It's not nice to speak ill of the dead ... but how about the merely brain-dead?

I ask because, after seeing Wall Street's reaction to Lifeway Foods' (NASDAQ:LWAY) Q3 earnings report, I'm concerned that the analysts following Lifeway may not be getting enough oxygen.

When all else fails, read the instructions
According to news reports, these analysts were expecting Lifeway to report $12 million in sales and $0.06 per share for Q3, and were surprised when, on Friday, the company reported $11.3 million and $0.05 per share.

And yet, Lifeway told us plain as day in October that its sales totaled only $11.3 million. Anyone who bothered to read the sales report has known for a month that sales weren't $12 million. What's more, anyone with a functioning, non-oxygen-starved brain would have known: If Lifeway missed the sales estimate, it probably didn't hit the earnings estimate, either.

Everyone but the analysts
And so it was that, despite growing its sales 15%, and its profits 67% -- numbers that fellow foodies General Mills (NYSE:GIS), Kraft (NYSE:KFT), and Dean Foods (NYSE:DF) would drool over -- Lifeway's share price actually dropped on Friday. But is that fair?

Yes and no. No, because:

  • Achieving double-digit sales growth on a discretionary foodstuff in the middle of a recession is quite a neat trick. And expanded relationships with retailers like Kroger (NYSE:KR) and Costco (NASDAQ:COST) promise to keep those sales growing.
  • Lifeway did even better on profits growth, and better still on free cash flow. Thanks to management's decision to begin including cash flow statements in its earnings reports (seriously guys, thanks), we know that, so far this year, Lifeway has grown its free cash flow an astounding 16 times in comparison to where it was this time last year. Free cash flow now amounts to $1.6 million year to date.

And yes?
And yes because I'm afraid Lifeway's share price is still a bit too -- shall we say -- "optimistic" relative to the firm's profits and growth prospects. The way things are going, Lifeway is on track to end this year with about $0.20 per share GAAP profits and about $2.1 million in cash profits. For P/E purists, that works out to about a 47 P/E on this 30% predicted grower; for free cash flow fans, an even more optimistic 74 P/FCF ratio.

To me, the stock seems obviously overpriced. And while the analysts haven't realized this yet, well, give 'em some time. As we've seen already, they're a little slow.

For more Foolishness on this little dairy maker from the Illini State, read:

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy is probiotic, crisp 'n' clean with no caffeine, and has no aftertaste.