Armanino Foods - A Microcap That Meets Buffett Criteria

Oct.21.13 | About: Armanino Foods (AMNF)

Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

As an avid investor for 31 years, I have always followed the tenets of Warren Buffett. I believe these tenets can be applied to the world of microcap stocks, an arena where Mr. Buffett does not participate. In fact, I have recently uncovered a microcap that I believe adheres to the Buffett philosophy closely and is therefore worthy of investment. Here's the story.


Mr. Buffett has attributed much of his market success to these four tenets. He mandates

  • A simple and understandable business product/concept, a consistent operating history, and favorable long-term outlook
  • Management that is rational, transparent and generous to shareholders
  • Return on equity (ROE) that is consistently increasing without high amounts of leverage, and
  • A fair or undervalued purchase price.

However, large investors are much more constrained than individuals. Buffett types taking positions in tiny companies will strongly affect the stock price. Because many microcap stocks trade with low volumes, any sizable trade can have a large impact on the price of the stock. As a result, a large investor like Mr. Buffett could never take a position in AMNF without disrupting the stock price. Smaller individual investors however have a free hand to invest in any stock - they will not move the stock price.

Under the Radar

Armanino Foods (OTCPK:AMNF), a company I accidentally discovered using the Portfolio123 screening system, meets the Buffett criteria. I uncovered this "under the radar" value stock by running a screen to comply with the following metrics.

  • Price is greater than 1.00.
  • Market cap is less than $250 million.
  • Return on Equity is greater than 30% over the past 5 years.
  • Gross margins are greater than 30% over the past 5 years.
  • The dividend payout ratio is less than 70%.
  • The annual rate of dividend growth over the past three years is greater than 5%.

When normally my screens produce 10 to 500 companies, this time only one passed muster - AMNF.

Company Background

Public since 1978, AMNF had its origins in the 1920s by providing fresh vegetables and herbs to a growing Italian community in San Francisco. By the 1950s, the Armanino family had embraced the freeze-drying process and subsequently became a leader in providing frozen products to consumers and the food industry.

Today Armanino makes frozen foods, including meatballs and pasta products. Their flagship product line is Armanino Basil Pesto. Over the years the term "pesto" has successfully evolved into a American household name like mayonnaise, ketchup or marinara. (By the way, Buffett is fond of household names. Another check.)

Building on the popularity of pesto, the company now markets a variety of pesto flavors, domestically and internationally.


Results for Third Quarters Ending September 30, 2013 and September 30, 2012



Net Sales



Income from Operations



Net Income



Income Per Share



Shares Outstanding



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Net sales for the third quarter were $7.39 MM versus $7.09 MM for Q3 2012, an increase of 4%.

Income from operations was $1.46 MM compared to $1.28 MM for the same quarter in 2012, an increase of 14% and resulting earnings per share was $0.028 versus $0.025, an increase of 12%. On September 12, they declared a regular quarterly dividend of $0.014, its 53rd consecutive payout and a 16.7% increase over last year.


Packaged food companies' products are typically commodities, but AMNF's fundamentals suggest a strong brand recognition.

*Thousands of Dollars for Revenue, Pretax/Net Income








*Pretax Income




*Net Income




Income Per Share




Return on Equity




Gross Margin




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At recent prices, AMNF appears to be fundamentally sound and fairly valued. From 2010 to 2012, revenues have grown about 10% annually and their ROE increased significantly, creating a strong value added proposition. Another check.

AMNF has wisely allocated its capital. Since 2010, they have reduced their outstanding shares by 9% and paid healthy quarterly and special dividends. At recent prices and their increased annual dividend of $0.056 per share, the stock is yielding 3.2%, excluding a likely end of year special dividend. Another check.

There are a couple of additional points in the Industry Comparisons table below to consider.

*Data provided by S&P Compustat (trailing 12 months data)

AMNF compared to Industry Peers

Financial Metric


Industry Peers




Price/Cash Flow



Return on Assets









Gross Margin



Operating Margin



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Clearly AMNF has some attractive fundamentals compared to industry peers. Note that ROE is significantly higher than the group average.

Another attraction is a potentially large special dividend distribution, mentioned above. Management has shown they are willing to draw down on their line of credit (albeit slightly) to buy back shares. Given their history of shareholder friendliness, we might well see a debt drawdown to pay a large special dividend to shareholders as in 2012.

The last item is the potential takeover possibility. Their 2012 income statement shows AMNF to be paying at a very high 36.4% rate.

AMNF is doling out around 3% of sales to brokers as commissions to get their products on store shelves. A major competitor would be interested in that expense line item. Buying it would eliminate commission costs by independently distributing its products through their internal sales force. Doing so would cost the acquirer nothing assuming a sales force is in place. The elimination of this broker fee expense would increase earnings by $950k. Using a reasonable 8x multiple, $7.6M of earnings increase would be attractive to a company having a gap in packaged frozen foods.

There are potential synergies between AMNF and a larger acquirer, and the company appears relatively undervalued at today's prices. A buyout would likely occur at a large premium, easily supported by the synergy potential. Meanwhile, investors are receiving a 3% dividend and capital appreciation.

The CEO owns 1.5% of the shares outstanding and has been good about returning cash to shareholders. The founders' daughter owns a 4% stake, and the chairman owns 8%, so there is enough insider ownership to keep management focused on value creation.

There are potential risks with AMNF. Like all microcap stocks, AMNF has risks inherent to the group. Ample public information can be difficult to find and this lack of information makes them more vulnerable to investment fraud schemes. The company is also subject to inspections by federal, state, and local regulatory agencies. Under various statutes and regulations, failure to comply can result in a variety of sanctions. In addition, the majority of AMNF's products are sold frozen. Frozen foods have a shorter shelf life and are more expensive, thereby excluding some consumers.

As mentioned at the start, Warren Buffett and other large institutional investors do not participate in the world of microcap stocks. Many of these stocks trade in low volumes and are illiquid; any sizable trade can have a large percentage impact on the price of the stock. Not true for the small individual investor.

Want A Taste?

The King of Omaha's recent purchase of Heinz was classic Buffett. As the consummate value investor, he has historically bought fairly valued, "plain" household name companies having low risk, solid balance sheets and competent management. Heinz attractiveness lay in its predictable cash stream based on high premiums for tomatoes mixed with vinegar.

AMNF, a company 50 times smaller than Heinz, offers the same attributes as this ketchup icon - a branding niche with pesto sauce, low risk due to conservative management, and a solid balance sheet at fair value. This "under the radar" microcap merits a taste test.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCPK:AMNF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.