I have often recommended Armanino Foods of Distinction (symbol AMNF on the pink sheets). Armanino is out today with its earnings for the third quarter. Sales and earnings are both records for the third quarter. Net earnings were up 34% year over year from 2009 when the company set its previous record for the quarter. for the nine months ended September 30, 2010, net income was up 46%, an extraordinary performance for a food company like Armanino. The full press release from the company is available by clicking on the title to this post.
There are some important points to note about this earning report. First, none of the increase in earnings per share is due to the stock buy back program that Armanino currently has underway. That program was announced in late September just days before the end of the quarter and the number of shares outstanding at the end of the quarter showed no sign of any significant reduction in quantity.
Second, the company's president and CEO included a statement that expectations for the fourth quarter are high given what has happened in the three weeks of the quarter that have already concluded. Specifically, Pera stated, "Although our fourth quarter profits a year ago were strong, given indications to date, we anticipate that Q4 2010 profits will exceed them.”
Third, Armanino has now earned 4 cents per share for the last six months. this is an annual rate of 8 cents per share. The current dividend is 3.32 cents per year or just about 40% of eearnings. That level is substantially below the level set by the company for dividends in the last few years. While the company just paid a special dividend, it is still likely that there will be an increase in the regular dividend level for next year. I would project that at a minimum the dividend will be raised to one cent per quarter or four cents per year with the likelihood of more special dividends as well. At 4 cents, the yield at the current price of 60.5 cents is 6.6%.
Fourth, the business seems to be expanding in many different ways, all successful. The press release mentions the "new accounts we have recently opened with three relatively major retail chains". while no further explanation is given, I believe this means that Armanino is making new products for these chains under a store brand. This type of business is steady and requires no marketing to promote sales. That is left to the customer who makes a higher margin on its in house brands and prefers to sell them. Obtaining accounts of this sort is the culmination of a long term effort by the company; it could have taken as long as three years to develope and get approvals of the products and then to commence sales.
With numbers like these, the company's current price earnings multiple is amazingly low. Given the numbers for the last two quarters and the statements about the fourth quarter and future growth prospects, one has to estimate that the company is now likely to earn 9 - 10 cents per share for the next twelve months. The appropriate multiple is contracted somewhat because of the stock trading on the pink sheets at a low price. Nevertheless, given its current growth rate, I will use a multiple of 13, which is some 15% lower than the average multiple for major food companies like Kraft, Campbells Soup, and General Mills. This multiple gives a target of $1.17 to $1.30. With the company's stock buy back program providing some of the punch to drive the stock price higher, I think that the $1.30 price is the target to use.
One final note: Armanino is now a fairly interesting acquisition target for a smaller food company. For example, a company like B&G Foods (BGS) that grows principally by acquisition could well be interested in Armanino, expecially since any acquisition would likely be accretive from day one. I have not included anything in the above numbers for a take over premium, but it is very real.
Disclosure: I am long Armanino.
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