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Bear of the Day: Farmer Bros (FARM)

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Farmer Bros (FARM), a Zacks Rank #5 (Strong Sell) is in the business of roasting, packaging and distributing coffee and allied products to restaurants, hotels, hospitals, convenience stores and fast food outlets. The company's primary raw material is green coffee. Green coffee is purchased through domestic commodity brokers.

Recent Earnings Miss

Last week, the company reported Q3 18 results where they significantly missed the Zacks consensus earnings estimate, and came in short of the revenue estimate.  The company posted a net loss of -$3.9 million compared to net income gain of $1.6 million in the year ago quarter.  Also, adjusted EBITDA fell by $1.7 million to $10.5 million verse the prior year period.  Further, gross margins declined by 170 basis points to 37.2% compared to the year ago quarter.  To add to the quarter, operating expenses increased by $9.9 million to $61.7 million (+19.1%) due to a rise in general & administrative, and selling expenses. 

Management’s Take

According to Mike Keown, President and CEO, “We continue to make meaningful progress in executing our strategy and working to leverage our solid platform for growth. While we did not achieve year-to-date results at the level we had initially projected to reach our Adjusted EBITDA objective for the fiscal year, we expect that our recently achieved SQF certification and the continued ramp-up of our state of the art Northlake, Texas facility will position us well to secure more national accounts. Further, we are pleased with the continued integration of the Boyd’s business, which remains on-track. Looking ahead, we continue to be focused on leveraging the investments we have made in our roasting facilities, expanding our distribution network, adding new customers, and increasing business with existing customers. Our pipeline remains robust and we believe that Farmer Brothers has the right foundation and strategy in place for long-term growth.”

Price and Earnings Consensus Graph     

As you can see in the graph below, the stock price had been doing well over the past several years, but the recent quarterly miss due to direct store delivery sales declines, and the long sales cycles (typically about 6 months) caused the stock price to fall.

Farmer Brothers Company Price and Consensus

Farmer Brothers Company Price and Consensus | Farmer Brothers Company Quote

Declining Earnings Estimates

Since the earnings announcement, Q4 18, Q1 19, FY 18 and FY 19 earnings estimates have all be negatively revised over the past 7 days.  Q4 18 fell from $0.29 to $0.09, Q1 19 plummeted from $0.18 to $0.07, FY 18 declined from -$0.57 to -$1.18, and FY 19 was cut from $1.17 to $0.69.

Bottom Line

The poor Q3 results were not expected, as management missed its forecast for new direct store delivery and direct ship channels estimates which caught many analysts off guard.  Further, the long sales cycle has investors worried; typically from lead generation to contract takes about six months.  While the company has several positives, it will take a few quarters to see the stock price bounce back from this disappointing quarter. 

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