Armanino Foods of Distinction (OTCPK:AMNF), based in California, has been hard hit by the COVID pandemic, as a major source of revenue is derived from the dine-in restaurant industry. However, the company’s stellar balance sheet and ability to control variable costs has delivered net profits during arguably the worst drop in operating sales ever. In fact, management just RAISED the dividend 29% to $0.0225 per quarter (3.3% yield at $2.73 price), anticipating a stronger 2021 period. Technical trading momentum has been quite robust for several months, and the stock has plenty of room to rebound off a ground-floor type valuation. The 2019 all-time high around $3.71 is well within reach if business demand rebounds back to pre-COVID numbers.
Armanino Foods manufactures and sells Italian specialty food items such as pestos, sauces and pastas. Customers include foodservice enterprises, cafeterias, restaurants, other food manufacturers, and direct retail. Basil pesto is a top seller. Additional flavors include cilantro, dried tomato, roasted red bell pepper, southwest chipotle, artichoke, garlic, chimichurri, harissa, bolognese, alfredo sauce, and romesco. Armanino also markets cheese shakers, frozen pastas, and meatballs. Items are sold through food brokers and directly to customers.
Image Source: Company Website
Armanino began as a family agribusiness, expanding in the 1970s to become the leading producer of both chives and basil pesto in the U.S. The company sold its sour cream and chives idea to food giant Kraft, and has been supplying them chives ever since. Over the decades it has grown into a top Italian herb and food company in the U.S., although the enterprise remains a smaller, lesser-known food player to a majority of investors.
The latest Q4 earnings release does a nice job of explaining the COVID ups and downs, alongside brighter expectations going forward. Tim Anderson, President & CEO stated,
We are pleased that our profits for the fourth quarter continued to grow versus the third quarter, 2020. This growth was largely attributable to our ability to control our overall costs and expenses. Specifically, this included efforts to control our promotional and G&A spending. Furthermore, investments in technology to improve manufacturing efficiencies continue to reduce our relative production costs, offset by the effect of selling a larger mix of higher cost products. We also continued to benefit from various cost cutting measures put in place since the beginning of the COVID pandemic. Additionally, prior year investments in tax strategies materialized this quarter and lowered our overall annual tax rate.
We continue to make investments to reposition the company for recovery from the current economic environment for sustained future growth with an eye towards new products, new markets, and potential acquisitions. Given our financial resources, the strength of our brand, and proven track record of management excellence, we remain confident in our ability to achieve our long-term vision for the company despite the current economic environment.
We are more hopeful that the worst of the COVID-19 effects are behind us as COVID vaccinations roll out, and recent trends in COVID infections have declined. Further, sales over the past 5 weeks have trended stronger, exceeding normal pre-pandemic levels.
In many respects, the company represents another economic reopening play. The difference from many of my 2021 economic recovery suggestions is Armanino's business is taking longer to turn higher from its direct exposure to the hard-hit fine dining industry. Yet, management has done a truly excellent job controlling expenses during the falloff in sales, with an eye toward improving margins to a new level of profitability on the 2021-22 rebound.
Management has traditionally run the company without meaningful debt or leverage on the balance sheet. This super-conservative setup is one reason it was still able to report a profit last year, despite a 25% drop in revenues. A low level of liabilities vs. assets is something akin to a fortress setting, similar to the fabled Tootsie Roll (TR) conservatism and flexibility to fight weak economic periods.
Below is a graph of Armanino's uncommon lack of leverage vs. some small food competitors and the biggest U.S. food giants like Kraft Heinz (KHC).
Cash flow generation has also stayed at strong levels for shareholders during the pandemic drop in demand for full-service Italian restaurants and related ingredient buying. Below is a 10-year graph of cash flow returns on assets, sales and debt. Notice the company could repay all debt using just three months of cash flow, during a truly horrible operating span.
Profit margins are down dramatically, but still quite positive. The good news is a recovery in sales will send margins and returns back to 2019 levels (or higher after cost-cutting efforts) by early 2022. According to management, the cost-containment initiatives created by the pandemic are expected to stay in place, even when business sales rebound. It is entirely possible the 2022-23 version of Armanino Foods will be one of the highest net profit margin and most conservative balance sheet setups in the food industry.
Valuations on the underlying business remain quite cheap, assuming sales are about to rebound. Below you can review the near 10-year low on price to trailing cash flow and tangible book value. Of course, price to sales and earnings are struggling after taking into account 12 months of pandemic disruptions for the sit-down restaurant sector.
Armanino’s stock momentum is scoring relatively well in my computer-sorting system. As of Friday, it was ranked in the Top 2% out of the thousands of equities searched each day using my best-performing, shorter-term formula. Price is above the rising trends in both the 50-day and 200-day moving averages, drawn below.
Out of nine indicators I review, the Accumulation/Distribution Line, Negative Volume Index and On Balance Volume readings are moving nicely higher the last six months. In fact, the NVI measurement of price change on low volume days reached a new 6-month high on Friday March 26th, circled in red. Plus, OBV outlined a new 6-month high two weeks ago, circled in green. Both appear to be leading price in a bullish fashion.
On the 2-year chart below, notice the big COVID-19 dip in price. Also, look at the sharply improving momentum and price gains since December. With most U.S. stocks recovering to all-time highs in late 2020, holding lower margin business operations, and far riskier balance sheets, why not expect Armanino to reach $4 sometime in 2021-22?
If you are looking for a top-quality food company, yet to hit its stride as the economy reopens, Armanino Foods is a great choice. A price under $2.90 remains an intelligent, risk-adjusted buy proposition. 2022 EPS of $0.25 on revenues of $45 million would be slight records above the 2019 level.
I expect 2021 to be helped by some catch-up demand as restaurants reopen at a faster clip, although it will end up being more of a transition year getting back to regular life. The huge $1.9 trillion pandemic stimulus passed in March could combine with relaxed dine-in rules and expanding consumer confidence that a visit to local Italian dining establishments is actually safe again. According to the company’s CEO, heightened restaurant demand was already taking place in February.
What could go wrong? The company is considered a micro-cap with a total equity worth of $87 million. Trading is listed on the OTC Markets Quotation Service, where reporting and auditing requirements are different than the NASDAQ or New York Stock Exchange. If the company is mismanaged, the average investor will likely not find out until the stock quote has already tanked. Trading liquidity issues are another factor to think about, if you want to invest large sums.
Macroeconomic events like a stock market crash or new restaurant closure issues with COVID-19 variants are two risks to contemplate before investing. All told, I plan to keep any personal investment on the small position side in my portfolio because of these risks and other potential downside developments. I am looking to purchase shares on mild weakness, especially if the excuse for lower prices is a general 7% to 10% stock market sell-off.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
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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.
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