Thursday, October 9, 2014

Recent Buy

I wasn’t quite sure I would stretch for a second stock purchase this month after adding to my General Electric Company (GE)position a little over two weeks ago, but September has been very kind to me in regards to my dividend income and kicking in some fresh capital from my bank account meant I had enough to go shopping.
Much like some people derive pleasure from going shopping at a local mall or getting a new electronic gadget, I derive a similar experience/feeling from buying shares in excellent businesses that reward me with regular and increasing dividends. So you can imagine how great it is for me to be able to regularly buy stocks!
I came upon the stock that’s featured in this particular article after writing a quick blurb about their most recent increase for Daily Trade Alert. The more I looked at it, the more I liked it.
This recent purchase is a bit outside of my usual wheelhouse in regards to how small the company is, but I felt confident in their quality and future prospects after studying through their financial statements dating back to 2008.
I purchased 800 shares of Armanino Foods of Distinction Inc. (AMNF) on 9/22/14 for $1.84 per share.

Overview

Armanino Foods of Distinction is an international food company. They manufacture and market a variety of refrigerated and frozen Italian specialty foods, including sauces, stuffed and sheet pasta products, and ready-made meatballs. They market to the retail, food service, and industrial markets.
The company has a market capitalization of $59 million.

Fundamentals

Armanino is a very small company, as previously mentioned. But their growth from being previously an even smaller company to where they’re at today has been pretty impressive, as I’ll go over below.
Their fiscal year ends December 31.
Revenue grew from $19.852 million in FY 2008 to $28.867 million in FY 2013. That’s a compound annual growth rate of 7.78%. Not too shabby at all.
Meanwhile, earnings per share increased from $0.02 to $0.104 during this same time frame, which is a CAGR of 39.06%. That’s extremely strong.
It’s difficult to really get a grasp on whether or not they can continue this type of growth, but recent quarters have continued to break new records for the company. And being just a ~$60 million company, one can see where there’s a lot of potential.
The dividend track record is very impressive for such a small company. They’ve increased their dividend for the last 10 consecutive years. And these raises have been fairly substantial; the company sports a 10-year dividend growth rate of 10%, and they’ve routinely paid special dividends on top of this.
They just recently increased their quarterly dividend by 12.5%, and they did so a quarter early due to strong sales results. Gotta like a small company that takes care of its shareholders.
The payout ratio appears a bit high, at 64.9%. But their net income is growing briskly, so I think the company can easily withstand this and continue to grow as they have been. And the growing dividend has led to a very attractive yield; the current entry yield on shares stands at 3.91%, which is obviously well above what the broader market averages.
The balance sheet is extremely conservatively managed, which is wonderful considering their size and need to be flexible. Their long-term debt/equity ratio stood at 0.11 at the end of FY 2013, while the interest coverage ratio was over 80. So they have no issues with their debt management or ability to pay their interest expenses.
Profitability appears very sound. Net margin ended at 11.7% for FY 2013. Return on equity meanwhile finished at 45.89%.
The company is also engaged in actively buying back shares, which is another method to return value to shareholders. From 2010-2011, the company authorized $2.5 million in share repurchases. By the end of 2013, they had used approximately $2.4 million of this authorization, which added up to about 9% of the entire company. Pretty stout for a small company.
The company is international, as described. Asian sales amounted to 11% of the company’s total gross sales for 2013.

Qualitative Aspects

The business model is extremely easy to understand. I’ve previously talked about my desire to invest in businesses that are extremely easy to run, and a company selling pasta, sauces, and meatballs certainly qualifies. But the management that is already in place appears to be doing very well. The original CEO, and co-founder of the original company, William J. Armanino, died back in 2009. Longtime director and former COO, Edmond J. Pera, took over at that time, and has been running it since. He’s been with the company since 2000.
Organic and homemade food has been increasing in popularity lately, which has lead to some shunning of anything processed or prepackaged. In that regard, that’s a headwind for this company. But I think it’s unlikely that anyone after a hard day’s work is going to make pasta sauce, pasta, or meatballs from scratch; it’s too time consuming. So there’s a certain likelihood that this company is going to be selling these types of products for many years to come. I guess I’m basically making a bet on Italian food still being popular a decade or more from now, and I feel good about that.
You have to imagine more people are going to be alive in 5, 10, and 20 years. And they’re going to be hungry. Furthermore, this company primarily markets in the West, where they’re based. There’s a ton of expansion potential for the company over time.
They don’t have a lot of product diversification, but one wouldn’t really expect that for such a small company. It seems that they’re concentrating on what they know and what they do best, but they do employ a full-time R&D department to develop and explore new products, including new sauces, pasta products, and sandwich spreads/dressings.

Risks

I see the biggest risk as their size. They heavily rely on a small handful of key customers. Two customers accounted for 62% and 15%, respectively, of outstanding receivables at the end of FY 2013. In addition, they have a network of brokers that sell and distribute their products, which adds a nature of third-party risk. However, the company feels it’s unlikely that established end market relationships will be affected by intermediaries over the long haul, and I tend to agree. One last interesting note is that the company has not officially applied to trademark the name “Armanino”, which they use as a trademark for their products. I find this odd.

Valuation

Shares in AMNF trade over-the-counter, off-exchange. The P/E ratio stands at 16.58, based on trailing-twelve-months EPS of $0.111. That’s a pretty solid valuation, and you have to like the yield near 4% here. The growth potential is enormous, but one has to carefully consider the downside, which is why I like this stock at what appears to be a below-average valuation with an above-average yield.
I valued shares using a dividend discount model analysis. I was very conservative here, using a 10% discount rate and just a 6.5% long-term growth rate. That growth rate is far below what the company has been able to post for growth in both earnings and the dividend, but considering the size, inherent risk, and high payout ratio, I wanted to be conservative. That gives me a fair value of $2.19, which is still about 20% higher than what shares trade at today. So I think a substantial margin of safety is present.

Conclusion

Overall, this is a really interesting stock. You have a growth, value, and high-yield stock all rolled into one. It’s conservatively managed, has been actively reducing what is already a small float, aggressively increasing dividends, and underlying profitability and growth are all fantastic. I really don’t see much to dislike here, but I’m cautiously entering into just a small position right now.
The company appears poised for growth. They’ve been growing substantially on a limited line of products in a rather small market. They have huge expansion opportunities both in terms of market and products, and they’re also actively increasing prices to reflect rises in input/commodity prices.
This purchase adds $57.60 to my annual dividend income, based on the current quarterly dividend of $0.018.
I usually include popular analyst valuation opinions, but I can’t find any that actively track this small stock.
I’ll update my Freedom Fund in early October to reflect this recent purchase.
Full Disclosure: Long GE and AMNF.
What’s your opinion? Think this small stock is too risky? Or does the valuation, yield, and growth offer a lot to like? 
Thanks for reading.

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