I have written often about Armanino Foods of Distinction (symbol AMNF on the pink sheets). Around mid-day today, Armanino released its first quarter earnings report. It was filled with good news. Revenues were down 0.2% compared to last year, but earnings per share rose by 18% to 2.33 cents.
The company pointed out that there were some distortions in its sales figures due to a recent price increase put in place for some of its products. Mr. Pera, President and CEO had this to say on the subject:
"While our sales for the first part of the quarter were below last year’s level, activity for the latter part of the quarter picked up significantly with the quarter ending with very strong results. This trending suggests to us that, as we have seen before, customers ramped up their purchases prior to year end 2012 in anticipation of the 2013 price increases.”
It is important to remember that the bulk of Armanino's sales are wholesale in nature; they sell to other companies rather than directly to the public. In that millieu, price increases are not simply sprung on the customers; instead, the sales force will warn customers of impending price increase both to allow final orders prior to the increase and to guage the reaction from the buyers. Therefore, it is not at all surprising that sales would have fallen during the first month of the quarter as some customers bought at the end of the fourth quarter before the price increase went into effect. The news that sales picked up to "very strong results" means that the price increases have stuck and that forward momentum in sales is back in full force.
In fairness, the same news also means that the fourth quarter results got a bump up due to the pending price increase and were not as good as previously thought. Nevertheless, moving forward, things look good.
It is also important to note that the management of Armanino has a track record of understatement when it comes to earnings reports. For this management to describe the end of quarter sales as "very strong results" is an extremely good sign for the future.
In the past, the Armanino results have exhibited strong seasonality. Between 2009 and 2012, the first quarter has constituted between 15% and 22% of the profits for the year. If the first quarter results in 2013 maintain the same trend as last year (22% of total), that would put EPS for 2013 at 10.5 cents. On the other hand, if the first quarter results in 2013 constitute the same share of annual earnings as was the case over the last four years, then the earnings per share would reach 12.2 cents. These are key figures to keep in mind in analyzing the prospects for Armanino. Right now, Armanino last traded at $1.09 (on heavy volume today). If the earnings for the year are 10.5 cents, then the price earnings ratio is 10.4; if the annual EPS hit 12.2, then the price earnings ration is only 8.9. Both of these multiples are extremely low.
Armanino has been growing its EPS year after year by large percentages. It outperforms all of the large food companies on that metric. Despite that outperformance, Armanino is saddled still with a low multiple. Most likely that is due to the small cap nature of the company. Nevertheless, at some point, the market will better recognize the full value of Armanino and the shares could rise by 25% just from that alone.
Meanwhile, Armanino continues to pay a hefty dividend. Last year, the stock paid 6 cents in regular and special dividends. That is a return in the mid 5% level at the current price. Further, because of the extremely low price/earnings multiple for Armanino, an acquisition of the company would be immediately accretive for essentially every large food company in the market. The is certainly no guarantee that there will be such an acquisition, but the prospect is certainly a sweetener for an investment in the company.
The eighteen month target for Armanino is now $1.60 and we recommend it as a strong buy.
DISCLOSURE: I am long Armanino stock. I purchased about an additional 0.1% of the outstanding stock today after the earnings were announced.
The company pointed out that there were some distortions in its sales figures due to a recent price increase put in place for some of its products. Mr. Pera, President and CEO had this to say on the subject:
"While our sales for the first part of the quarter were below last year’s level, activity for the latter part of the quarter picked up significantly with the quarter ending with very strong results. This trending suggests to us that, as we have seen before, customers ramped up their purchases prior to year end 2012 in anticipation of the 2013 price increases.”
It is important to remember that the bulk of Armanino's sales are wholesale in nature; they sell to other companies rather than directly to the public. In that millieu, price increases are not simply sprung on the customers; instead, the sales force will warn customers of impending price increase both to allow final orders prior to the increase and to guage the reaction from the buyers. Therefore, it is not at all surprising that sales would have fallen during the first month of the quarter as some customers bought at the end of the fourth quarter before the price increase went into effect. The news that sales picked up to "very strong results" means that the price increases have stuck and that forward momentum in sales is back in full force.
In fairness, the same news also means that the fourth quarter results got a bump up due to the pending price increase and were not as good as previously thought. Nevertheless, moving forward, things look good.
It is also important to note that the management of Armanino has a track record of understatement when it comes to earnings reports. For this management to describe the end of quarter sales as "very strong results" is an extremely good sign for the future.
In the past, the Armanino results have exhibited strong seasonality. Between 2009 and 2012, the first quarter has constituted between 15% and 22% of the profits for the year. If the first quarter results in 2013 maintain the same trend as last year (22% of total), that would put EPS for 2013 at 10.5 cents. On the other hand, if the first quarter results in 2013 constitute the same share of annual earnings as was the case over the last four years, then the earnings per share would reach 12.2 cents. These are key figures to keep in mind in analyzing the prospects for Armanino. Right now, Armanino last traded at $1.09 (on heavy volume today). If the earnings for the year are 10.5 cents, then the price earnings ratio is 10.4; if the annual EPS hit 12.2, then the price earnings ration is only 8.9. Both of these multiples are extremely low.
Armanino has been growing its EPS year after year by large percentages. It outperforms all of the large food companies on that metric. Despite that outperformance, Armanino is saddled still with a low multiple. Most likely that is due to the small cap nature of the company. Nevertheless, at some point, the market will better recognize the full value of Armanino and the shares could rise by 25% just from that alone.
Meanwhile, Armanino continues to pay a hefty dividend. Last year, the stock paid 6 cents in regular and special dividends. That is a return in the mid 5% level at the current price. Further, because of the extremely low price/earnings multiple for Armanino, an acquisition of the company would be immediately accretive for essentially every large food company in the market. The is certainly no guarantee that there will be such an acquisition, but the prospect is certainly a sweetener for an investment in the company.
The eighteen month target for Armanino is now $1.60 and we recommend it as a strong buy.
DISCLOSURE: I am long Armanino stock. I purchased about an additional 0.1% of the outstanding stock today after the earnings were announced.
3 comments:
Hey Jeff,
I am doing an investment report on AMNF as well. Could you send me a quick email when you get the chance. Gurn5130@mylaurier.ca
Hi, Thanks for all your analysis of ARMF. looks like it just hit a 20+ year closing weekly high on friday May 31st. I have been a shareholder since 1988 in the Falcon Fund days. I'm hoping this recent strength may presage a divvy increase as we are due for a quarterly announcement next week. Thanks for your ongoing coverage of this little gem. Marc
Nice call, Jeff.
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