Description

Armanino Foods of Distinction, Inc. (AMNF) is a debt-free ~$106 million market cap OTC-traded producer of frozen and refrigerated food products that grew sales at a 6.8% CAGR for the 18-years prior to the pandemic.  AMNF is adeptly managed, and recession-resistant as evidenced by its sustained profitability through the pandemic and is well-positioned to capitalize on the recovery of the foodservice industry after doubling its manufacturing capacity in 2018.

AMNF specializes in pesto, stuffed pasta, and cooked meats and is currently exploring new products, markets, and potential acquisitions. The COVID-19 pandemic’s effect on foodservice demand unsurprisingly led to 2020’s net sales coming in at 25% below 2019’s.  However, AMNF remained profitable, eking out annual earnings of $0.0631 per share versus 2019’s $0.2022 per share. AMNF is relatively illiquid, trading an average of 22,000 shares/day over the last five years.  

All-in-all results in 2020 were better than would have been expected given that the pandemic shut down AMNF’s key end-user – the foodservice industry.  While AMNF’s share price has recovered to pre-pandemic levels after a decline in 2020, it remains inexpensive trading as if sales growth will deteriorate, margins will compress, and their increased manufacturing capacity will go unutilized.  AMNF’s financial reports since 2012 can be found here; those from years prior to 2012 are available through the SEC.

[Source: Yahoo! Finance]

The Business

Armanino Foods of Distinction is a producer of frozen food products located in Northern California.  The Company sells its products to retail and foodservice distributors, club-type stores, and industrial accounts through a network of food brokers.  The Company sells into the US Domestic market and the Asian market (Asia accounts for roughly 8% of gross sales).

Products

Sauces

AMNF sells a variety of pesto sauces, Alfredo sauce, and Bolognese sauce, primarily to industrial foodservice customers, with some sauces also made available through retail channels.

Frozen Pasta

AMNF offers stuffed pasta and pasta sheets in both cooked and uncooked varieties, which are again available mainly to industrial customers, but also some retail channels.

Meatballs & Cheese Shakers

Finally, AMNF sells cooked beef and turkey meatballs and cheese shakers only in the retail channel.

Value Chain

Many of AMNF’s products are manufactured in its facilities in California, and others are manufactured and packaged on a “co-pack” or “toll-pack” basis by third parties.  AMNF’s products are marketed via a network of food brokers to retail, foodservice, and industrial customers.  Brokers are compensated on a commission basis ranging from 2 - 5% of sales. 

Why Is AMNF a Buy Today?

1. AMNF is a historically consistent performer with a 3.2% dividend yield, run by a well-incentivized management team, benefiting from both pricing power and scale economies

2. AMNF is recession-resistant, having survived the COVID-19 pandemic coming out streamlined on the other side with double its manufacturing capacity 

3. AMNF is cheap based on a conservative DCF valuation

1. AMNF is a Consistent Performer

Revenue Growth

During the 18 years, through 2019, AMNF grew revenues at 6.8% CAGR.

[Source: Sentieo & author calculations]

Revenue growth has historically been driven by new customers and products, increases in order sizes, and price increases.  In each year since 2012, AMNF has attributed its increase in sales, in part, to the “addition of new customers including national accounts.”  Furthermore, AMNF has spent heavily on effective promotions to drive sales growth and intends to continue these programs to grow its market share in the domestic market.

[Source: AMNF financial reports]

Regular Quarterly Dividends

AMNF has paid 86 consecutive quarterly dividends (and ten special dividends) since 2000 totaling $1.18/share, and currently boasts a 2021 dividend yield of 3.2%.  The regular dividend was cut in 2020 from $0.0275 to $0.0175 to protect the company’s cash position during the pandemic but has since returned to $0.0275.  The average dividend payout ratio for the past 12 years (excluding 2020) was 55.39%.  

[Source: AMNF financial reports]

Management & Insider Ownership

AMNF is operated by managers who prioritize returning capital to shareholders with collective insider ownership of 7%. Management is further incentivized by non-dilutive phantom stock awards with exercise prices ranging from $2.09 - $3.48 per share vesting over 48 months. 

[Source: AMNF financial reports]

Pricing Power

On top of adding new accounts each year, AMNF has been able to pass on cost increases to customers.  In 2013, AMNF faced rising commodity prices, primarily energy costs, leading to ingredient cost inflation, but maintained its margins.  In the second half of 2018, the company increased prices further, again allowing it to maintain its gross and operating margins.

Since the pandemic, we have seen inflation begin to pick up. However, AMNF’s management team has continued to reiterate that the company is well-positioned.  

“Material changes have taken place in the organization, which have helped us successfully weather the ongoing pandemic and economic challenges, while setting up the organization for record growth. We expect to exceed sales projections, while optimizing marketing and cost spend. In addition, despite labor shortages, inflation, and logistics challenges that continue to plague our industry, Armanino is confident that sales will achieve record levels for the year.”

President & CEO, Tim Anderson [12/20/2021 Press Release]

[Source: Sentieo & AMNF financial reports]

Economies of Scale

Over the past 20-years, except for 2020, AMNF has increased revenues without a one-for-one increase in operating expenses.  This effect can be seen below in the two charts that illustrate operating expenses as a percent of sales and sales per full-time employee.

[Source: AMNF financial reports]

[Source: AMNF financial reports & author calculations]

2. AMNF’s Increased Capacity and Streamlined Cost Structure

Doubled Manufacturing Capacity

In 2016, AMNF took out a loan to begin work on a $3.5 million plant expansion that would double manufacturing capacity.  The management team emphasized that without the expansion, it would be difficult for them to keep up with demand in the years after 2018.

The project involved re-working process flows, adding new machinery to allow for automation, and modernization to comply with USDA food safety requirements more efficiently.  The project was completed on time and within budget in 2017. 

Following the most recent quarterly reporting period, AMNF entered into two new leases for a larger warehouse and office location.  Management states that “the new leases will provide the Company with additional manufacturing capacity to support its anticipated growth in sales in the foreseeable future.”

Prudent Management During the Pandemic

The COVID-19 pandemic had a catastrophic effect on the US outside-of-the-house foodservice industry.  Yet, while AMNF saw a steep drop in sales and compression of gross and operating margins, margins quickly reverted closer to the long-run mean over the first three quarters of 2021.  During 2020, AMNF was successful in its efforts to lower inventory levels and cut other costs to protect its cash position.

“These tactics were so effective that even after expediting the repayment of its loans, continuing to pay dividends, as well as continuing to invest in equipment and technology and other strategic growth initiatives, the Company’s cash and cash equivalents, and certificate of deposit balances have actually increased by $1.2M from $8.8M at 12/31/2019, to $10M at 12/31/2020.”

[MD&A AMNF 2020 Annual Report]

AMNF’s ability to control its promotion, COGS, and SG&A costs will help the company to maintain or improve margins as the industry recovers from the pandemic and utilization of new capacity increases.  In Q3 2021 AMNF reported the highest quarterly sales in its history as well as record-breaking year-to-date sales through Q3.

3. AMNF is Cheap on a Conservative Valuation

Assumptions Implicit in Current Market Valuation

Today’s market valuation of AMNF implies a 10-year deterioration in revenue growth from 6.8% linearly down to a long-term growth rate of 2%.  This further implies that the company never realizes the benefit of the doubling of its production capacity in 2017-18 and instead only achieves a 50% increase in sales over the 10-year planning period.  This model also includes a linear deterioration of gross margins from 35% to 27.48%.  Cash flows are discounted at 6.9%.  1.9% (30-yr Treasury yield) + [0.50 (5YR monthly Beta) * 6% market risk premium] + 2% illiquidity premium and zero debt.  

It is our view that this valuation is too dismal, given the company’s historical consistency and success.  A more reasonable baseline valuation model assumes that AMNF can continue its revenue CAGR of 6.8% for the next ten years through price increases, additional accounts, and fully utilizing its increased capacity (revenues double over this period.)  We assume a terminal growth rate of 2.5%.  Furthermore, we assume that the Company will continue to benefit from economies of scale with operating expenses as a percent of sales declining from 17% to 16% over the period.  Finally, gross margins are held at 34.76% during the planning period.  We believe this model represents what AMNF can reasonably achieve over the next decade.

Base Case DCF Valuation

Risks

• Input cost inflation

• Supply chain issues

• Coronavirus variants leading to lockdowns

• Distributor and broker concentration

• Illiquid trading market

Catalyst

• Addition of new customers in both the US and Asia driven by promotions
• Maintained or expanded margins through price increases and economies of scale
• Increased utilization of rate of its recently doubled plant capacity
• New products
• M&A