Last Update 12 Jan 26

FARM: Streamlining Efforts Will Ultimately Outweigh Higher Coffee Costs And Softer Traffic

Narrative Update on Farmer Bros.

Analysts have trimmed their price target on Farmer Bros. to US$3.00 from US$3.50, citing near term pressure from softer restaurant traffic and higher coffee costs, even as the company focuses on streamlining operations to improve profitability.

Analyst Commentary

Recent Street commentary around Farmer Bros. centers on how much near term pressure from softer restaurant traffic and higher coffee prices should weigh on the shares, versus the potential benefits from the company’s effort to streamline operations and improve profitability.

Bullish Takeaways

Bullish analysts see the decision to streamline operations as a key lever for lifting margins over time. They view this as supportive of the current valuation even with a lower price target.
The maintained Buy rating signals that, in their view, the long term earnings and cash flow potential remain intact despite near term pressure on results.
Cost discipline and a sharper focus on more profitable lines of business are seen as important execution steps that could improve returns on invested capital if management follows through effectively.
Some bulls argue that a reduced target of US$3.00 still implies room for upside if Farmer Bros. can show consistent progress on profitability metrics and cash generation.

Bearish Takeaways

Bearish analysts focus on reduced restaurant traffic as a direct headwind to volume, which could limit revenue growth and weigh on operating leverage in the near term.
Higher coffee prices are highlighted as a risk to gross margins, especially if Farmer Bros. is unable to pass those costs through to customers quickly or fully.
The cut in the price target to US$3.00 is seen as a sign that execution risk around the profit improvement plan is still meaningful and that investors may require more proof before rewarding the stock with a higher multiple.
Near term headwinds are expected to impact reported results, which could keep sentiment cautious and make it harder for the shares to re rate until there is clearer evidence of margin and earnings stability.

Valuation Changes

Fair Value: The model fair value estimate is unchanged at US$2.25 per share.
Discount Rate: The discount rate has fallen slightly from 7.92% to 7.84%, reflecting a small adjustment to the required return used in the model.
Revenue Growth: The assumed long term revenue growth rate is essentially unchanged, at about 3.05% in both the prior and updated inputs.
Net Profit Margin: The projected net profit margin has edged down from 5.65% to 5.56%, indicating a slightly more cautious view on future profitability.
Future P/E: The assumed future P/E multiple has risen slightly from 2.97x to 3.01x, implying a marginally higher earnings valuation in the forecast period.

Enhancing DSD and strategic leadership additions aim to boost revenue, customer growth, and retention.
Product diversification and proactive market strategies are set to improve gross margins and earnings stability.
Ongoing customer attrition, coffee volume declines, and commodity volatility threaten revenue, gross margins, and customer retention, despite proactive pricing strategies.

Catalysts

About Farmer Bros

Engages in the roasting, wholesale, equipment servicing, and distribution of coffee, tea, and other allied products in the United States.What are the underlying business or industry changes driving this perspective?

Farmer Bros. has focused on enhancing its direct store delivery (DSD) operations to drive customer and volume growth, which is expected to boost revenue and strengthen customer retention.
The strategic addition of Brian Miller as Vice President of Sales aims to improve business development efforts and potentially enhance revenue through an increased customer count and higher sales volumes.
The company's recent SKU rationalization and completion of its brand pyramid projects are anticipated to yield ongoing operational efficiencies, likely improving net margins and operational scalability.
The development and rollout of a new specialty tier coffee brand and a partnership with Eurest for eco-friendly blends can drive both top-line growth and higher margins through product diversification and premium offerings.
Farmer Bros.' proactive pricing adjustments and inventory management in response to volatile coffee commodity markets position the company to maintain gross margins above its 40% target, which may improve overall earnings stability amidst market fluctuations.

Farmer Bros Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

Analysts are assuming Farmer Bros's revenue will grow by 3.1% annually over the next 3 years.
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 -4.2% to the average US Food industry of 6.2% in 3 years.
If Farmer Bros's profit margin were to converge on the industry average, you could expect earnings to reach $23.2 million (and earnings per share of $1.06) by about September 2028, up from $-14.4 million today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.4x on those 2028 earnings, up from -2.9x today. This future PE is lower than the current PE for the US Food industry at 19.8x.
Analysts expect the number of shares outstanding to grow by 1.35% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Farmer Bros Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

The company continues to experience customer attrition and a decline in coffee volumes, with an 8% year-over-year reduction in coffee sales, potentially impacting future revenues and earnings.
High prices and volatility in the commodity markets, especially for coffee, may put pressure on the company's gross margins, affecting net earnings as higher costs could be challenging to pass on to consumers without impacting demand.
Customer count degradation and decreased consumer spending could further hamper top-line growth, impacting overall revenue and potentially lowering net profit margins.
There is a heightened risk of trade actions affecting key export markets for coffee and allied products, which could lead to increased costs or supply chain disruptions, negatively impacting revenue and net margins.
The company has proactively adjusted prices, but continuous price increases may not be sustainable, posing a risk to customer retention and potential top-line revenue if consumers seek alternatives.

Valuation

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

The analysts have a consensus price target of $3.75 for Farmer Bros based on their expectations of its future earnings growth, profit margins and other risk factors.
In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $374.3 million, earnings will come to $23.2 million, and it would be trading on a PE ratio of 4.4x, assuming you use a discount rate of 7.4%.
Given the current share price of $1.91, the analyst price target of $3.75 is 49.1% 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.

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Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

DSD Optimization And Eurest Partnership Will Advance Operations