The big names now testing the Lifeway Foods
In May, the company announced that it was getting four of its 12 flavors of kefir into "select" Target
The kefir story is one of a growing group of products that are offered in supermarkets including Whole Foods Market
The Costco news, though, has sent the stock on a two-day rally. On Tuesday, the stock was up more than 15% before closing with a more-than-respectable 9.1% gain. The stock is up 13% this morning as investors seem to be warming to the thought that the company's kefir products may finally become widely accepted. And that's good news, since kefir and drinkable yogurt make up approximately 60% of Lifeway's sales.
Even after the recent gains, the stock is still trading mid-range for the year and at roughly half what it fetched at its pinnacle in 2004. That said, it still commands a premium 50.8 times trailing earnings. If you're looking for a company flying under the radar, this isn't it.
The attraction is its fat 16.1% operating margin. That's a whopper of a number when you consider that the dairy industry average is 1.7%. Heck, that even tops the margins at Motley Fool Income Investor recommendation Kraft Foods
The company has also shown a willingness to use its cash to make small acquisitions that might grow into bigger opportunities. In July, the company paid $575,600 (a little less than one times sales) to acquire a small gourmet cream cheese producer based in the Philadelphia area. The acquisition gives the company a new high-quality product line that complements the soft unripened farmer's cheese it already sells to offer its existing customers.
Lifeway is a small company with $19.2 million in trailing annual sales. While the company has added another big name to its efforts to sell kefir beverages, investors should remember that this is another test market in a limited number of stores. Until the company can start producing a string of double-digit percentage gains in net earnings, investors would be wise to watch, rather than own, this promising company.
Whole Foods and Costco are Stock Advisor recommendations. Kraft is an Income Investor recommendation.
Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.