It is not often that a Russian food product makes it big in America. Stolichnaya has done it. And Beluga caviar. Next up -- kefir.
From Russia with love
A brief introduction is probably in order for those who have not yet been introduced to the product. Kefir is a sort of drinkable yogurt, widely consumed within the former Soviet Union, where it is sold in half-liter and liter cartons. Over there, the drink has a sourish taste and is reputed to have innumerable health benefits derived from its active yogurt cultures -- the purported benefits range from boosting drinkers' immune systems to curing hangovers.
In the U.S., few dairy manufacturers have tried their hand at producing the product. Of these, Lifeway is the largest manufacturer and, as is becoming apparent, a force to be reckoned with in this nascent industry.
Founded in 1986 by Michael Smolyansky, a Ukrainian immigrant who began culturing kefir in the basement of his Chicago home, Lifeway is now run by his daughter, Julie Smolyansky. The company is not large, with an enterprise value south of $50 million. But it is growing by leaps and bounds. For instance, when I first discovered this company six months ago, its enterprise value was in the $30 million neighborhood.
Key to the company's success has been its willingness to tailor its product to the American palate -- and wallet. Whereas in Russia, kefir comes more or less in one flavor (sour) and sells for about $0.50 a quart, Lifeway offers 16 different flavored and lowfat flavored varieties priced closer to $3.00 a quart. The company then sells these products through everything from neighborhood health food stores to major chain supermarkets, such as Harris Teeter (a wholly owned subsidiary of Ruddick Corporation), Jewel-Osco (a division of Albertson's), Dominick's (a division of Safeway
Growth at a reasonable price
Like its signature product, Lifeway is not cheap, selling for an enterprise value-to-free cash flow ratio of 23.6. But that price may well be justified by the company's astonishing rate of growth.
Over the last five years, the company has averaged earnings growth of about 19%. Moreover, that rate is accelerating. From 2001 to 2002, Lifeway increased earnings 25%. But more importantly, the earnings rate is outpacing expansion in sales. To raise those earnings 25%, Lifeway only had to increase sales 14.3%. While that might seem like a neat trick, the company made it look almost effortless; Lifeway increased its gross margins by 5%, and decreased its operating expenses by more than 7.5%.
The market's response was predictable: Lifeway's share price has increased roughly 120% over the past 52 weeks -- about twice the rate of growth of the S&P 500.
Lifeway has a strong balance sheet, with $10.5 million of its $60 million market cap being in cash and marketable securities over and above its long-term debt. What little debt the company has consists of a commercial mortgage at 6.25% (thank you, Mr. Greenspan) and payments on its fleet vehicles (at 0%! -- thank you, GM
A gem in the making?
Only one analyst covers the company, and institutional share ownership amounts to a paltry 2%. On the other hand, this is a family shop and insiders own a whopping 74% of the company (Groupe Danone
In the February issue of The Motley Fool's small-cap prospecting newsletter, Hidden Gems, Fool co-head honcho Tom Gardner argues that "insider ownership north of 50% encourages the board to covet gains in shareholder value." To date, his investments in such family-run operations as Hooker Furniture have proven out this theory. But there is a flip side to the insider ownership coin -- think Adelphia Communications, which is in bankruptcy proceedings right now after being pillaged by its insiders.
So when considering buying into a company with high insider ownership, I like to at least scan a company's proxy statement to see if any red flags are waving. I especially keep an eye out for company management "giving away the store" to insiders, whether through enormous grants of stock options (as every second tech company in California seems to do) or by management super-sizing its own salaries (name a Dow company and I will bet they do it).
But Lifeway has no option grants to insiders. Zero. Zilch. Nada. Nor are exorbitant salaries being paid to management. In fact, Lifeway CEO Julie Smolyansky is one of the most reasonably paid chief executives I have ever found in a public company (she earns under $75,000 a year, including bonus).
The inflexion point
There comes a time in some companies' histories, when the "story" changes. Think Nokia
I see that happening with Lifeway today. The company began with a Ukrainian immigrant culturing kefir in his basement 20 years ago, selling it to the small U.S.-Russian immigrant community. It grew and expanded its offerings over the next two decades to appeal to the burgeoning U.S. health food market, and then announced that it was targeting the fastest-growing segment of the U.S. population -- Hispanic consumers.
In 2001, Lifeway began marketing a "La Fruta" brand of drinkable yogurt, distributing it through numerous stores catering to the Latin American community in the U.S., including the Save-a-lot supermarket chain (a subsidiary of Supervalu). In 2003, realizing the success the product was enjoying and determined to capitalize on it, Lifeway added two new flavors to the original four being offered.
This could be the move that breaks Lifeway into the big time. A company that was able to increase sales and earnings at double-digit rates while targeting the relatively static niche markets of Russian émigrés and health-food fans, is now targeting a growing segment of the population.
I predict this move will yield years of tasty returns for Lifeway shareholders.
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Rich Smith likes kefir so much that he "bought the company." He currently owns shares in U.S. kefir-maker Lifeway Foods and Russian kefir-maker Wimm-Bill-Dann. The Fool is investors writing for investors .