Let’s start with what Armanino does. They make frozen foods, focusing mainly on meatballs, pastas, and especially pesto. You can browse their products here.
I tend to think that their frozen products fall more into the “commodity” segment than the “branded” segment, but their returns on capital actually suggest other wise. Pre-tax returns on capital are well over 50% and gross margins are in the 35% range. Those tend returns tend to indicate some form of brand strength or competitive advantage
Let’s move on to valuation. Armanino hasn’t released their 2012 annual report yet, but they did put out a press release with annual results. Operating income for the past 12 months comes in over $4.5m, revenues at just shy of $28m, and EPS at $0.09. At today’s stock price of $1.03, that represents EV / revenue of 1.14x, EV / EBIT of 7x, and P/E over 11x.
Those certainly aren’t the cheapest numbers this blogs ever seen. But those numbers exclude something- AMNF is growing rapidly. Revenue grew almost 20% quarter over quarter in Q4 and over 13% YoY from 2011 to 2012. And this isn’t a one time shot of revenue growth- since 2008, revenue has consistently grown 5-10% year over year. When a company is growing 5-10% and investing capital at over 20% after tax (which AMNF is well exceeding), it creates a lot of value.
But the story doesn’t end their. Capital allocation has been excellent. When a company grows while investing at at high ROIC, they throw off a ton of cash. Armanino has done a good job of allocating that cash- since 2010, they’ve retired almost 10% of shares outstanding while paying out pretty large dividends. Check out the chart below from their 2011 annual report (they paid out an additional $0.06 per share in dividends in 2012).
At today’s price of $1.03 and their annual dividend of $0.048 per share, the stock is yielding over 4.6% and that’s without taking into account any special dividends.
So overall, your’re probably reading this post and thinking the title hits the nail on the head- this is a solid company trading at a decent price and represents a quality investment, but it’s really not the type of deep value / special situation this blog focuses on.
That’s true…. but I do think there’s a kicker or two here.
First, branded food companies tend to trade at pretty high multiples. Their consistent earnings and strong ROIC make them strong investments. Nestle, for example, trades for over 13x EV / EBITDA and 2.2x EV / Revenue. Kraft is at over 13x EV / ebitda and 2x revenue. Even Diamond Foods, which is embattled in an accounting scandal and saw consolidated revenues decline 20% quarter over quarter, trades at 20x EBITDA and 1x revenue.
AMNF is growing faster than these guys, has a more conservative balance sheet (cash roughly equals debt after adjusting for their dividend payments), and has a similar / better ROIC than the big boys. But they trade for roughly half the multiple. So, on a relative basis, AMNF looks like a bargain.
The second kicker is a potential leveraging. After adjusting for their most recent dividend payments, cash should roughly equal debt when they put out their 4th quarter financials. I can’t think of a single branded food company that doesn’t employ a decent amount of leverage- leverage simply makes too much sense in this industry, as earnings are steady and leverage allows them to shield earnings from taxes. Management has shown a willingness to draw down on a line of credit slightly to buy back shares; I wouldn’t be surprised to, at some point, see a big debt drawdown to pay a large special dividend to shareholders.
The final, and perhaps most important kicker, is a potential takeover. Here’s a screenshot of their 2011 income statement (pay attention to their large tax payment, which supports the “leverage” argument above)
AMNF is paying roughly 3.3% of sales to brokers as commissions to get their products on store shelves. I have to think a major competitor would be salivating at that line item. Why? Because they could buy AMNF and immediately distribute AMNF’s products through their internal sales force. Doing so and cutting out the brokers would cost the acquirer nothing (the sales force is already in place) and increase earnings by $826k. At a 10x multiple, that’ $8.26m in increased value. Versus AMNF’s roughly $30m EV, that’s a huge potential synergy. Some may argue my math here is too aggressive, but I will point out that this type of synergy is pretty standard in the industry, and even if I’m overestimating a bit (perhaps it can’t all fall straight through to bottom line), there is also quite a deal of revenue synergy potential. If AMNF is acquired by a company that has a hole in frozen foods, by pushing AMNF’s products through their sales force, they could also rapidly grow AMNF’s revenue.
However I look at it, I think there are huge synergies between AMNF and a larger acquirer.
So, to wrap it up, I think Armanino is undervalued at today’s prices. It’s growing pretty fast and creating tons of value from that growth, so that value gap should (hopefully) grow over time. And, as an added kicker, there’s the potential for a merger at a huge premium, which would be easily supported by the synergy potential, and/or a big special dividend to lever the company up.
The one big downside I would point out is that the CEO only owns 1-1.5% or so of the shares outstanding. However, he hasn’t been shy about returning cash to shareholders, and two directors own strong stakes in the company (the founders daughter owns ~4%, and the chairman owns ~9%), so there should be enough insider ownership to keep management focused on value creation.
Disclosure- Long AMNF, JCTCF
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