For the past several weeks, I have been arguing with myself about my call on Armanino Foods of Distinction, Inc. (AMNF) and if I should buy shares in the company or not. There is very little information available on AMNF, and I have searched the web to find any information that could give me more insights. I am having very little luck in my pursuit.
What We Know
Its products are sold by the company or by distributors to four different sectors and are marketed by food brokers. These sectors are retail, foodservice, club-type stores, and industrial accounts. Unfortunately, we do not know the percentage of sales each sector makes up of the total sales. AMNF’s products are sold in two markets: the United States and Asian markets. Once again, we do not have these figures, or do we?
First quarter gross sales in our US markets grew by approximately $700,000, or by 7%, over the prior year. This was offset by lower first quarter gross sales in our Asian markets which declined by approximately $340,000, or by -21% over the prior year.
(Source: Company 1Q’20 financials press release)
Figure 1: Gross Sales By Market
(Source: Cells in blue plus are from the company’s 1Q20 financials, and the rest are the author’s own estimates)
Armanino Foods does not always provide the data that I used to discover its sales for each market, and this will limit my ability to find seasonal trends and to see how sticky its exports are. Still, it will be enough to estimate this year’s sales better. As you can see, the US market accounted for 89% of the company’s 1Q20 sales and the Asian markets accounted for 11%. In 1Q19, the Asian markets represented 14% of the company’s gross sales.
To calculate Armanino’s future sales, I used the Trading Economics’ retail sales forecasts for the United States, China, Japan, South Korea, and Japan. For the Asian market, I did a GDP weighted estimate of the retail sales for China, Japan, South Korea, and Japan retail, as we do not know where in the Asian market the company sells.
The Company Will Not Use The “CARES Act” To Keep Dividends Stable
On May 14, 2020, the Company decided to repay the PPP Loan. While the Company applied for the loan in good faith based on then-existing eligibility criteria established by the U.S. Treasury Department, government guidance regarding the interpretations of the criteria issued subsequent to the Company’s application, made it unclear whether the Company met the eligibility requirements. Accordingly, out of abundance of caution, the Company decided to return the proceeds from the PPP Loan rather than risk potential negative consequences to the Company.
In my opinion, Armanino Foods repaid the loan because it did not want to suspend the already approved dividend payment and the planned future dividend payments. It would have been required to suspend dividend payments if it had taken the loan. In my opinion, one of the reasons why the company did not want to suspend its dividends is that the board of directors owns 6.4% of the outstanding shares.
On March 5, 2020, the Company’s Board of Directors declared an increase in the Company’s regular cash dividend of $0.0275 per share that was paid on April 24, 2020, to shareholders of record on April 1, 2020.
Source: Company quarterly report March 2020
Armanino Foods has around 114 employees, and the fact of it being such a small company means that management knows its employees. I feel that management will not just leave their employees high and dry because they probably know them and their families personally. In my opinion, SG&A will be almost the same in dollar value terms.
We are exploring new revenue streams with additional marketing efforts to augment our current efforts in the coming months.
(Source: Company 1Q’20 financials press release)
AMNF is exploring ways to keep its employees working, while at the same time trying to reduce idle time at its production facilities. The above quote reinforces my belief that SG&A will remain nearly the same as in 2019.
Figure 2: Dividend Discount Model
(Source: Company financials and author’s own estimates)
If Armanino Foods decides not to lay off its employees at the expense of the company’s performance, I agree with this action. In the long run, it will have more loyal employees, and that should result in a more productive company. I remain very bullish on AMNF, as it has a possible upside of 36% and an alpha of 26%. The target price for the stock is $3.18 to be realized in the short term.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMNF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.