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Urbem's 'Wonderful Business' Series: Armanino Foods of Distinction

With only a bit over $100 million market cap and 42 employees, California-based Armanino Foods of Distinction (AMNF) produces upscale and innovative frozen and refrigerated food products, including pesto and other sauces, stuffed pasta products and cooked meat products. The company markets its products mainly through a network of food brokers to retail, industrial and foodservice customers throughout North America (roughly 90% of FY2018 sales) and Asia. We note that two brokers each handled over 10% of the FY2018 and FY2017 sales, indicating a concentration risk.


As of the latest filing, individual insiders account for over 6% of total shares outstanding. CEO and President Edmond Pera, Chairman Douglas Nichols, and Director and Secretary Deborah Armanino LeBlanc respectively owned 1.4%, 2.3% and 1.9% of the company. We at Urbem like the management's commitment to voluntarily keeping the financials audited and publicly available, although they are no longer required to do so following the company's deregistration from Nasdaq in 2005.

In our opinion, Armanino's reputation for superior quality helps build an economic moat in the premium food segment. To compete favorably, the company markets its products based on quality and natural ingredients rather than price. The brand has achieved some national recognition, especially on the West Coast. Its pesto products have been in existence for almost half a century, and they are still growing. At Urbem, we particularly favor brands with long-term history and predictable future results calculated fom the perspective of the so-called "Lindsay Effect" (which states that the future life expectancy of a non-perishable thing is proportional to its current age).

According to the chart below, Armanino Foods of Distinction outperformed most of the major businesses in the food sector over the past few years, including Kraft Heinz (KHC), Tyson Foods (TSN), McCormick (MKC), Archer-Daniels-Midland (ADM) and Hormel (HRL).

The business was also able to increase both its sales and operating profit year-over-year throughout the great recession, showing resilience to the economic downturn.

Going forward, we see plenty of room for Armanino to grow its business to the next level. Overseas expansion in Asia could be a significant driving factor. Even in the US, the company can continue to work on increasing geographic coverage outside of the West Coast region while diversifying its channels and customers. Premiumization is a global megatrend among consumers and applies to the food industry as well, enlarging Armanino's target market size. Product line extension (e.g., new flavors) and expansion into vertical adjacencies (e.g. the broader Mediterranean cuisine) may also propel value-generative growth for shareholders. While we do believe in the team's capability of product innovation and go-to-market launch in this regard, investors should keep their eyes on the diversification risk, which may dilute the company's core competency.

Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market; we own shares of Armanino Foods of Distinction.

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