Is Lifeway Foods As Good For Your Portfolio As It Is For Your Health?

| About: Lifeway Foods, (LWAY)

Summary

Earnings were short of expectations.

Since 1999 Groupe Danone USA has owned roughly 20% of the stock.

Sales growth has slowed.

For years Lifeway (NASDAQ:LWAY) has enjoyed the ride of the probiotics health craze. For years dieticians have known the benefits of probiotics and Kefir. This article, this article and even this one are a few of the articles touting their benefits. After occupying the Kefir industry for over thirty years LWAY is now the largest producer and marketer of Kefir in the United States. Unfortunately, being the largest does not always translate into being a good investment.

Despite having a stellar CEO (Julie Smolyansky) who has been named on Fortune Magazine's "40 Under 40" and "55 Most Influential Women on Twitter" Lists, the company has sputtered in recent years on both the sales and earnings fronts.

Stock performance

Anyone who reads Seeking Alpha articles does so to become more informed about their investments. So lets start with how LWAY stock has done.

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Clearly, Lifeway has been a severe underperformer. In the past 52 weeks the stock has seen a high of $21.80 on May 19, 2015 and a new 52 week low of $8.88 last night (April 19, 2016), before closing at $9.01. So what is the reason for the drop? In a nutshell, it is slowing sales coupled with missed earnings. Should you worry if you currently own LWAY? Is it a good time to initiate a position? It depends on the metric you choose.

Revenues and Profits

The following chart extracted from the company's recently filed 2015 SEC Annual Report shows the slowdown in both sales and earnings:

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While sales have averaged a compounded 13.5% growth rate over the past three years, earnings are down 60%. In addition, the company seems confused on what they want to do regarding a dividend. Prior to 2012 Lifeway did not pay a dividend. In 2012 however, that changed and a dividend was paid. 2013 saw an increase in the dividend, but in 2014 the dividend was omitted despite the fact that earnings were adequate to cover these payments despite a large drop in profits. So should LWAY be considered a growth stock or a dividend play in the future? As earnings increase there may be pressure on the company to reinstate a dividend but is that really the best choice for the company? While a dividend would get a few investors to hold their stock for a longer period of time, the more prudent choice is to continue reinvesting in the growth of their sales channels to get back to a faster revenue model.

Growth

Lifeway sees to have lost direction regarding how they are going to grow. The company has decided to enter Canada and Mexico but has not saturated the United States market yet. It is absent from any store shelves in 7-11,Walgreens CVS or Rite Aid that I have visited. Those companies alone represent 20,000 retail outlets. LWAY has shown that they can manufacture their products in various sizes so there is great flexibility in the offerings they can provide to the customers of these locations.

Selling Costs

Especially unnerving was this excerpt from the annual report:

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How did selling expenses decrease $1.3 million? Who received the lower salaries? How much of the savings was attribute to lower salaries? Are these one time reductions or permanent savings? How much was attributed to lower travel costs? There is little transparency here to dig your teeth into. Were the lower travel costs related to not servicing Mexico and Canada after introducing Kefir into those markets? if so, are there no additional plans for continued support in these markets?

Earnings Estimates History and Trends

The uncertainty surrounding Lifeway is evident on many fronts as exhibited clearly by analysts. In the past ninety days the consensus earnings estimate has been reduced by a hefty 30 percent.

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Based on recent performance that seems like a prudent decision. Three of the past four quarters have shown earnings misses by the company.

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Lifeway is currently trading at a PE ratio of 75x current earnings, 28x projected 2016 earnings and 22x projected 2017 earnings. All earnings projects are based on the belief (currently unfounded) that the company will regain their mojo and once again exhibit the rapid growth that shareholders were accustomed to ten years ago when the stock rose from $4 (split adjusted in 2005) or $1.41 (split adjusted in 2001) to $21 this past year.

Balance Sheet

The Lifeway balance sheet is one of the company's strengths. Cash and cash equivalents rose a healthy $2.38 million this past year and now stand at $5.646 million. Total notes payable decreased 12% to only $7.12 million. Of that $7.12 million only $840,000 is due in 2016 and another $840,000 is due in 2017. The company also has a $5 million revolving credit facility that is currently unused.

Also of note is that the company owns all six of their properties and does not show any long term lease obligations for their manufacturing. LWAY does however have lease obligations of only $70,000 for the next three years (all related to the three company stores operated under the Starfruit brand name).

Another positive for investor has been the fact that Lifeway does not issue stock nor does it dilute shareholders. March 1, 2016 saw LWAY with 16.188 million shares outstanding which is actually less than the 16.346 million shares reported in the 2012 annual report.

Conclusion

If you have patience and do not want to miss the beginnings of a run up in the stock now may be a good time to establish a small long position. A more logical conclusion however seems to be to wait for proof that Lifeway is back on track prior to initiating a new position. Given the dramatic sell off in the stock lately, missing the bottom seems more prudent than trying to catch a falling knife.

Disclaimer: Investing in stocks such as Lifeway can be risky. There is no guarantee that your investment will be safe. There is also a great likelihood that you may lose some or all of your investment. Please do your own due diligence before investing in Lifeway or any other investment. Information provided in this article is informational and should not be the sole guide to determine if investing in the company is appropriate for you. The above are my opinions and should not be the sole purpose for initiating a trade. Always do your own due diligence prior to investing. Also remember to only initiate trades that are within your pre-defined risk parameters.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.