Tuesday, December 16, 1997

Lifeway Foods Inc.
(Nasdaq: LWAY)
Phone: 847-967-1010
Website: http://www.kefir.com
Price (12/15/97): $7 3/8


Drinkable yogurt? Smooth, sweetened sour cream? The descriptions for Lifeway's flagship product line, a fermented dairy beverage known as kefir, are as colorful as they are varied. Yet for those who have been consuming shares of Lifeway, the equity nutrition has been nothing short of phenomenal.

As heartening as the story of an Eastern European immigrant building up a company by selling an indigenous drink may be, the real kicker has been how that small beverage maker has produced stellar margins and earnings growth and is now moving into a production facility that will increase its output fifteen-fold.


Michael Smolyansky founded Lifeway and continues to wear just about every executive hat for the company. The original line of kefir has evolved into other flavors, and the company recently introduced a fat-free version of the dairy beverage.

Lifeway also makes farmer cheese, fruit-sweetened cream cheese, and Golden Zesta seasoning. The products are mainly sold in the metropolitan area of Chicago but are available globally. Export sales doubled last year.


Income Statement
12-month sales: $5.7 million
12-month income: $0.7 million
12-month EPS: $0.19
Profit Margin: 12.3%
Market Cap: $28 million

Balance Sheet
Cash: $0.5 million
Current Assets: $2.2 million
Current Liabilities: $0.8 million
Long-term Debt: $1.4 million

Price-to-earnings: 38.8
Price-to-sales: 4.9


Tim Biehler, who in a previous life used to scour Fooldom for overpriced stocks as MF Shorty, first brought my attention to Lifeway two years ago. I was intrigued. After all, when someone who begins looking at a company from a jaded bearish perspective finds one worth considering, it should mean something.

Back then Lifeway was an obscure $3 stock. Yet unlike most speculative penny stocks, Lifeway was showing consistent profitability and growing earnings. The stock remained stagnant until it broke past the $5 threshold this summer.

Tim then came to the Food Industry message folder to ponder if the stock was finally poised to break out. Lifeway had just teamed up with Galagen (Nasdaq: GGEN) to produce "functional foods" and the company was ready to move to a larger facility.

Along the way Individual Investor ran a short blurb on the company and the shares had a short-lived spike into double-digit stock price territory. The shares have since retreated, but like fermentation, agitation is always churning and turning, even past the expiration date.


What should be turning more heads than its brief stay in double-digit stock price territory last month is the company's double-digit profit margins. Most food companies, even the large brand name conglomerates, are destined to a life of meager margins. The Nabiscos and Hersheys of the world are great companies, but they ultimately find bottom line profits to come in at 4% to 7% of sales.

Lifeway's success may be tied to a unique premium-priced product, but in reality the credit goes to the lean operations Smolyansky inspires. It is hard to imagine the 12% profit margins getting any better, but they probably will now that production has the capacity to increase 1500%. That's a lot of kefir.

Lifeway no doubt realizes that it can become a victim of its own success. If steady growth continues -- at such lofty margins -- new competitors are bound to show up. But Lifeway's Kefir now has the premium brand name. The surge in exports, from $215,000 to $414,000 last year, is an encouraging trend but still is less than 10% of total revenues.

Now selling at 39 times trailing earnings, one has to wonder if the company is fairly, or possibly, richly valued. The huge increase in capacity is welcome, but the reality is that sales have only been rising at a 10% clip this year. However, stronger margins find earnings growing at twice that pace. If the trend towards rising margins continues as the company penetrates new markets with the added supply, the stock may continue to be palatable.

-Rick Aristotle Munarriz

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