AMNF - Armanino Foods Distinction

[Jurgis]

and they pay him in pesto sauce.

 

 

... sorry just kidding. ;)

[bookie71]

I didn't see anything exciting, not knowing the reviewer, but many feel that they have to find something to write up.  Mostly a smaller firm and it is hard to have all the "separation of duties"  the big guys want you to have.

My personal opinion is it is good to have the same auditor as he (she) get to know where to look for weaknesses.  Of course the big guy's don't agree.

Would need to know more about the CPA firm to have a real opinion.  In the early 70's when the review process was voluntary the reviews were very helpful and constructive.  as the years progressed they got more and more nit picky to the point our firm quit auditing. 

Any way please don't jump to conclusions, more info is needed.

jmho

[plusalpha]

very good write up by Travis Wiedower

 

https://traviswiedower.com/2016/07/06/armanino-foods-amnf/

 

cheers

[Guest Schwab711]

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/liberated-syndication-lsyn/msg323794/#msg323794

 

More appropriate to answer here. I'm sorry, I didn't mean to imply something like Citron or whatever, if that's how folks took it. I should have been more clear in what I wrote.

 

I just meant that they are aggressive with tax credits. The R&D tax credits they take don't seem to fit what CA allows.

 

They pay a related party to do the accounting and use a single-man auditing firm.

 

They increasingly rely on promotions but it doesn't seem to have much effect on gross margins. If they have a single supplier for pesto, it doesn't make sense to me. At least the incremental margins should look different.

 

I usually say "interesting sidenote" or something like that on comments like these to make it clear it's just a stupid piece of trivia I think is interesting. Sorry I left the comment cryptic, it wasn't my intention!

[rpadebet]

Thanks for your post Schwab

 

Yes the risks with respect to suppliers and distributors are well understood, (I hope). Wouldn't it be too much to expect a diversified supplier and distributor network from a micro cap? Would we expect them to have the bargaining power of a large cap?

 

Yes there is that related party transaction for all financial and accounting needs except audit. It might not be completely kosher from an independent score keeper/oversight point of view, but then again it's a micro cap on the pink sheets. Doesn't make something automatically a fraud just because other fraud's have done something like this in the past. There could very well be legitimate reasons for this. (Could it be that a related family/board member/friend is doing all the financial accounting work and doesn't want to pay an auditor that much for signing off on his work? Not saying it is a good idea nor do i know exactly what is going on here, but isn't it a conceivable reason? To me they seem to be living on the border of stingy/frugal)

 

I am aware I maybe coming off as someone willing to give them the benefit of doubt or looking at the glass as half full, but I look at their history of operations, earnings, dividend payments etc and to me that swings the vote to the optimist side. IMO most frauds are in for the quick money unless you are Bernie Madoff and are riding a tiger you can't get off

 

Very useful to have a skeptic's perspective though always. Investing is hard. It's an art when it comes to judgement's like these

[Guest Schwab711]

Thanks for your post Schwab

 

Yes the risks with respect to suppliers and distributors are well understood, (I hope). Wouldn't it be too much to expect a diversified supplier and distributor network from a micro cap? Would we expect them to have the bargaining power of a large cap?

 

Yes there is that related party transaction for all financial and accounting needs except audit. It might not be completely kosher from an independent score keeper/oversight point of view, but then again it's a micro cap on the pink sheets. Doesn't make something automatically a fraud just because other fraud's have done something like this in the past. There could very well be legitimate reasons for this. (Could it be that a related family/board member/friend is doing all the financial accounting work and doesn't want to pay an auditor that much for signing off on his work? Not saying it is a good idea nor do i know exactly what is going on here, but isn't it a conceivable reason? To me they seem to be living on the border of stingy/frugal)

 

I am aware I maybe coming off as someone willing to give them the benefit of doubt or looking at the glass as half full, but I look at their history of operations, earnings, dividend payments etc and to me that swings the vote to the optimist side. IMO most frauds are in for the quick money unless you are Bernie Madoff and are riding a tiger you can't get off

 

Very useful to have a skeptic's perspective though always. Investing is hard. It's an art when it comes to judgement's like these

 

That's why I wanted to apologize. I just think they are interesting. Nothing damning. Nothing worth changing your mind over. The company seems to be working well. It's incorporated in CO with no controlling shareholder. I think minority shareholders should be fine.

 

The bolded part I think is as reasonable of a guess as anything. Everything seems to fit the narrative of frugal. But I'll always worry about situations where one person (or team) writes the books and signs the books. It's too tempting of a situation for many people. I think AMNF makes enough to afford an accountant that doesn't have a perception of a COI. I don't think it's a deal-breaker though.

 

My biggest issue is that they sell pesto at high margins and I don't get it. I know there's other (non-public) premium niche food companies like AMNF that have pulled off similar financials, so I don't think it's a sign of anything terrible. I just personally don't get it.

[rpadebet]

" My biggest issue is that they sell pesto at high margins and I don't get it "

 

Ha ha ... I guess there are ppl out there selling colored and carbonated sugar water too for centuries and super high margins

[Foreign Tuffett]

Thanks for your post Schwab

 

Yes the risks with respect to suppliers and distributors are well understood, (I hope). Wouldn't it be too much to expect a diversified supplier and distributor network from a micro cap? Would we expect them to have the bargaining power of a large cap?

 

Yes there is that related party transaction for all financial and accounting needs except audit. It might not be completely kosher from an independent score keeper/oversight point of view, but then again it's a micro cap on the pink sheets. Doesn't make something automatically a fraud just because other fraud's have done something like this in the past. There could very well be legitimate reasons for this. (Could it be that a related family/board member/friend is doing all the financial accounting work and doesn't want to pay an auditor that much for signing off on his work? Not saying it is a good idea nor do i know exactly what is going on here, but isn't it a conceivable reason? To me they seem to be living on the border of stingy/frugal)

 

I am aware I maybe coming off as someone willing to give them the benefit of doubt or looking at the glass as half full, but I look at their history of operations, earnings, dividend payments etc and to me that swings the vote to the optimist side. IMO most frauds are in for the quick money unless you are Bernie Madoff and are riding a tiger you can't get off

 

Very useful to have a skeptic's perspective though always. Investing is hard. It's an art when it comes to judgement's like these

 

That's why I wanted to apologize. I just think they are interesting. Nothing damning. Nothing worth changing your mind over. The company seems to be working well. It's incorporated in CO with no controlling shareholder. I think minority shareholders should be fine.

 

The bolded part I think is as reasonable of a guess as anything. Everything seems to fit the narrative of frugal. But I'll always worry about situations where one person (or team) writes the books and signs the books. It's too tempting of a situation for many people. I think AMNF makes enough to afford an accountant that doesn't have a perception of a COI. I don't think it's a deal-breaker though.

 

My biggest issue is that they sell pesto at high margins and I don't get it. I know there's other (non-public) premium niche food companies like AMNF that have pulled off similar financials, so I don't think it's a sign of anything terrible. I just personally don't get it.

 

I believe they are the only manufacturer of frozen pesto on the West Coast that can produce quantities sufficient for food service. This, along with the goodwill they have built up from decades in business, is the moat.

[bookie71]

(Could it be that a related family/board member/friend is doing all the financial accounting work and doesn't want to pay an auditor that much for signing off on his work? Not saying it is a good idea nor do i know exactly what is going on here, but isn't it a conceivable reason? To me they seem to be living on the border of stingy/frugal)

An auditor is required to be independent.  No relations or investments. If so then CPA has done an act "discreditable to the profession" and will lose his certificate.

 

[rpadebet]

(Could it be that a related family/board member/friend is doing all the financial accounting work and doesn't want to pay an auditor that much for signing off on his work? Not saying it is a good idea nor do i know exactly what is going on here, but isn't it a conceivable reason? To me they seem to be living on the border of stingy/frugal)

An auditor is required to be independent.  No relations or investments. If so then CPA has done an act "discreditable to the profession" and will lose his certificate.

 

This was a carryover of a conversation from a couple of other threads between Schwab and I

The auditor is pretty famous now ..... at least over here! Don't think the auditor is related party/friend or has a business interest. Their 10K says the related party provides financial/accounting services other than audit services I think

 

 

d. Disclosure of Related Party Transactions – During the years ended December 31,

2016, 2015 and 2014, the Company paid accounting fees of $7,675, $9,565, and

$9,245, respectively to a company controlled by a director/shareholder. Services

provided by this accounting firm are in the area of tax preparation and related

services, management and business consulting. No audit services were provided

by this company.

[Travis Wiedower]

Everything Schwab brought up is legitimate and I don't like the auditor situation either. Maybe my definition of fraud is different than others, but Armanino is a legitimate business selling legitimate products. There's always a chance there's financial engineering or shady stuff going on behind close doors, but they are a real business (you can go buy their pesto on Amazon if you don't believe me). I do think Armanino is a better business than it appears from the outside. Below is a copied post I made in the MicroCapClub thread last year that explains my logic:

 

First, just over half of their sales are through Dot Foods which is by far the largest redistributor in the foodservice industry. Dot sells to all the broadline distributors (Sysco, US Foods, etc) and directly to food manufacturers and large chains. There are really only five companies selling pesto through Dot. And only two of those sell in bulk (Armanino and Carla's Pasta). Thus, for the many companies in the industry that buy their products through Dot, if they're big and buying in bulk they really only have two options. The reason more pesto manufacturers aren't selling through Dot is they have monthly minimums for sales. If you join Dot as a supplier and don't sell enough each month, they kick you off the platform. So yes, there are a ton of mom and pop pesto manufacturers selling locally around the country, but only a few have scale. I think that's a big reason Armanino has been able to generate such great returns in an industry that appears from the outside to be a commodity.

 

Also, once they get a major customer (Sysco private label, large restaurant chain, food manufacturer, etc), those customers are very sticky. I've talked to several people in the industry (owners of restaurant chains, owners of food manufacturers, co-packers, etc) and they all say the same thing: once you're happy with a supplier relationship like that, you rarely change it. Rough quote from a CEO of a restaurant chain when I asked him if he'd change co-packers for a 5% savings: "Absolutely not. Once you find a manufacturer that does a good job and sign a contract with them, you want to stay with them. Switching is a long process, there's no guarantee a new company gets it perfect, and switching can introduce new problems you didn't even think of. All manufacturers use different sources of ingredients, all have different equipment, different freezing techniques, etc." This is something I didn't originally appreciate. One pesto manufacturer can't simply reverse-engineer Armanino's pesto, it's not that simple. And pestos from different manufacturers have minor differences. If you're a food manufacturer using Armanino pesto to produce a product that sells well it's very risky to switch to one of Armanino's competitors.

 

One of Armanino's largest single clients is Sysco (they do private labeling for them, in addition to selling Armanino branded products). I've been told that it takes Sysco a year or more to change a private label supplier (same reasons as I discussed in the last paragraph). "You really have to piss them off" was the exact quote I got. It's very difficult to get a Sysco private label, but once you do it's very difficult to lose the business. Management won't say how big the Sysco private label is, so I'm guesstimating it's their largest end client (Armanino only reports concentration at the redistributor/broker level).

 

If you're like me and wonder "why is pesto demand growing so consistently over the years?" the answer is their fastest growing segments are Mexican and burger joints. Pesto is healthy (and yummy) so it's a nice fit for gourmet burger places (or mid/high-end restaurants that have a couple nice burgers on the menu). Anecdotally, I looked at the menus for a bunch of restaurants around Austin that serve burgers and quite a few did serve burgers with pesto on them, so it is "a thing."

[Foreign Tuffett]

Travis, please accept my (belated) thank you for providing some really good insight here.

[bookie71]

Yep, they need a big outfit like Arthur Anderson , they did such a good job on Enron.

[Guest Schwab711]

Yep, they need a big outfit like Arthur Anderson , they did such a good job on Enron.

 

AMNF is the only non-fraud/bankruptcy Gregory Associates has ever signed-off on. Most have been classic penny stock-types with a few proven frauds sprinkled in. They've only audited a 10 or so public companies. Gregory Associates never once warned about any going concerns or issues with financials/accounting until after the fact. Maybe a more reputable firm wouldn't be a bad idea.