Henrik Sorensen
Both JVA and NASDAQ:FARM are selling at multiyear lows. They have each been taken behind the woodshed and beaten beyond recognition. The hate selling has been nothing less than brutal, relentless and excessive. The recurring theme has been to sell now and ask questions later. Fear and uncertainty are clouding any possible light at the end of the tunnel scenario for both these equites. The old Buffet quote of “be greedy when others are fearful” couldn’t be more illuminated at this juncture.
The pendulum has swung too far: Has the market overreacted? Of course, it has, especially considering both these companies have produced sound improvement over the past twelve months. JVA earned 22 cents per share in its latest fiscal year and paid out a 7 cent cash dividend. FARM saw its fiscal 2022 revenues grow 18% as covid pressures abated. The market is emotional, and fear and greed are its largest forces. If you strip the emotion away and evaluate each enterprise strictly on their merits and metrics, it will be easy to determine how undervalued they really are.
Farmer Brothers: Assessing the company from an asset side reaps some nice discoveries. Its brand new $65 million state of the art headquarters/plant in Northlake Texas consists of 535,000 sf of office/distribution and processing space. It also provides a lot of room for future expansion, sitting on 28 acres of land. They also own 37 of their 97 branch distribution locations (the land and structures). In addition, the company possesses a title to its 142,000 sf equipment repair center in Oklahoma City. Lastly, the enterprise operates three other manufacturing plants in Houston (330,000 sf), Portland (114,000 sf), and Hillsboro, Oregon (20,400 sf).
One thing for sure, FARM’s treasure trove of real estate holdings should definitely allow shareholders to sleep better at night. There is definite real estate value able to be tapped either from a straight sale or a sale lease-back transaction. This real estate is undervalued on the company’s balance sheet (recorded at acquisition price, not current market price) and I consider it “hidden value” which can always be monetized. It is a built-in safety line.
Farmer Brothers recently presented at the 11th annual Roth Deer Valley Conference last month.
Highlights included: (1) additional success at their new west coast distribution center (2) momentum at their Revive equipment repair division (3) continued spot pricing softness in the coffee commodity market (4) point of sales software advances.
Metrics are dirt cheap: FARM is selling at a mere 18% of annual sales and 86% of its book value. Next month’s second quarter estimates are also in the gutter. Gerry Sweeny of Roth Capital is anticipating the company’s loss will nearly double to 56 cents from last year’s loss of 31 cents. That’s despite an anticipated 11% top line jump, from $118 million to $131 million. That forecast could be too bleak considering management already expressed margin improvement gains in the latter half of their second quarter (relayed during their 1st q conference call). They said, “substantial margin recovery is already underway.”
Activist Investors have arrived: The “JCP” party (made up of JCP Investment Management LLC and 22nw, LP) has now attained a 17% ownership stake and has placed two of their representatives to the board of directors (David Pace & Bradley Radoff). In addition, Mario Gabelli of GAMCO Investors has a 7.9% position, followed by Kennedy Capital Management Inc with a 5.30% interest. I’m excited for the role this group of “smart money” can play in the company’s future. I think accountability, and the quest to enhance shareholder value is always a good thing.
Caveats still present: The company’s cash position is too low at $7.60 million and its debt load of $114 million is too high. Although Farmers current ratio improved from 1.89 to 2.0, it is still too low. In addition, the company handed out nearly 1 million shares of incentive grants, raising the outstanding share total 5% from 17,969,694 to 18,948,453. I simply don’t like dilution and feel the company should have granted out options to purchase, rather than a flat-out giveaway of company stock, at such beaten down prices.
The complex acquisition of JVA: By March 31,2023, Delta Corp Holdings Limited is expected to merge with JVA and create a $655 million valued company. At that point, JVA shareholders would own a 4.79% stake in the new company. If you do the math, that implies a $5.50 share price- more than double today’s share price of $2.30. The math is arrived by the following: (4.79%) ($655 million) = $31,3745,000. You then divide the $31,374,500 by JVA’s 5,708,599 shares outstanding, to come up with the $5.50 figure.
Clearly, Mr. Market is highly skeptical of the deal. Why else would he assign nearly a 60% discount to the proposed figure? The big question is how much did Delta really earn in its latest year ending period of 12/31/22? We know in 2021 they earned a respectable $45 million. When will Delta’s 2022 earnings be released? Coffee Holdings shareholders will need this information to decide whether to approve the deal or not. Soon, JVA should issue an S-4 filing to the SEC revealing this information, especially if the deal is to be consummated by the end of the calendar first quarter. Time is certainly of the essence.
Obviously the “uncertainty” of the transaction is certainly producing a very toxic effect. Especially since Delta Holdings is such a new company with minimal assets. As a shareholder, I don’t like the complexity of the deal. If I had to vote today, it would be a resounding no vote. I’m a big believer in the “KISS” formula. “Keep It Simple Stupid”.
Bottom line: Both JVA and FARM represent compelling investments, because at their beaten down levels, they offer more reward than risk. Each stock has rallied well off their 52 week lows. JVA has climbed 33% from its low of $1.73 and FARM has improved 11% from its $4.33 low. There is a decent chance JVA could more than double in the next ninety days, while FARM could see a 50% markup (especially if its second quarter results beat expectations).
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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