|The principal business activity of Lifeway Foods, Inc. (LWAY) is the manufacturing of probiotic, cultured, functional dairy and non-dairy health food products. Lifeway's primary product is kefir, a fermented drinkable dairy beverage similar to but distinct from yogurt. Kefir has a slightly effervescent quality, with a taste similar to yogurt and a consistency similar to buttermilk. It is a product distinct from yogurt because it incorporates the unique microorganisms of kefir as the cultures to ferment the milk.|
Lifeway Foods was founded in February 1986. It completed its initial public offering on March 29, 1988. Since 1994, the company has grown its revenues at a compounded annual rate of 17%, from $3,541,841 in 1994 to $14,877,788 in 2003. During that same period the company’s operating earnings have grown at a compounded annual rate in excess of 27%, from $386,089 to $3,478,644.
The company has 8,438,888 shares outstanding, of which 70.0% are closely held. There are no outstanding options. The Smolyansky family, the founders, own 49.5% of the outstanding shares. Danone Foods, Inc. owns 20.5%. There are approximately 2,540,000 shares in the float. (Note: These figures were taken from the company’s proxy materials that were filed earlier in the year and have not been adjusted to reflect recent insider sales.) As of October 2004, Nasdaq reported the short interest position at 670,900 shares, approximately 26.4% of the float.
The company was “discovered” by Motley Fool’s Rick Smith in an article posted on February 9, 2004. Prior to the posting of the article, the stock was trading at $7.08 per share and the volume averaged less than 5,000 shares per day. Following publication of Smith’s article, the stock price exploded, tripling to a high of $28.24 on April 13, 2004. The company subsequently hit some earnings bumps – the price of milk, the main ingredient for keifr, doubled – and the stock has retraced most of its gains. It closed Friday at $4.55 per share, adjusted for a 2006 two-for-one split.
In October 1999, the company entered into a Shareholder’s Agreement with Danone Foods, Inc. According to the terms of that agreement, Danone agreed not to purchase any additional shares in LWAY and the two companies agreed not to compete in certain product lines for a five year period. The agreement expired at the end of September, though the two companies have extended it for an additional month while they attempt to negotiate a new agreement.
I have several reasons for liking this company. It occupies an attractive niche and management has achieved an enviable record of consistent and profitable growth. It would make a perfect acquisition for Danone Foods. The company is selling at approximately 30 times earnings. While not exactly cheap, the PE ratio is not out of line with the company’s historical record. The price of milk has come down and the company should be able to resume its earnings growth. The low float and the high short interest position is a short term positive
It is a family run business, always a negative. There have been some insider sales this year, primarily after the initial publication of the Rick Smith article.
The above comments are only my opinions. Anyone interested in the company should do their own due diligence.
Company website: lifeway.net
SEC filings: sec.gov