Armanino Foods Of Distinction: An Unknown Gem

Summary

• Armanino Foods of Distinction is an unknown producer of upscale frozen food products.
• The company boasts growth, strong fundamentals, and pays a great dividend.
• While the company carries risk simply due to its small size in a massive industry, the company is a great business and wealth generator.

There are thousands of publicly traded companies in the world, which makes it near impossible to be aware of every investment opportunity out there. When you get into small-cap stocks, it becomes even more difficult as coverage lessens as market caps shrink. One small cap that has caught our attention is Armanino Foods of Distinction (OTCPK:AMNF). Not only does the company's interesting name grab our attention, but the company has rock-solid fundamentals, exhibits growth, and pays a strong dividend. With a market cap of less than $100 million, this small company has the potential to pack a large punch for investors.

Armanino Foods is a manufacturer and seller of upscale foods, primarily frozen Italian food. Its products range from pesto sauces, to pasta, to meatballs, and poultry products. The company was founded in 1986 and is located in Hayward, CA. The company generates more than $35 million in annual revenue.

Financial Performance

Source: YCharts

Armanino Foods has exhibited strong growth over the past decade. The company's performance dipped some during the recession, but it has roared back since then. Over the past decade, the business has grown revenue at a CAGR of 7.93%, and earnings per share at a CAGR of 19.09%. These are very robust growth rates for a packaged foods business.

To get additional perspective on the company's strengths and weaknesses, we will begin by analyzing Armanino Foods' profitability. We start with operating margin and FCF conversion. The company has grown immensely over the past decade (more than doubling revenue), so the expanding margin is a great sign, and likely that the company is scaling effectively. Meanwhile, the company is converting revenue at a decent rate. The conversion rate flirts with our 10% benchmark but falls just short. While we would like to see our benchmarks hit, the company's strong revenue growth makes up for this as FCF is still growing over time.

Source: YCharts

Next, we want to see the company's effectiveness at deploying its resources. Therefore, we will review Armanino Foods' cash rate of return on invested capital (CROCI). This rate measures the company's capital efficiency from a cash generation standpoint, as well as serves as a base indicator of the strength of a company's competitive "moat". The company's CROCI is very strong at 24.66%, well above our typical benchmark (generally 13+%). Although the CROCI did steeply decline in 2015, it has begun to rebound. This should be monitored by investors for continued recovery.

source: Ycharts

The last area of review before moving on in our analysis is the balance sheet. It is very important that a company (especially a smaller business) avoids becoming overleveraged. Too much debt can cause cash flow issues in the event that the business suffers an unexpected downturn.

source: Ycharts

The balance sheet of Armanino Foods is very strong and a testament to strong management. The company carries virtually no debt at just $36,000 of total debt against a cash pile of $3.65 million. This gives the company plenty of stability, as well as capital that can be used to grow the business via possible acquisitions or investments.

Dividend Outlook

Despite its small size and rapid growth, Armanino Foods is building itself up as a dividend growth stock. It has increased its payout for each of the past 13 years. The dividend is paid every quarter and totals an annual sum to investors of $0.09. The current yield of 2.94% is a solid income stream for investors looking to generate dividend income. As a comparison, US 10-year treasuries yield 2.64%.

Source: YCharts

The dividend has grown at a strong rate despite its solid yield. Over the past 10 years, the dividend has grown at a CAGR of 11.8% and has remained pretty consistent. The five-year CAGR is similar at 11.0%, and the most recent increase was a 12.5% bump. An uptick in capital expenditures has inflated the payout ratio, but it normally hovers around 60% of cash flow. The large cash balance that the company carries ensures the dividend's safety during times like this. The company is still growing at a strong rate, so we foresee strong dividend growth continuing for a while longer. A very long-term rate will likely come in at the high single digits as long as the company's performance doesn't suffer a huge fall off.

Growth Opportunities & Risks

The company faces a multitude of growth opportunities and risks - many of which are due to the company's size. The company's $35 million in sales are a very small slice of what is a multi-billion-dollar frozen foods industry. The company faces a large growth runway of simply taking market share away from competitors with much larger revenue share. The company can do this organically through sales efforts and expansion of product offerings. Even acquisitions are in play, given the company's strong cash position. The company recently outlined that it is investing $750,000 into new equipment to expand the company's capabilities.

Source: Allied Market Research

The company also faces threats as well that investors should be aware of. The company can grow as a small player in a huge industry, but that can also work against it as well. Armanino Foods lacks the scale and financial resources of the main players in the market. In addition, the company sells its products partly through food distributors. The company's top two largest customers make up between 75% and 80% of total revenues. If anything were to happen to those relationships - either through a breakup, or if a distributor were to fold, the damage to Armanino Foods would be catastrophic.

Valuation

Shares of Armanino Foods currently trade at $3.05, making it one of the lowest trading stocks we have covered on a share price and market cap basis. This price places shares near the top of their 52-week range. The company currently trades at 16.77X TTM earnings, which is in line with its average over the past five years.

Source: YCharts

Given the company's track record of achieving growth and strong fundamentals, we feel that the current earnings multiple is an attractive entry point for a long-term investor. The company carries more risk than larger players due to smaller scale and a reliance on major customers, but we feel that the company is well managed and that its investments into additional growth will continue to bear fruit in the years ahead.

Wrapping Up

Small-cap stocks often come with a stereotype of being ultra-high risk and volatile as investments. When we analyze Armanino Foods, we find a bit of an outlier. The company may be small, but it acts like an established blue chip. The company is very profitable, generates strong returns on its capital, pays a growing dividend, and carries a wealth of cash on its balance sheet that gives it financial tools to continue growing. Armanino Foods still carries some risk that it just can't get away from as a small player in a large field, but there is no question that the business is about as solid as you will find with a market cap under $100 million.

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Author Disclaimer: Wealth Insights is an investor and investment author. His content is not geared to anyone's specific investment goals, time horizons, or risk tolerance. Content is for illustrative purposes only and is not intended to displace advice from a fee-based financial adviser. Accuracy of data is not guaranteed.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.