Armanino Foods Of Distinction Is A Two-Way Play With More Upside Than Ever

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Includes: AMNF
by: Ville Peltonen

Summary

Provides good dividends with room to grow.

Food industry is consolidating.

Armanino gives you both plays.

Armanino Foods of Distinction, Inc. is traded on the Pink Sheets under the symbol AMNF, which means they are traded OTC and don’t have to meet the same requirements as companies traded in the stock exchange or file with the SEC. In my opinion, this is not a problem, because they still provide adequate financial and performance data on their website. The company operates in a niche market inside the highly competitive food industry. They provide retail, food service and industrial markets with a variety of refrigerated and frozen Italian foods such as pestos, sauces, different pastas and cheese shakers for example. The company was founded in 1978 and operates from California.

A quick look at the stock data before diving into details and why it might be a good addition to my portfolio. The market cap is now around 89.7 MUSD. Stock price is at $2.59 with a dividend yield of 3.47%. EPS was 0.159, P/E ratio 15.73, P/B ratio 5.9 and P/S ratio 2.1.

Fundamentals in more detail

Net sales have been growing at an average of 7.85% for the past four years and were $38.933 million in 2017. Looking back ten years to 2008 the net sales we at $19.852, so they have been able to double their sales in that time period. In a niche market, that is impressive to me. It is common that gross margin might decrease when sales are growing, but Armaninos gross margin has been a steady 35% for the past three years. Around 10% of sales comes from the Asian market. Q1/2018 sales were the highest in the company’s history.

They have also been able to boost the earnings per share from $0.02 in 2008 all the way to 0.159 in 2017. The latest reported quarterly dividend was $0.0225 which means an annual dividend of $0.09 and a payout ratio of 56.6%. Solid numbers and nothing alarming. They just recently increased the dividend by 12.5% and have paid quarterly dividends now for 72 consecutive quarters. The dividend has almost doubled from the $0.012 in 2013. Strong dividend growth, modest payout ratio and an investor friendly dividend history is something that grabs my attention. No reason in the horizon why this trend shouldn’t continue.

On the balance sheet side they have a strong cash position of around $3.5 million and approximately $3.5 million in debt taken for plant expansion project and new equipment. March 31 working capital was $13.551 million.

With these fundamentals Armanino is an excellent addition to DGI portfolio. Good entry yield, strong growth in both dividend and earnings, and modest payout ratio.

Market situation

If we look at the trends of food consumption these days, the frozen foods are definitely not the hottest one. However, if we look at how much people have free time then we can see that there is and will be a market for fast selections and it’s not like Italian food is going out of style anytime soon, right?

They sell in Asia, but the portion of net sales is only around 10% and it hasn’t really developed in recent years in terms of share from net sales. Sales will continue, but they have stated to grow very carefully in that market. I expect the major part of growth in sales to come from the domestic market as they primarily market their products in the West coast. A small company they have a lot more room to grow than the major players in the food industry.

Key customers might be one of the biggest risks when looking at a company of this size. The company has two distribution customers who accounted for 66% and 10% of the outstanding receivables at 31 December 2017. That is a combined 76% for only two customers and that is a big risk. They also have brokers that sell and distribute their products, so that adds a third-party risk.

Will someone acquire Armanino?

In addition to being an interesting addition as a pure dividend growth stock, AMNF is also a company that might be acquired by a larger player in the food sector. With a market cap of $90 million it won’t even be a big investment for some of the industry leaders. I could very well see someone like Kraft Heinz Co. (KHNC) making a play here as they struggle to find organic growth. I think AMNF could meet Buffets investment criteria and also complement the product portfolio of Kraft Heinz Co. On the other hand, AMNF might be too small for them as they are clearly seeking to make a major acquisition as we saw with the bid for Unilever. Other possible acquirers could be Unilever, General Mills or Pinnacle Foods, which already owns a variety of frozen brands including Birdseye, Evol and Udi’s and could add some value with acquiring another frozen food company.

The U.S. Food Industry announced $42 billion in deals in 2017 and expect 2018 to be even a bigger year. Consolidation is one way to get leverage and the upper hand in a tug of war with the retailers. The 10 largest U.S. packaged food companies have seen about $17 billion in sales evaporate over the last three years as consumer behavior is changing. This will mean more deals within the industry and Armanino might very be a part of one of those deals.

Valuation and conclusion

I prefer to use the dividend discount model when determining the value of a stock. With AMNF I used 10% discount rate and a modest 7% growth rate. The growth rate is below that the company has been producing in recent years, but taking into account the risks and size of the company I wanted to be a bit conservative with the calculations. This gives me a fair value of $3.00, which is about 16% higher than the current price. However, I will keep monitoring the stock and if it drops 20% below the fair value, I might initiate a small position here.

AMNF gives a healthy growing dividend and possibility to acquisition. In my view, it’s a two-way play.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.