Armanino Foods of Distinction (AMNF)

Armanino is a company that makes a variety of frozen prepared foods for the food service industry.  It is a wonderful company that has enjoyed years of growth and high returns on capital.  This company trades on the pink sheets and deregistered its shares in 2005.

P/E ratio: 15.4 (according to Google Finance)
Market cap: $46.82M
Share price growth over past 10 years (annualized, excluding dividends): 18.5%

What they do

I don’t know if I’m being a food snob, but I’m going to say it: Armanino helps people cut corners in cooking.  One of their main products is frozen pesto.  There are a few different ways of sourcing pesto in general:

  1. Make it fresh.  This tastes the best.  The downside to this is that it takes a lot of work.  Unless you are making a very large batch of pesto, it should be cheaper to use one of the methods below.
  2. Use frozen pesto.  This is supposedly the next best in taste.
  3. Use canned pesto.

Armanino’s main customers seem to be distributors who ultimately sell to restaurants.  The unfortunate reality is that many restaurants don’t make their ingredients fresh and simply use frozen stuff.  This is where Armanino comes in.  The company makes frozen pesto (and other sauces and types of Italian food).  If a restaurant only consumes small amounts of pesto every day, it can save money by using frozen pesto.

Making good pesto is an open-ended problem.  There are different recipes, variation in the quality of ingredients, and different freezing/preservation techniques that can be used.  Because I haven’t tasted Armanino’s product, I can’t comment on the quality.  From the website, it looks like the company uses cheap canola oil instead of olive oil.  I don’t know how the value of Armanino’s products stack up against competitors.  Growing revenues suggest that Armanino generates value for its customers.

Armanino has a number of other products such as frozen sauces, grated cheese, meatballs, and pasta.  Many of their products are eventually sold at the retail level at supermarkets (there is a list of retailers on Armanino’s website).

The company has dabbled in many other areas:

  • Focaccia (?-2011?).
  • Garlic Zing (2002-2009).
  • Running quick-service restaurants (1995-1997).
  • Frozen entrees (1997-2002).

The discontinuation of these products and businesses suggest to me that Armanino’s markets are highly competitive.  I have a feeling that the average profitability in this industry is low.  The only reason why the company is highly profitable is because the company has been well managed.

Management

The company was previously run by William Armanino from 1988 until his death in January 2009.  The former COO Edmond Pera took over in February 2009 and remains the CEO today.  The company has done well under both CEOs.  Pera so far seems to be a little better than Armanino.  Pera hasn’t diworseified the company into new businesses.  Under Pera, margins have improved slightly and profits continue to go up.

YE2009 net income:  $1.571M
YE2012 net income:  $2.889M

YE2009 operating margin: 11.95%
YE2012 operating margin: 16.25%
*Operating margin = income from operations / net sales.  It excludes discontinued operations.

Capital allocation and financial reporting

The company returns almost all of its profits to shareholders through dividends and share repurchases.  I really like this.  Normally I’d like to see companies repurchase shares instead of dividends.  However, this stock isn’t very liquid and the company is likely restricted in the amount of stock it can repurchase.

The company took up a manageable amount of debt ($2M) to repurchase shares.  This should be a safe level of debt as it is less than one year’s worth of earnings (the company made $3.63M pretax in 2010 and $4.55M in 2012).

In 2005 the company deregistered its shares.  I agree with this move as the cost of compliance can be very high for small companies like Armanino.  The company continues to have its books audited, though its auditor does not check the company’s internal controls (this likely saves money).  The company posts financial information on its website.

Annual report 2012
Annual report 2011
Annual report 2010
Annual report 2009

Management strikes me as having high integrity and respect for shareholders.  The company definitely isn’t run like a management employment agency.

Accounting

The company’s accounting may be on the slightly conservative side.  For example, trucks are depreciated on a straight-line method over 7 years.  The company may still be using trucks over 7 years old that have been depreciated to 0.  (I presume that most trucks last a lot longer than 7 years.)

Bottom Line

In my opinion, this is a management driven business that doesn’t have a moat.  At a P/E of around 15, it doesn’t look that cheap and I am not super excited to buy shares.  However, I’m attracted to growth at a reasonable price.  I will likely take a very small initial position and look at buying more shares if the stock were to irrationally sell off.

Links

OTC Adventures’ writeup

Whopper Investments’ writeup

VIC writeup – *I have no idea what that writeup says as I don’t have access to it.

*Disclosure: No position though I will probably have a limit order out to buy shares at lower prices.

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