The fourth quarter and year end earnings report was issued yesterday by Armanino Foods of Distinction (symbol AMNF on the pink sheets). The results were stellar. Revenues and profits for the fourth quarter and the year were both records for the company. In fact, this is the fourth year in a row of record profits for Armanino. The increases for the year were 13% for revenues and 21% for profits. The increases for the fourth quarter were 19% for revenues and 35% for profits compared to the fourth quarter of 2011. What that means is that not only were records set by Armanino, but that the rate of increase over the previous year is accelerating. Earnings per share were 9.0 cents for the year, an increase of 27% over the EPS for 2011. (The per share figures are different from the total eanings increase due to share buy backs and rounding.)
In addition to the numbers, Armanino announced that it had instituted a price increase in January due to rising commodity costs which squeezed margins at the end of 2012. It also announced an upgrade to its manufacturing facilities that will allow it to introduce new products in the second half of 2013 as well as making the production of current products more efficient.
The stock reacted well to the earnings news. Volume yesterday was twice the recent average and the stock rose to a new all time high before settling back at the end of the day to $1.06, up 3% for the day.
So what does this mean for the company? It should indicate a whole host of good things moving forward. After all, with trailing earnings per share of 9 cents, the price earnings multiple is now about 11.8, hardly a heady figure. Remember, Armanino is a company that has had record earnings for four years in a row and which grew its EPS by 27% for the year (33% for just the fourth quarter.) Even for a microcap, earnings growth at that rate ought to justify a P/E multiple of 15 or higher. At a P/E of 15, the stock would be selling at $1.35 per share, and increase of 27% from Friday's closing price. Clearly, just on this metric, Armanino has a large upside.
But there is more than just the trailing earnings that should support the company. First, there is the expectation for the current year. Armanino has raised prices. The company has not stated the size of the price rise, but the increase will be significant in any event. Raising prices will not affect the cost structure of the company; additional revenue will go to the bottom line. The potential down side to price rises are that they may result in reduced sales. If one assumes that the price rise is just 3% and that it is small enough to keep sales steady, that price rise should, by itself, increase net earnings by over 20%. Of course, this analysis only applies if everything else stays the same, something which can be guaranteed not to happen. Nevertheless, the point here is that a price rise can be a powerful driver of earnings.
A second driver of the stock price should be the dividend. In 2012, the company paid 4.8 cents per share in regular dividends and a 1.2 cent special dividend. We should hear in the next week or so what the dividends will be for the first quarter. In view of the great earnings, it would not be surprising to see the company increase the regular dividend. That increase may come later in the year, but it seems to be in the cards. So the stock should have a regular dividend of more than 5% with the potential for more special dividends.
The third driver of the stock price is the potential for the sale of the company. With the earnings being generated by Armanino, the purchase of the company would be instantly accretive to nearly any acquirer. Further, an acquirer could plan to take Armanino from a regional seller to a national one. There is plenty of room to grow.
This is not just a pie in the sky discussion of the potential of a sale. Potential buyers are many. One example is B&G Foods (symbol BGS). B&G has grown through acquisitions for quite a while now. Just this past week, the B&G management announced in its conference call that it was looking for acquisitions of food products or companies that would be accretive. B&G's announce target price for acquisitions is $50 million. Armanino is not as focused on sales in the retail market as the typical B&G acquisition, but it clearly would fit within the parameters announced by the B&G management.
All things considered, Armanino is underpriced at the moment. My 18 month target for the stock is $1.50.
DISCLOSURE: I am long Armanino stock and have been for many years.
In addition to the numbers, Armanino announced that it had instituted a price increase in January due to rising commodity costs which squeezed margins at the end of 2012. It also announced an upgrade to its manufacturing facilities that will allow it to introduce new products in the second half of 2013 as well as making the production of current products more efficient.
The stock reacted well to the earnings news. Volume yesterday was twice the recent average and the stock rose to a new all time high before settling back at the end of the day to $1.06, up 3% for the day.
So what does this mean for the company? It should indicate a whole host of good things moving forward. After all, with trailing earnings per share of 9 cents, the price earnings multiple is now about 11.8, hardly a heady figure. Remember, Armanino is a company that has had record earnings for four years in a row and which grew its EPS by 27% for the year (33% for just the fourth quarter.) Even for a microcap, earnings growth at that rate ought to justify a P/E multiple of 15 or higher. At a P/E of 15, the stock would be selling at $1.35 per share, and increase of 27% from Friday's closing price. Clearly, just on this metric, Armanino has a large upside.
But there is more than just the trailing earnings that should support the company. First, there is the expectation for the current year. Armanino has raised prices. The company has not stated the size of the price rise, but the increase will be significant in any event. Raising prices will not affect the cost structure of the company; additional revenue will go to the bottom line. The potential down side to price rises are that they may result in reduced sales. If one assumes that the price rise is just 3% and that it is small enough to keep sales steady, that price rise should, by itself, increase net earnings by over 20%. Of course, this analysis only applies if everything else stays the same, something which can be guaranteed not to happen. Nevertheless, the point here is that a price rise can be a powerful driver of earnings.
A second driver of the stock price should be the dividend. In 2012, the company paid 4.8 cents per share in regular dividends and a 1.2 cent special dividend. We should hear in the next week or so what the dividends will be for the first quarter. In view of the great earnings, it would not be surprising to see the company increase the regular dividend. That increase may come later in the year, but it seems to be in the cards. So the stock should have a regular dividend of more than 5% with the potential for more special dividends.
The third driver of the stock price is the potential for the sale of the company. With the earnings being generated by Armanino, the purchase of the company would be instantly accretive to nearly any acquirer. Further, an acquirer could plan to take Armanino from a regional seller to a national one. There is plenty of room to grow.
This is not just a pie in the sky discussion of the potential of a sale. Potential buyers are many. One example is B&G Foods (symbol BGS). B&G has grown through acquisitions for quite a while now. Just this past week, the B&G management announced in its conference call that it was looking for acquisitions of food products or companies that would be accretive. B&G's announce target price for acquisitions is $50 million. Armanino is not as focused on sales in the retail market as the typical B&G acquisition, but it clearly would fit within the parameters announced by the B&G management.
All things considered, Armanino is underpriced at the moment. My 18 month target for the stock is $1.50.
DISCLOSURE: I am long Armanino stock and have been for many years.
1 comment:
The widely followed Whopper Investment blog did a write up on AMNF this morning.
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