To paraphrase the great Hannibal Smith: "I love it when a trend comes together."
It's been more than six months since I first suggested that Russian dairy and juice manufacturer Wimm-Bill-Dann (NYSE:WBD) had reached the stage of its corporate life when it no longer needed to spend huge sums on acquisitions, when it could finally settle down to the business of making money for investors. Just three months later, Wimm turned in a bang-up fourth quarter, generating enough cash to put it in the green for the year, a company first.
Having been so fortunate with my calls so far, today I'm going out on a limb for a third time: I think Wimm can maintain its new profitable status. Already Russia's leading dairy concern, I believe that Wimm has now reached the stage where it can milk (pardon the pun) that profit to begin rewarding its shareholders. That's why I now say: "Don't mind the GAAP."
Judging from the reaction to Wimm's Q1 2005 earnings report yesterday, the suits on Wall Street aren't heeding that advice. Wimm's report has been out to analysts for two full days, yet the company's share price hasn't budged. It seems they saw only Wimm's 45% drop in net profits year on year, and while they may have accepted Wimm's explanation that favorable currency exchange rates inflated the year-ago quarter's generally accepted accounting principles numbers, they're interpreting the report overall as neutral at best. But I fear they're missing the real point here: Wimm's cash profitability improved dramatically.
In 2004, Wimm generated substantial amounts of cash in every quarter but Q3, when a spike in working capital requirements knocked its cash generation off stride. So far, this year is similar to last year, with a free cash flow-positive Q1. But there's a key difference: The first quarter showed a 43% increase in free cash flow over Q1 2004.
That's right, folks. GAAP profits may have fallen by 45%, resulting in a paltry $2.9 million in reported income. But the real story here is that Wimm generated $19.7 million in actual cash (operating cash flow less capital expenditures) -- almost seven times those reported GAAP profits.
Wimm achieved this, in part, by using the tools available to a market-dominating company: it's able to put off paying its bills a bit longer (accounts payable grew 5% year over year), and to demand faster payment from debtors (accounts receivable declined by 6%). The company's also tightened up its operations: Despite growing sales by 17%, for example, it knocked 6% off its inventories. From where this Fool sits, Wimm did just about everything right this quarter. If Wimm keeps this up, it should make for a fine play on Russian growth.
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Fool contributor Rich Smith does not own shares in Wimm-Bill-Dann.
