Armanino Foods of Distinction, Inc. (OTCPK:AMNF) recently released its Q3 2020 results, which, in my opinion, were slightly better than what the market expected. AMNF went up by a little over one percent during the first couple of trading hours after releasing its results.
The coronavirus severely impacted AMNF’s Q2 2020 results. The Q2 results shined a spotlight on one of its weaknesses: its reliance on the foodservice industry. The pandemic began at the most inopportune time for Armanino (technically, any time is an inopportune time for a pandemic) as its second-quarter has historically been the most important company sales quarter.
AMNF is traded on the OTC Markets, a market typically less transparent and with fewer regulations than the NASDAQ. AMNF has an average daily trading volume of 32,500. Because of the low ADTV, I used a liquidity risk premium of 2% in my cost of equity calculation.
The company has high sales concentration in one non-exclusive national distributor and one customer who generally accounts for over 60% of its receivables. Due to this high sales concentration, I included a 1% premium in the cost of equity.
Q3 2020 and Macroeconomic Conditions
Figure 1 – U.S. Restaurants And Other Eating Places Retail Sales
Source: FRED Economic Data
The second quarter is an important sales quarter for the foodservice industry, as seen in Figure 1. The issue is that the stay-at-home orders occurred weeks before the beginning of the second quarter, and restrictions were only lifted, for the most part, at the end of the quarter. Because of this, the most important quarter for the industry became its worst quarter.
There are still sales hindering restrictions on the restaurant industry, with social distancing rules being the primary reason restaurants are operating below their normal capacity levels. As long as these restrictions remain, monthly restaurant retail sales will continue below normal levels.
Table 1 – U.S. Restaurants Monthly Retail Sales
Source: FRED Economic Data
Q2 2020 Restaurant retail sales were down by 33.1% compared to Q2 2019. Armanino’s Q2 2020 U.S. sales were down by 52.8% on a year over year basis.
The third quarter is also an important quarter for the restaurant industry, mainly due to summer traffic. Restaurant retail sales are down by 13.4% in July and 12.1% in August. On a q-o-q basis, August restaurant sales are up by 2.6%, demonstrating continual but slowing improvement. AMNF’s net sales fell from $10,334,608 in 3Q 2019 to $8,321,414 in 3Q 2020, a 19% decrease. July and August collective monthly restaurant retail sales are down 12.7%.
Why I believe Armanino underperformed the market in Q2 2020 and possibly underperformed again in Q3 2020
- I believe the company has heavy exposure to casual and fine dining restaurants, which were the types of restaurants most affected by COVID-19 restrictions as they do not have delivery services.
- All three Brokers have exposure to casual and fine dining restaurants, but I believe that Broker B’s exposure is more than the other two brokers. This is why its gross sales declined by 64.7%, while Broker A’s and Broker C’s sales declined by 44.1% and 48.7%, respectively (Q2 2020).
- The company’s national non-exclusive distributor gross sales declined from $5.7 million to $2.8 million, a decline of 50.7% (Q2 2020).
- According to the company’s 2019 Annual Report, its brand is best known on the West Coast. The West Coast states were some of the last states to reopen their businesses. The lack of regional diversification also hurt its sales.
Updated DDM Model For Armanino Foods
This growth trend continued into the third quarter where we ended with a surge in sales at the end of the quarter which prompted us to increase production to meet the higher demand. Source: Q3 2020 Press Release
The company ended with a surge in sales at the end of the quarter. I believe that this increased demand will rollover to Q4 2020. I estimate that Q4 2020 sales should be around $8,665,000, 4.1% more than in Q3 2020, and 15.6% less than Q4 2019.
By 2024, I believe the company’s net sales will be $49,024,000. This estimate is aligned with global industry estimates provided by PrimeFeed. My net sales estimates for 2020 and 2021 are based on the idea of a lazy v-shaped recovery. After analyzing Figure 1 and Table 1, it is clear that a U-shaped recovery will not occur. It is also clear that the recovery in restaurant sales will not be a perfect v-shape either.
Armanino Foods is in a very competitive industry where they compete against many brands that belong to large corporations. Some of their competitors are Conagra (CAG) and Cambell Soup (CPB) that produce low-cost pasta. The company DeLallo produces high-quality pasta similar to those produced by Armanino. Some of these competitors have large marketing budgets and could negatively impact Armanino’s sales.
I estimate that Armanino will have lower profit margins this year and next year due to its decision not to use the Paycheck Protection Program. In nominal terms, fixed expenses should be similar to what occurred in 2019.
Figure 2 – Armanino DDM
Source: Company financials and analysts estimates (grey cells)
This year, AMNF has paid a total of $0.0625 in dividends (1Q20: $0.0275; 2Q20 and 3Q20: $0.0175). In the past two dividend announcements, the company informed shareholders that the company preferred to pay down its debt instead of paying the full dividend ($0.0275). The wording used in Armanino’s Form 8-K makes me believe that the company wants to resume its $0.0275 dividend payment as soon as possible. I do not feel that the company will do so this year. To pay out $0.08 in dividends this year, AMNF had to use cash, giving it a negative retention ratio of over 30%, considering that my 2020 estimates are correct.
I estimate that the company will pay a dividend of $0.0175 in 4Q20 and 1H21. I think it will not reinstate its $0.0275 dividend until Q3 2020, based upon historical retention rates. My target price for AMNF is $3.10, giving it a possible upside of 43% over the course of the next two years.
I am bullish on Armanino Foods due to the information in this article. I believe the company needs to diversify its sales channels and customer base, which is why I am not very bullish on AMNF.
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Disclosure: I am/we are long AMNF. 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.
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