Armanino Foods of Distinction–Self-Growth

Disclosure: I own this stock.

Printable version of the write up is here.

Tl;dr

AMNF is a pesto sauce producer traded on the OTC Market. It’s able to profitably grow with little to no incremental investments and has been very shareholder friendly with 79 consecutive quarters of dividends payouts. The current market valuation implies that the Company will achieve only half of the 2019 sales and earnings in five years, which is too pessimistic given the quality of the business and the adaptive recovery of the foodservice industry. Under the conservative case, the stock can return 44% to $3.46, while the extreme downside case would lose 17% to $1.99. For the more reasonable bull case, I can see this stock achieve $4, which represents a 67% upside.


Business Description

This is a very simple business, I will just copy and paste the official description: Armanino Foods of Distinction, Inc. (the “Company”) was incorporated in the state of Colorado in October 1986. The Company engages in the production and marketing of upscale and innovative food products, including primarily frozen pesto sauces, frozen pasta products, and cooked and frozen meat and poultry products, to customers throughout the United States, Canada and Asia (7% of 2019 sales).

In 2015, the Company voluntarily delisted itself from the NASDAQ exchange to save money. Now the Company is trading on the OTC Market, so this is at best a PA investment idea given the low volume and liquidity of the stock.

Note that the Company sells primarily to the foodservice and industrial customers.

Armanino markets its products through food brokers and sells those products to non-exclusive national distributors.

This model works for the Company because customers are not price sensitive; they want freshness and quality. So, AMNF can maintain a good margin when it sells products to distributors, who then resell to customers at mark-up price points. This is efficient for a microcap from a cost point of view. Store and distribute frozen foods that have short shelf lives can be an expensive process if the Company does it itself.

Recent Developments

  • The Company is repurposing new machineries purchased last year to make low-margin but high-demand items like meal kits, etc. as a response to the COVID dynamic.
  • The management reduced the dividends to 1.75 cents per share and used the savings to pay off an equipment loan of $3m, which reduces the total debt outstanding to $1.7m, well covered by $8.5m cash in the treasure trove. The management expects to reinstate dividends at 2.75 cents per share as soon as operating performance returns to the normal level.
  • The management expects a loss for 2Q, the first time in 67 consecutive quarters.
  • The new CEO joined the company as the previous one retired. Timothy Anderson has relevant experience at companies like Campbell and Del Monte Foods. Most recently Tim served as Senior Vice President at Challenge Dairy, where he more than doubled the size of the regional butter brand, leading it to become the number two national brand that is available in all 50 states. Under Tim’s management, food service sales and profits for Challenge recorded double digit gains. Although it is still early to make a judgement about the new CEO, we believe that at least he will not destroy the value of the business.

Investment Thesis

Although the stock has no institutional coverage, its well-covered by the retail investing community. There are many good writeups on the Company:

https://brettonfund.com/2013-q1-shareholder-letter/

https://www.valueinvestorsclub.com/idea/ARMANINO_FOODS_DISTINCTION/5675673983

https://seekingalpha.com/symbol/AMNF

These writeups have well illustrated the shareholder friendliness of the business. So, I will just briefly touch the fundamentals of the business but spend more time on why this is undervalued.

Strong profitability and FCF generation: the Company’s pesto sauce is well recognized for its freshness and the good taste, because of the word-of-mouth effect, the Company has been able to grow with little to no incremental investments. In the past five years, the Company has grown its EPS at 9% CAGR, and its FCF at 10.6% CAGR. As the Company expands, it benefits from economies of scale as the management has expanded its earnings margin from 2.4% in 2004 to 15.2% in 2019. With such strong growth and profitability, the Company rewards shareholders with undisrupted dividends payout for 79 consecutive quarters.

While there’s little visibility into the management strategy for non-retail customers, it’s not hard to find out why the Company has been so profitable by doing some quick searches on Amazon.

Normally, retail brands of pesto sauce sell their products in glass jars or disposable containers on a standalone basis, meaning each unit carries a price tag of as low as $3. It’s not hard to imagine that the margin for these products is pretty low.

By stark contrast, Armanino only sells in bulk (at least $80+ per order). And its pesto sauces are loaded in styrofoam buckets, which is very cheap. In addition, Armanino products have all 5-star and positive reviews on their taste and freshness. There’s only one 3-star rating written by someone who likes the taste but does not support the use of styrofoam as it’s not environmentally friendly.

The Company has significant exposure to food service customers, which explains the flat performance of the stock since the March selloff. But the current valuation implies too much pessimism.

Undervalued: Let’s just do a reverse DCF to figure out what the market is thinking.

At the current price of $2.4, the Company is trading at 12.6x LTM P/E, which is below the peer median, despite its high profitability.

With the current valuation in mind, we can do a reverse engineering to figure out what the market thinks of the Company’s future:

Basically, the market is saying that the Company can never return to its 2019 level in 5 years. Yes, the food service end-market suffers in the near term, but as shown below, total sales are recovering as businesses are adapting social-distancing measurements to serve foods. Yes, there’s a possibility for the second wave, but people are psychologically prepared for it. I think the worst has prevailed in April and that things won’t get worse than that anymore.

Source: US Consensus

Valuations

So, what would be a fair price for the stock?

Here, I assume that 4Q sales would be 90% of that of 1Q’s (i.e. $9.8m). And being conservative, I assume the Company’s sales and earnings won’t return to the 2019 level by 2024 (similar to the current market assumption but at a more reasonable level). I assume a WACC of 6.7%, which straight comes from Bloomberg and a terminal growth rate of 3%, which is below the historical inflation rate of 3.25%.

With this base case, I’m basically assuming earnings declines at 3% CAGR from 2019 to 2024. With such conservatism, the stock is worth of $3.46, representing a 44% upside.

So, what if the Company returns to the 2019 level by 2024? This would be my bullish case, which is not optimistic since I’m basically assuming a 0% CAGR from 2019 to 2024.

With the reasonable bull case projection, I can see the stock go to $4.01 (this excludes the growth assumptions that the Company can expand its presence to other parts of the United States or world).

How much can I lose?

In the blow-up scenario, I assume some structural damage to the whole industry and that the Company’s margins are permanently depressed. That’d give me a $1.99 per share, or a 17% downside. Note that even in the crazy March selloff, the lowest price the stock was trading at was $2.05.

Just given the asymmetrical risk-reward ratio, I think this stock is a no-brainer buy.

Catalysts

Dividends reinstatement

Domestic reopening of food services businesses

General awareness of how undervalued this stock is

2Q ended up being profitable (not likely but is an option)

One thought on “Armanino Foods of Distinction–Self-Growth”

  1. Thank you for the write up! Did you talk with the company about the packages meals? I had forwarded an article on California’s plan for prepared meals for seniors to management back in March -April but never heard that that was a go for them. I have been long AMNF since the late 1980s. They are local to me. Thank you Marc

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.