Reenergized Delivery Network And Specialty Coffee Expansion Will Drive Long Term Upside Potential

Catalysts

About Farmer Bros

Farmer Bros is a coffee roaster and distributor that serves foodservice, retail and specialty customers with branded, private label and allied products across the United States.

What are the underlying business or industry changes driving this perspective?

• Reenergizing the direct store delivery network with unified sales training, growth focused KPIs and a sharpened good, better, best brand architecture is poised to reignite coffee pounds sold and expand share of wallet within existing accounts, supporting a return to top line growth and higher operating leverage on SG&A.
• Scaling the white label and contract manufacturing portfolio through the highly flexible, SQF and LEED Silver certified Portland roasting facility should increase plant utilization, drive volume based cost efficiencies and improve gross profit dollars even in a high green coffee cost environment.
• The expansion of the Sum>One Coffee Roasters specialty brand, including the rollout of 50 branded cafes with Eurest and growing presence at major universities such as UCLA, positions Farmer Bros to capture premium coffee demand and mix shift to higher margin products, enhancing net margins and earnings power.
• Industry wide normalization in coffee input inflation and potential tariff relief on imported green coffee, combined with Farmer Bros reengineered sourcing methodologies, can restore gross margins from the high 30 percent range toward historical levels and materially strengthen adjusted EBITDA and cash generation.
• Ongoing structural cost reductions, including lower selling and general and administrative expenses and a leaner operating model, create a more resilient earnings base so that even modest revenue recovery can translate into outsized improvements in adjusted EBITDA and a faster path toward sustainable profitability.

Assumptions

This narrative explores a more optimistic perspective on Farmer Bros compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Farmer Bros's revenue will grow by 3.8% annually over the next 3 years.
• The bullish analysts are not forecasting that Farmer Bros will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Farmer Bros's profit margin will increase from -4.0% to the average US Food industry of 6.1% in 3 years.
• If Farmer Bros's profit margin were to converge on the industry average, you could expect earnings to reach $23.1 million (and earnings per share of $1.03) by about December 2028, up from $-13.5 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 3.6x on those 2028 earnings, up from -2.5x today. This future PE is lower than the current PE for the US Food industry at 20.4x.
• The bullish analysts expect the number of shares outstanding to grow by 1.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in restaurant foot traffic and changing consumer dining habits, as evidenced by seven consecutive months of declines, could structurally reduce away from home coffee consumption, limiting the recovery of coffee pounds sold and constraining long term revenue growth.
• Structural green coffee inflation driven by tariffs on Brazilian imports, supply chain disruption and adverse weather may keep coffee input costs elevated for an extended period, embedding higher cost of goods sold and capping gross margin improvement even if volumes stabilize.
• Management’s stated decision to avoid further price increases despite record input cost inflation could prove unsustainable, either eroding margins if maintained or triggering customer churn and volume declines if reversed, which would pressure both net margins and earnings.
• Reliance on cost cutting and SG&A efficiencies to offset a declining top line may reach natural limits, after which continued revenue softness and coffee pound degradation would translate more directly into operating deleverage, weaker adjusted EBITDA and ongoing net losses.
• If the planned expansion of the DSD network, white label contracts and Sum>One specialty brand fails to fully utilize the Portland facility or gain sufficient traction in a weaker macro environment, the company may be left with underutilized assets and insufficient scale benefits, restraining gross profit dollars and overall earnings power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Farmer Bros is $3.0, which represents up to two standard deviations above the consensus price target of $2.25. This valuation is based on what can be assumed as the expectations of Farmer Bros's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.0, and the most bearish reporting a price target of just $1.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $378.7 million, earnings will come to $23.1 million, and it would be trading on a PE ratio of 3.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $1.57, the analyst price target of $3.0 is 47.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.