After surging far ahead of the S&P in the post-Economic Armageddon rebound, shares of Lifeway Foods
A new hope
Last week's earnings report gave investors reason to believe that happy days are here again. Lifeway boasted increased stock keeping units (SKUs) on sale at Safeway
What's more, with conventional milk prices near historic lows, Lifeway's input costs declined, driving up gross margins more than seven percentage points last year. Better still, even as Lifeway ramped marketing efforts, these higher costs did little to dent improved profitability, leaving the year's operating margins up a full 600 basis points over fiscal 2008 -- 15.4%.
All of which added up to a year of $0.33-per-share profit (three times the 2008 tally), with $5.8 million in annual free cash flow, which was slightly ahead of reported earnings under GAAP and more than twice what the company generated in 2008.
And yet ...
Here's what troubles me about Lifeway: the stock price and the growth needed to support it. Consider: Lifeway sells for about 35 times trailing earnings today. That might be reasonable if, as CFO Ed Smolyansky claimed on the conference call, Lifeway were "growing organically still at 25 to 30 percent."
Presumably he was referring to Lifeway's turbocharged-by-low-milk-prices profit growth. But if you back out the $7.9 million that last year's Fresh Made acquisition contributed to sales, the firm's organic sales growth was only 13%.
Here's the problem in a nutshell: Super-low milk prices are boosting profit today, but when prices are this low, they're more likely to cycle back up than to drop further, which would crimp profit. So far, Lifeway's been able to stave off the specter of slowing growth by buying up competitors, and adding their sales numbers to its own. But according to Smolyansky: "We don't have many competitors [anymore] ... we don't see anything [large enough to buy] right now."
Which leaves organic growth as the only option. Now, if Lifeway can manage 25% to 30% earnings growth on its own, that's fine and dandy. The stock should be safe. But if it cannot, a "lost year" may be the least of shareholders' problems.
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