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(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Third Quarter Results Ahead Of Expectations

G. Willi-Food International Ltd. (NASDAQ:WILC) reported Q3 results this morning, with revenue up 12.6% to $22.3 million, and net income up 36.6% to $2.4 million. EPS came in at $0.19 vs. $0.14 (adjusted for a constant currency). This was particularly impressive given that the company reported overall food consumption was down 3.2% in Israel during the quarter, and that Rosh Hashanah reduced the number of working days in September to thirteen.

Management Remains Very Confident About Next Year

I particularly enjoy listening to WILC's conference calls, as the company normally provides extra details about business trends that are not found in the press release. Specifically, management highlighted several bullish data points on today's call that provide me with additional confidence that this stock is headed to double digits within the next several months.

  1. October revenue growth accelerated to 25% year over year.
  2. The company hopes to see 20% organic revenue growth in 2014, with an uptick in gross margins to the 28-30% range.
  3. Management is continuing to work on private label opportunities in the U.S., with additional meetings scheduled in the first quarter of 2014.
  4. WILC hopes to introduce another 25-30 new products in 2014, adding to its 600+ product portfolio of high quality, affordable kosher foods.

The Israeli shekel continues to hold year over year gains of better than 10% vs. the U.S. dollar, which will have a modest, negative impact on operating margins, but this will help as Israeli-based assets are converted to U.S. dollars each quarter on the balance sheet. Book value increased from $7.45 at the end of Q2 to $7.81 at the end of the third quarter, aided by the stronger Shekel.

An Inexpensive Stock

I have updated my model to forecast $0.20 in EPS for Q4, making the full year EPS $0.74. Assuming 20% revenue growth in 2014, 28% gross margins, modest operating leverage across SG&A, and a slightly higher share count due to an expected options grant, I can forecast 2014 EPS of around $0.93-$0.96, placing the P/E at around 8 times. This is before taking into consideration the company has over $61 million in cash and investments, or $4.75 per share! Total liabilities stood at $9.3 million at the end of the third quarter. Given the expected rapid growth in 2014, combined with an estimated $1.5 million of expansion capital expenditures, free cash flow is expected to again be a fraction of net income, but even $3-4 million would be impressive relative to the firm's enterprise value, which stands at less than $40 million.

Shareholder Dispute Has Been Settled

In my initial article on WILC, I discussed an ongoing dispute over nearly one-third of the company's shares. Happily the two sides came to an agreement in mediation during the third quarter, and management continues to hold all of their shares. Willi-Food, a holding company controlled by WILC's founders, owns 7.3 million shares of WILC, or over 56% of the total shares outstanding.

Private Label In The U.S. Would Be Icing On The Cake

WILC has carved out a nice niche in the estimated $15 billion market for kosher food in Israel. The U.S. market size for kosher food is at least as big as the market in Israel. An estimated 15% of WILC's 2012 sales were generated from customers in the U.S. If the company were able to land a private label opportunity with one or more of the big U.S. supermarket chains, I'm quite confident that 2014 will be a good year to be a shareholder in WILC. I remain long WILC and look forward to seeing the company's progress in the coming quarters.


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Source: Investor Appetite For This Food Stock Should Grow From Here