PRODUCTION IF RUNNING LONG, KILL THE LAST ITEM
Something may be perking at Torrance-based Farmer Bros. Co., the coffee distributors traded on the Nasdaq.
Farmer is a wacky one even by Los Angeles standards, dominated for generations by Roy F. Farmer, 81. He has been on the board since early in the Eisenhower Administration and chief executive and chairman for most of that time.
Farmer also owns 43.3 percent of the stock, and generally “runs the place as a one-man shop,” said Fred Astman, senior portfolio manager at Pasadena-based First Wilshire Securities Inc., a money management shop.
Farmer really hasn’t grown much in recent years, despite the visible coffee mania that has swept the nation, resulting in a Starbucks, or a competitor, seemingly on every street corner in America. Farmer’s sales and profits in 1997 were a little above 1996, but still below 1995 levels, and really haven’t done much in the past decade. The company posted net income of $16.7 million on revenues of $224.8 million in 1997. Its stock trades at 13.6 times earnings, meek by today’s standards.
But in the last two years, big buyers have been sipping at the stock. In particular, San Mateo-based money managers Franklin Resources Inc. took an 8.6 percent stake in January 1997, followed by the Los Angeles-based investment advisors Everett Harris & Co., which in May 1997 bought a 7.4 percent stake. Farmer stock hit $195 in trading last week, up from $130 in early 1995.
Back in 1981, Astman, then an aggressive investor, made a run at changing Farmer’s management, which he thought was in need of fresh management. Gathering up some shares, Astman launched a proxy fight.
Chairman Farmer beat back Astman’s charge, although he allowed his sister, a then-Astman ally who owned 8.6 percent of the company’s stock, a seat on the board. “But nothing really changed,” Astman said last week. “(Roy) still controls three of the five seats on the board.”
One local speculator in Farmer figures that buyers are taking positions based on the expected changes that may occur if Chairman Farmer leaves. Harry Eisenberg, publisher of the Lafayette-based Walker’s Manual series of investment manuals, said last week that the senior Farmer may be purposely depressing the price of the stock so that it is less valuable when estate taxes become a consideration.
Farmer does not talk to the press as a rule, and did not last week. After waiting for a change for 17 years, is veteran stock-picker Astman buying Farmer stock now? “No,” he said. “Roy (Farmer) is there. He may be there another 10 years. He doesn’t drink or smoke. He just sips coffee.”
Domestic bonds
With Asia in a mess but the U.S. economy strong, what do bond buyers like?
“We are in domestic corporate bonds for the most part, and we are staying in situations where it doesn’t matter if Asia falls out of bed,” said Jeff Rollert, managing director of ALM Advisers Inc. in Pasadena, a bond shop.
Rollert assembles bond portfolios for pension fund and other institutional investors. Middle-end U.S. hotel chains, such as La Quinta Inc., are the type of investment Rollert likes.
Even if Asia stays messy which many think will be deflationary Rollert thinks domestic interest rates on 10-year government bonds will rise in the next couple of years, from around 5.4 percent now to 6.5 percent.
Why? For one, Japan is sitting on $1 trillion worth of U.S. government and private bonds, and other assets, which it may start to sell. “That will help push rates up,” Rollert said. More bonds will be looking for buyers, lowering prices, and thus raising rates.
In addition, U.S. workers are going to start getting raises in tight labor markets. And third, many international investors may switch assets to the Euro, the new multinational European currency. Dollar-denominated assets will have to offer more to keep buyers interested, said Rollert.
Korea forecast
Speaking of Asia, we turned to our resident South Korea expert, Stewart Kim, founder of the downtown Los Angeles-based Pacific Gemini Partners LLC money management firm, and asked him if the bottom had been reached yet for the Korean stock market.
“It’s at an 11-year low,” answered Kim. “But it could go down further. I think when the government stops propping up certain banks and lets market forces work, that’s when the bottom will hit.”
Kim expects that to happen sometime this summer.
Merger record
The year 1996 was an all-time record for mergers staggering in its scope, never to be topped, according to M & A; mavens at the time. But in 1997 there were more mergers than 1996, and experts concurred again that it had to be the top of the market.
By June 10 of this year, there were more mergers, measured by dollar volume, than in all of 1997, according to Mergerstat, an arm of Century City-based Houlihan Lokey Howard & Zukin. Through June 10, there were 3,526 transactions, with a combined disclosed dollar volume of $659.8 billion.
No slowdown is in sight, said Scott Adelson, managing director with HLHZ. “People will continue doing deals because they believe consolidation creates value,” he said, referring to economies of scale and the marketing heft that comes with combination. “And now, companies have to merge, as they watch competition merge. You have to get bigger to compete.”
Contributing reporter Benjamin Mark Cole covers the local investment community for the Los Angeles Business Journal. His e-mail address is [email protected].
