farmer Bros manufactures coffee, tea and other culinary products and distributes them to restaurants, hotels, casinos, hospitals and other food service providers. The market cap of the company is $242.5 million. Framer Bros competes against The J. M. Smucker Company (SJM - Analyst Report), which carries a Zacks #3 Rank (short term ‘Hold’ rating).

Please login to Zacks.com or register to post a comment.