Please ensure Javascript is enabled for purposes of website accessibility

Lifeway's Growth Story Lives!

By Rich Smith - Apr 10, 2013 at 11:39AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Sales are going great guns, and free cash flow is gushing, but the valuation still nags.

Shares of Lifeway Foods (LWAY -0.39%) are on a tear, up nearly a full $1 (or 8.3%) since reporting earnings last week. But is the price spike justified? Let's find out.

Reporting on Friday, Lifeway gave investors updated information on both its fiscal fourth-quarter 2012 performance, and on full-year 2012 as well.  Let's focus on that latter report giving a broader picture of how the company's doing. In fiscal 2012, Lifeway:

  • Grew its sales 16% to $81.4 million
  • Expanded its gross profit margin earned on these sales to 34%
  • Grew operating profits 74%
  • On the bottom line, scored $0.34 per share for full-year earnings, a "record" total -- and twice what the company earned in 2011.

Going forward, CEO Julie Smolyansky promised shareholders even stronger results in the fiscal first quarter (and the quarter having just ended, she should be pretty confident of hitting those targets). According to Smolyanksy, first-quarter 2013 sales will be up 30% over first quarter 2012, an acceleration from the 24% sales growth experienced in fourth quarter 2012.

Probably the best news Lifeway had to report, though -- at least, to this Fool's mind -- was that the company has remained true to its word about focusing on "managing expenses" and "generating cash" from its business.

No longer just rushing full-tilt after higher and higher sales numbers (but not avoiding them, either), the company has doubled down on efforts to make these sales pay. Free cash flow at Lifeway approached $5.2 million in 2012, or literally twice the $2.6 million the company threw off in 2011.

Of course, this does still leave the company trading for a valuation of 39 times that free cash flow (or 36.5 times GAAP profit, if you prefer that flavor of "earnings"). Most analysts doubt Lifeway's ability to keep on doubling its profits year after year, and posit a 25% long-term growth rate instead. That being the case, while I applaud the company's performance, I still can't countenance the valuation on Lifeway stock today.

Long story short, the company's going great guns -- but the stock is overpriced.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lifeway Foods, Inc. Stock Quote
Lifeway Foods, Inc.
$5.08 (-0.39%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.