Armanino Foods of Distinction

This writeup will be short and simple, befitting the situation. Armanino Foods is a Hayward, California-based manufacturer of Italian specialty foods, primarily pasta sauces.  It's a well-run company with a stable business that compounds value and is shareholder friendly, unlevered, relatively inexpensive and pays a steady dividend, which they have increased steadily over time. It is also a microcap, trades on the pink sheets and has very low volume, so this is probably a PA trade at best.

I originally came across the stock trading below $1, but good earnings and a dividend raise have led to a 60% run in the stock this year. In addition, it has been written up on a few websites over the last year:

http://www.whopperinvestments.com/amnf-armanino-foods-good-company-decent-price-takeover-potential

http://otcadventures.com/?p=334

http://connecticutcomments.blogspot.com/2013/07/the-armanino-earnings-report.html

http://brettonfund.com/2013-q1-shareholder-letter/

After the run, AMNF now appears only moderately cheap to fairly-valued here on a P/E basis at ~ 13x 2013 EPS.  Nonetheless, I think you can see a decent return from today’s price based on the 4% dividend yield (which has grown steadily) and continued growth in earnings. Between the two, and with the company’s record of shareholder-friendly behavior, and ROE around 50%, I expect annual returns of 15%+ and the possibility of an eventual takeout by a larger player. Micro-GARP if you will. For those with patience, it should be worth picking off a few shares for your PA on any selloff.

History

Armanino Foods grew from a family farm marketing fresh herbs and vegetables in the San Francisco Bay area, moving to freeze-drying specialty herbs, and eventually into pesto sauces.  In 1986, the farm business was sold, and the frozen pesto business was incorporated as Armanino Foods of Distinction, Inc.

 The stock was traded on NASDAQ until August 2005, but the Company deregistered to save money, and now trades on the Pink Sheets. It still has its financial statements audited and publishes quarterly and annual financial information on its website http://www.armaninofoods.com/Financial_Info.aspx.

Business

The company now markets a variety of upscale pesto sauce flavors, other pasta sauces, frozen filled pasta (ravioli, tortellini etc.), cheese shakers and precooked beef meatballs.

A sample of the company’s products can be seen at: http://www.armaninofoods.com/Grocery.aspx

Sales are primarily in North America but with a growing international business in Asia. Growth in Asia was rapid over the last few years (14%, 10%, and 11% of the Company’s gross sales in 2012, 2011 and 2010) but has slowed in 2013.

The company leases its manufacturing facility in Hayward, and owns all of the manufacturing equipment. The lease runs through 2016, with an option to extend for a further five years.

Armanino’s sells through food brokers to a series of retail and foodservice accounts as well as to processed food manufacturers as an ingredient (“industrial accounts”).

The foodservice accounts include hotel accounts, cruise ships and restaurants. They sell nationally (though with more exposure on the west coast), to chains as well as “mom-n-pops”, primarily through two main food distributors.

Retail is primarily west coast with sales of upscale products through chains like Safeway and Ralphs (see http://www.armaninofoods.com/Store_Locations.aspx if you want to do some store diligence)

Financials

Armanino refocused its sales efforts in the middle of the last decade. That, coupled with some new products has led to impressive sales growth. The business is not that cyclical, and performed well through the downturn. They have been able to leverage their existing manufacturing capacity well, and have kept headcount flat for many years. That has meant EBITDA has risen by almost 5x, and EPS by 10x over the period.

As well as the impressive growth in profits, the standout point from the chart is that of $12.9 million of net income earned over 2004-12, $12.5 million was paid out as dividends and $1.9 million net as stock repurchases, reducing the sharecount by nearly 10%. Account for the modest $1.6mm of debt incurred and you still have all the profits being returned to shareholders. The company achieved substantial profit growth without requiring additional capital.

Will this performance be sustainable? It’s hard to say. Recent growth has slowed – partly due to 2012 revenues having had a small pull-forward from an announced price increase in 2013, the first for a few years.  Growth in Asia slowed in the most recent quarter. Against that, the higher prices mean higher margins, and the company continues to try to expand its customer base further east, as well as adding new products opportunistically. Management indicated that recent investment in equipment and new products should provide new growth going forward.

Insiders own a meaningful amount of the shares – Chairman Douglas Nichols owns 6.3%, CEO Edmond Pera 3.7%, and Mrs. Deborah Armanino Leblanc , who is Director of Sales, Company Secretary and Director (and daughter of the former CEO) owns 3.7%.  The company is fairly tight-lipped on investment plans, other than saying that they have sufficient capacity for the near term, and that they intend to continue to prioritize dividends and repurchases.

Valuation:

Market Cap      47.4

Debt                1.4

Cash                2.1

EV                   46.7

I estimate 11c of EPS in 2013 based on 4% revenue growth, so the current multiple is 13x, with a dividend yield just under 4%. Cheap compared to other branded food companies, but given the liquidity discount, not that exciting. The fun happens if you believe that the management can continue to execute going forward.

I model revenue growth at 4-5% going forward (less than half of the 2004-12 CAGR. New products might provide upside to that growth. Paying out 55% of earnings as dividends and splitting the rest between buybacks and the balance sheet I get to over 17c of EPS by 2017. At a 15x multiple on that you get $2.50, with almost ~40c of dividends earned along the way.

A crude DCF with a 10% discount rate gives a present value of about $2.10, or about 50% upside.

Alternatively, 4% dividend plus over 10% EPS growth given the assumptions above.

The kicker of course, it the possibility of a takeover.

In conversations with the CFO he indicated that the company has been approached by buyers but is not currently for sale. Both the CEO and Chairman seem to have enough financial savvy to cut a good deal should that change. A larger buyer could probably extract value in a number of ways – cutting overhead and consolidating manufacturing, bringing greater scale to purchasing, increasing penetration of the brand across a greater nationwide distribution and reducing or eliminating the 2-5% brokerage commissions the company pays to food brokers to gain distribution for its products.