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Stocks: One-Day Wonder: Farmer's Market

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.

"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.)




The Forum is open to all Farmer Bros. shareholders, whether institutional or individual, and to professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives.  As stated in the Forum's Conditions of Participation, participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

There is no charge for participation.  Franklin Mutual Advisers, LLC, the manager of funds owning approximately 12.6% of Farmer Bros. shares, provided initial sponsorship for the Forum and arranged for it to be chaired by Gary Lutin.  Continuing support and guidance of the Forum is provided by an Advisory Panel of actively interested shareholders.

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