Stretching the definition of a Net/Net
Wake Up and Smell the Coffee: Farmer Brothers(FARM)

We hope Ben Graham wouldn't take offense if we loosened up a bit, and took a gander at some "double net/nets", or companies trading at less than two times their net current asset value. Afterall, we've already taken liberties with Ben's philosophy; he preferred companies trading at less than 2/3 of net current asset value, and we tend to focus on those trading below 1 times NCAV. Truth be told, it's slim pickings these days to find these companies (not unusual), but we'd thought it would be interesting to see what we could dig up at 2 times NCAV.

What we found was a list of about 300 companies, and one of the most interesting name we found was that of Farmer Brothers, a manufacturer and distributor of coffee. We remember this company as a thinly traded issue, trading at $400 per share a years ago. After a 10 for 1 split, and some difficult times, this company currently trades around $20--and shareholders are not happy. More on that later.

California based Farmer Brothers was founded in the 1920's, and sells coffee and other products primarily to restaurants and other institutions. Coffee accounts for about half of sales, but the company also provides 300 other products, many of which are coffee related. The company's primary raw material is green coffee, an agricultural commodity subject to many different factors that can cause wide and severe price swings. The company does utilize derivatives to hedge risk.

The Controversy
Lets face it, business at Farmer Bros has not been all that great in recent years, and sales have been flat. Investors have not been happy either. Five year total returns are in negative territory, and after looking at the balance sheet, you'd wonder whether this is a coffee company, or very bad money market fund. Much of the problem has been attributed to company insiders, who own more than half of the outstanding shares.

Tons of Cash and Marketable Securities
Farmer Brothers has $180 million in cash and marketable securities, mainly comprised of treasuries ($113.5 million)and preferred stock($61.7 million). That amount might not be that remarkable, except for the fact that the current market cap is $323 million, leaving the company with an enterprise value of just $143 million. Or in per share terms, thats $11 in cash and ms, while the stock trades at $20. The company currently yields 2.2 percent, hence the reference to being a "very bad money market fund".

The Numbers
Revenue for 2006 (year ended 6/30/06) was $207.5 million, up 4.5 % from 2005s $198.4 million. The company mananged net income of $4.75 million in 2006, up from a loss of $5.4 million in 2005. However, all of 2006's net income is attributable to dividends and interest from the companies cash and S/T investment hoard, an amount which exceeded $8 million. In other words, the operating business is not profitable.

Shareholder Revolt
Dismayed by poor operating performance, the poor use of excess capital, and disdain shown for minority shareholders, Farmer Brother's investors have become increasingly active over the years. For more on this, visit the Forum for Shareholders of Farmer Bros. Co.

Conclusion
This is one we'll be following. Frankly, we are intrigued by what might be an excellent business, with a relatively large amount of working capital. Shareholder influence can ultimately force change, and that's what it will take to right this ship.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.