As we noted recently with our coverage of Coffee Holding (Nasdaq: JVA), coffee stocks can be volatile and promising names in this group that are still flying under the radar can be hard to come by. Fortunately, there might be one microcap coffee stock that takes care of both of those conundrums.

The microcap name to look at?

Farmer Brothers (Nasdaq: FARM), a California-based manufacturer, wholesaler and distributor of coffee, tea and related culinary products.

What makes Farmer Brothers interesting and for that matter, less volatile than say a company like Green Mountain Coffee Roasters (Nasdaq: GMCR) is that it doesn’t operate in an arena where it’s competing directly with Starbucks (Nasdaq: SBUX). While the company does sell some of its products in coffee houses, it doesn’t operate those establishments itself and the company focuses on sales through direct and brokered sales to institutional food service establishments including restaurants, hotels, casinos, hospitals and food service providers.

Not to mention, there is more of a consumer staples feel to Farmer Brothers than an investor would get with Coffee Holding or Green Mountain. In addition to coffee, Farmer Brothers has a product line that includes coffee filters, sugar and creamers, assorted teas, cappuccino, cocoa, spices, gelatins and puddings, soups, gravy and sauce mixes, pancake and biscuit mixes, and jellies and preserves.

Conservative investors are bound to like that diversification as well as the fact that Farmer Brothers has been around for 100 years, so it’s certainly fair to say this company has staying power, something that cannot often be said of a lot of microcap stocks.

While not currently profitable, (wait…there’s a reason for that), the company’s bottom line is improving. For its fiscal second quarter, Farm Brothers reported a net loss of $4.1 million, or $0.27 per common share, compared with a net loss of $8.9 million, or $0.59 per common share, a year earlier. Excluding a $4.3 million, or $0.29 per common share, non-cash charge for withdrawal from a multiemployer pension plan, Farmer Brothers would have been profitable.

Sales up…expenses down!

Net sales for the second quarter of fiscal 2012 increased $12.6 million, or 11%, to $131.8 million from $119.2 million a year earlier.

To its credit, Farmer Brothers said its operating expenses decreased $5.4 million, or 10%, from the same quarter a year earlier. That’s no small feat considering that other coffee companies are seeing their costs rise.

What’s interesting about Farmer Brothers from a value investor’s perspective is that the stock is still trading below where it was when the broader market bottomed over three years ago. Actually, the stock trades for less than half of what it did in July 2009.

Good fundamentals

There might be reasons, good or bad, for that, but there are some fundamentals to consider here.

First, Farmer Brothers has done a good job of insulating itself from rising coffee prices by holding decent inventories and those inventories are not fully reflected in the company’s intrinsic value.

Secondly, they have over $50 million in working capital, a solid current ratio, are cash flow positive and have a relatively tight float (experienced small cap investors know what that means).

Thirdly, they have a new president, Michael Keown coming in this month from Deans Foods to continue the Company’s impressive financial turnaround. Founded in 1912, they are the country’s largest direct store delivery (DSD) coffee company

And as analyst Jeffrey Moore noted last year, Farmer Brothers has a lot of real estate. PP&E is on the books for $108.7 million.” That’s with a market cap of less than $180 million.

So maybe Farmer Brothers does belong in your cup…make that…microcap portfolio.

Posted by Dr. Micro