Anyone who follows this blog knows that one of my favorite investments is Armanino Foods of Distinction (symbol AMNF on the pink sheets). Armanino is a microcap maker of Italian specialty food items located on the West Coast. Unlike most pink sheet stocks, Armanino pays a steady and hefty dividend. It is consistently profitable and has been growing each year for quite some time. Right now, the stock is selling for 80 cents while paying a dividend of 4.8 cents per year. That 6% return would be impressive for any stock, but for a company this small, the return is extraordinary. Indeed, the likelihood is that in September we may well see that dividend rise even higher.
The reason to revisit this company now is that the earnings report for the second quarter will be forthcoming in a few weeks. If normal expectations are met, we should see the report in two weeks. The second quarter is usually one of the two quarters in which the company has a seasonal advantage. This year, there should even be a bigger advantage than usual. Let me explain. When the report for the first quarter was issued in mid-April, the CEO announced, “Although our raw materials costs have edged up and have impacted our gross margins, we have decided not to raise prices at the present time. Rather, for the time being, we are using our “hold the line” pricing strategy to strive for greater market shares in our various regional markets.”
This practice of not raising prices is key to future expectations. During the second quarter, commodity prices fell until the very end of the period. Of course, one of the biggest raw materials that Armanino uses is basil, and there are no readily available price records for that commodity. Still, in general, most commodity prices were falling through the quarter. This means that the margins achieved by Armanino should have recovered to the point where the increasing sales will mean rapidly increasing profits. My expectation is that Armanino will see earnings per share up more than 20% over the EPS in the second quarter of the prior year. Some of this gain in EPS is the result of the company’s ongoing stock repurchase plan. Whatever the cause, however, it will be welcome news.
My price target for the stock is $1.00 by the end of the year. Expected catalysts include improving earnings and an increase in the dividend. The best part of the analysis here, however, is the relatively low risk of this investment. Even if earnings and dividends do not increase, the stock is still paying 6% in dividends on the current price. As a result, if there is a delay in growth, you will still be well compensated for holding the stock.
DISCLOSURE: I remain long Armanino Foods of Distinction. It is one of the larger positions in the accounts that I manage.
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