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, Barel Karsan (368 clicks)
Long only, deep value, contrarian, bonds
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G. Willi-Food (NASDAQ:WILC) imports, manufactures and distributes hundreds of food items to supermarket chains and grocery stores. Recently, margins have fallen as food inflation has increased costs, while the company is hard-pressed to pass those costs on to customers. The stock price may have overreacted to this news, however, offering long-term investors a potential opportunity.

WILC has fallen over 40% since its highs in March of this year. As a result, it doesn't trade much higher than its cash holdings; the entire company trades for $60 million, and has cash holdings of about $50 million. In addition, this is a profitable business that has generated combined earnings of about $20 million over the last four years.

Any way you look at it, the company looks cheap, so let's take a look at some of the risks to this business. First, it's not clear what will happen to all that cash. Though the company announced a $5 million buyback program as shares fell, this represents only a small fraction of the company's cash holdings. It looks like management would much rather acquire other companies to grow the business than generate meaningful shareholder value.

When asked for details about the status of buybacks on the company's latest conference call, management answered that some shares have been repurchased but that it didn't know how many. The company's quarterly release shows that no shares have been repurchased in the most recent reporting period; however, management may have been referring to repurchases made between the end of the reporting period and the conference call date, for which we have no info.

Good luck trying to force action at this company, however; the company is majority-owned, so minority shareholders can wish for buybacks and/or dividends all they want, but they are unlikely to get their way if that's not what the majority-owners want.

Interestingly, a lot of this cash on the balance sheet is there because the company just issued shares about a year and a half ago. The proceeds of the issuance only netted the company about $5.75 per share (compared to today's price of $4.50), which suggests that either 1) management doesn't believe the company to be undervalued by much, if at all, or 2) they don't care, they just want to grow regardless of dilution. Neither of these scenarios bodes well for shareholders.

There is also a great deal of currency risk with respect to this business. The cash is pretty much all held in Israeli Shekels. Since most of the company's business is conducted in Israel, this makes sense. But for US investors, this can result in an erosion of value if the US dollar gains strength. Israeli companies are also the subject of headline risk, as the Middle East region is constantly under threat of war. With so much cash and so little debt, this company has the ability to ride out most storms, but if a war broke out the stock prices of companies operating in Israel may take large hits.

WILC has seen its stock price take a major hit over the last few months. As such, many value investors may wish to take a position. This stock is not without risk, however, as management actions along with country and currency risk may pose threats.

Disclosure: No position

Source: There May Be Opportunity In G. Willi-Food's Drop