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One-Week Wonder
Farmer's Market
By Lawrence Carrel
January 14, 2005
Farmer Bros. Co. (FARM1)
Share price as of last Friday's close: $22.49
Share price now: $28.70
Change: 27.6%
Last time this high: Jan. 11, 2005
52-week high: $39.39
52-week low: $22.05
INVESTORS BOUGHT
the farm this week — Farmer Bros. (FARM2),
that is.
Since the coffee roaster announced late
Sunday the death of its chief executive, shares of Farmer Bros. have
surged 28% to $28.70. According to the Orange County, Calif.,
Sheriff-Coroner Department, 52-year-old Roy E. Farmer, who also served
as chairman and president, died last Friday of a self-inflicted gunshot
wound. Guenter Berger, vice president of production and a 44-year
veteran of Farmer Bros., was named interim CEO.
The tragic loss of a company's top
executive typically raises concerns over a leadership void, prompting
investors to sell. In the case of Farmer Bros., just the opposite
occurred. That's what makes the sharp run-up in the stock so striking.
"It's all about whether a sale or change
of management will maximize the use of assets," says James A. Smith, a
fund manager at Miramar Partners, a private investment house in San
Francisco that's invested in Farmer Bros. in the past. "I think the
individual shareholders need to ask, 'Will there be a change in
management or not?' If so, then there's more value to come out of the
stock. If not, then the stock will continue to decline." (Smith doesn't
own shares of Farmer Bros.; Miramar Partners doesn't have a business
relationship with the company.)
A family business, Farmer Bros. has a
somewhat checkered past. Roy E. Farmer ran the Torrance, Calif., seller
of coffee and related products to the food — service industry for less
than two years, taking over the CEO post from his 86-year-old father,
Roy F. Farmer, in March 2003. Roy F., who remained chairman, was known
for having combative relationships with shareholders and the media alike
during his half-century tenure. Farmer Bros. was founded in 1912 by Roy
F.'s father and uncle; it went public in the 1950s.
"They were the only company I have ever
heard about that wouldn't send an investor an annual or quarterly
report," says Gary Lutin, president of Transition Investments, which
organizes corporate governance forums. "They wouldn't even return phone
calls." Lutin is also an investment banker at Lutin & Co. in New York.
Shareholders, including the senior
Farmer's sister and nephew, have been waging a long-running battle
against Farmer Bros. Without accusing the company of anything illegal,
questions have been raised about management's decision to sit on cash
rather than expanding the business or dramatically increasing the
dividend. At the end of September, Farmer Bros. had $198.4 million in
cash and no debt.
Declining financial performance over the
past few years has added credence to the complaints. For its fiscal year
ended June 30, Farmer Bros. posted net income of $12.7 million, or 81
cents a share, down from $23.6 million, or $1.30 a share, for fiscal
2003, and $30.6 million, or $1.65 a share, for fiscal 2002. Sales in
fiscal 2004 fell 4% to $193.6 million. Fiscal 2003's $201.6 million in
sales was down 2% from fiscal 2002. Coffee accounts for 50% of revenues,
while equipment and other food supplies make up the rest.
It's not a stretch to surmise from the
stock's heady gain this week that investors view less family control as
a positive development for Farmer Bros.
"There has been a lot of speculation that
the company would be sold because the family wouldn't be interested in
operating the business," says Jim Lucas of Abernathy MacGregor Group,
the company's investor relations firm. According to Lucas, the board is
mulling management changes, but it's early along in the process.
But the Farmer family, which controls 39%
of the company's shares, might not be ready to give up the reins just
yet. Carol Farmer Waite, the 58-year-old daughter of Roy F. and sister
of Roy E., was named to the board on Friday. Waite, who worked at the
company in the early 1970s, is a retired elementary school teacher. Her
son, Jonathan, is an employee of Farmer Bros.
"Our family is unanimous in our
commitment to this company," said Waite in a written statement. "We'd
like to assure the company's employees, customers and stockholders that
it is our wish for Farmer Brothers Coffee to continue the legacy of my
grandfather, father and brother. Farmer Brothers is too big a part of
our lives for us to change that."
The stock fell nearly 3% Friday following
Waite's appointment as a director of Farmer Bros.
Quote:
"The legacy that people are worried about is the lack of respect by the
former controlling shareholder for all the other shareholders, and that
is not a legacy anyone wants to see continued," says Lutin, who has run
a corporate-governance forum for Farmer Bros. shareholders for the past
three years. "A lot of people have been fighting with management for 20
years. It is considered one of the most intransient and unresponsive
boards in the U.S. The professional analysis hasn't changed. Management
needs to be replaced and will be replaced. They demonstrated an
inability to maintain competitive viability. You need somebody leading
this company who can at least achieve mediocrity. They need managers who
can at least watch how the other monkeys peel a banana and copy them."
(Lutin doesn't own shares of Farmer Brothers; his firms don't have
business relationships with the company.)
1http://www.smartmoney.com/eqsnaps/index.cfm?story=snapshot&symbol=FARM
2http://www.smartmoney.com/cfscripts/Director.cfm?searchString=FARM |
