- By GF Value
The stock of Farmer Bros Co (NAS:FARM, 30-year Financials) gives every indication of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $8.4 per share and the market cap of $149.7 million, Farmer Bros Co stock gives every indication of being modestly undervalued. GF Value for Farmer Bros Co is shown in the chart below.
Because Farmer Bros Co is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Farmer Bros Co has a cash-to-debt ratio of 0.07, which is worse than 85% of the companies in the industry of Consumer Packaged Goods. GuruFocus ranks the overall financial strength of Farmer Bros Co at 3 out of 10, which indicates that the financial strength of Farmer Bros Co is poor. This is the debt and cash of Farmer Bros Co over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Farmer Bros Co has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $412.1 million and loss of $4.28 a share. Its operating margin is -12.31%, which ranks worse than 88% of the companies in the industry of Consumer Packaged Goods. Overall, GuruFocus ranks the profitability of Farmer Bros Co at 3 out of 10, which indicates poor profitability. This is the revenue and net income of Farmer Bros Co over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Farmer Bros Co's 3-year average revenue growth rate is worse than 71% of the companies in the industry of Consumer Packaged Goods. Farmer Bros Co's 3-year average EBITDA growth rate is -64.7%, which ranks in the bottom 10% of the companies in the industry of Consumer Packaged Goods.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Farmer Bros Co's ROIC is -23.88 while its WACC came in at 13.34. The historical ROIC vs WACC comparison of Farmer Bros Co is shown below:
Overall, Farmer Bros Co (NAS:FARM, 30-year Financials) stock appears to be modestly undervalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in the industry of Consumer Packaged Goods. To learn more about Farmer Bros Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.