After surging far ahead of the S&P in the post-Economic Armageddon rebound, shares of Lifeway Foods (Nasdaq: LWAY) have been stuck in neutral since last summer. While others fret over the lost decade for stocks, Lifeway investors are more concerned about their own "lost year." But could that change in 2010? Is it time to buy Lifeway again?

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 (NYSE: SWY) and Whole Foods (Nasdaq: WFMI), and larger shipments to Wal-Mart (NYSE: WMT). Sales leapt 37% for the fiscal fourth quarter of 2009, and were up 31% for the year. This stands in sharp contrast to the low-single-digit growth numbers we've seen at larger food and drink companies like Kraft (NYSE: KFT), PepsiCo (NYSE: PEP), and Coca-Cola (NYSE: KO).

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.