G. Willi-Food International (WILC) is Israel's largest food importer and also distributes food in the United States (revenues 80% Israel, 20% U.S.). Currently, and for the foreseeable future, WILC’s profile has been changed and is growing organically at 15% as a result of an entry into dairy and refrigerated salad products. The company has more than $4 of net cash per share and an earnings estimate of 80 cents for 2011, which makes the Ex cash P/E equal to 3x. The stock has been dropping since the end of May from a high of $7.76 to the current price, which we believe presents an opportunity. (For my initial write up on the company please see here.)
A few things happened lately in Israel that make WILC even more attractive. At the beginning of June, a national protest was initiated against the rise of prices of dairy products in Israel. The protest, which received the somewhat entertaining name “the cottage cheese protest," started when Tenuva and Strauss, two companies that hold 91% of the dairy market in Israel, both increased the price of cottage cheese to 8 ILS. Cottage cheese is a heavily consumed product in Israel and the price was governmentally supervised until August 2008, when the price was 4.82. The 65% increase in cottage cheese prices is a multiple of the increases in other dairy products that saw prices rise on average 25% (with milk prices, volatile but flat over this period). The cottage cheese protest stirred the dairy market in Israel and made its way all the way to the government, which formed a committee to discuss the issue of non-competition in the Israeli dairy market. The committee’s recommendation was to decrease the taxes on imported dairy products to 0% in five years.
Dairy products are 19% of WILC’s imported products into Israel and have been for a few years an engine of growth for the company. Even with the current taxes, WILC's imported products are sold at a discount to the branded products of Tenuva and Strauss. The tax benefits will free more margin that will benefit the company even if Tenuva and Strauss will decide to decrease their prices.
On July 10, Psagot, one of the biggest investment houses in Israel, initiated coverage of the Willi Foods holding company (WLFD on the TASE which holds 53% of WILC shares and some cash) with a buy rating and a price target 25% above the previous closing price. Psagot noted the opportunity in WLFD both from a valuation standpoint and also as a beneficiary of the latest events. Since then, WILC has underperformed WLFD by 7% (WLFD is down 3%). The cottage cheese protest was only the first wave of protests in Israel, which are to some extent inspired by other uprisings in the Middle East. The current uprising has had an effect on the Israeli market, which dropped 6.3% in compares to WFLD (-3%) and WIlC (-10%). This current price of WILC presents a very good opportunity to a buy a stable and growing business at a distressed price.