Lifeway's Kefir Beverage Could Drive Upside in Stock

| About: Lifeway Foods, (LWAY)

Lifeway Foods Inc. (Nasdaq: LWAY) is an immigrant and family business success story. The company is America's leading supplier of the cultured dairy product known as kefir, and now America's only supplier of organic kefir. It also produces a variety of other natural and organic dairy products, including milk, cheese, yogurt and health food, and beverage products.

Lifeway kefir is a dairy beverage that contains the company's exclusive 10 live and active probiotic cultures. The tangy, fermented milk drink with Russian origins has gained widespread acceptance in the United States, largely through Lifeway's efforts. While most regular yogurt only contains two or three of these "friendly" cultures, Lifeway kefir products offer more nutritional benefits. Lifeway offers 12 different flavors of its kefir beverage, organic kefir and SoyTreat (a soy-based kefir).

Lifeway recently introduced a series of innovative new products such as pomegranate kefir, Greek-style kefir, a children's line of organic kefir products called ProBugs in a no-spill pouch in kid-friendly flavors like Orange Creamy Crawler and Sublime Slime Lime, and a line of organic whole milk kefir.

Lifeway also produces a line of products marketed in U.S. Hispanic communities called La Fruta, a yogurt drink it introduced in 2001. In addition, Lifeway kefir recently hit the shelves in Mexico for the first time in a variety of new, upscale supermarkets through a distributor in Texas.

The company is also targeting the rapidly-growing Indian immigrant population with a new smoothie drink called Lifeway Lassi. The new line is designed for Lifeway's core natural and health food markets, people who are familiar with lassi from Indian restaurants, and the large immigrant population from India, where lassi is a staple sold on street corners and in vending machines.

In addition to its line of kefir products, the company produces a variety of cheese products and recently introduced a line of organic pudding called It's Pudding!.

Lifeway Foods announced a distribution agreement with U.S. Foodservice May 18 that will expand Lifeway's footprint from retail grocery stores to restaurants, schools, hotels and other institutional sites for the first time.

"Americans spend nearly half of every food dollar on meals prepared away from home," said Lifeway President and CEO Julie Smolyansky. "That makes the foodservice market a strong potential area of growth for us, particularly with the rising interest in healthy eating in general and kefir and probiotics in particular. This agreement is an important first step in reaching that market and building a completely new revenue stream that will help us continue growing the company."

Second-quarter sales reported July 5 increased 53% to $9.72 million, from $6.37 million during the same period a year ago. Earnings for the quarter have not yet been announced.

First-quarter sales released May 14 rose 50% to approximately $9.02 million, from $6.00 million. Net income rose 40% to $0.07 per share, or $1.14 million, from $0.05 per share, or $895,000, during the same period a year ago.

This was the first full quarter where the company has been producing kefir from its recently-acquired Helios line in its main production facility in Morton Grove, Ill., and costs are dropping as the synergies from the acquisition improve.

Lifeway was founded by Michael Smolyansky, a Russian immigrant, in 1985, with the first bottles being produced in a family basement in Chicago. He began picking up orders from Chicago-area grocery stores, and the company grew rapidly. Needing financing to expand and build a new factory, Smolyansky listed the company on Nasdaq in 1988 and raised $600,000. Sales in 1988 were $800,000; by 1997, that had grown to $6 million. A decade later, the company now generates annual sales of more than $34 million.

Smolyansky suffered a fatal heart attack in 2002 at the age of 55. His daughter Julie, who had grown up with the company and was the firm's marketing director, took over at the age of 27. Her brother Edward is the company's chief financial officer, and their mother Ludmila chairs the company's board of directors.

About half of the stock rests in family hands, with another 20% controlled by French yogurt maker Groupe Danone. The company has fewer than 17 million shares outstanding and a trading float of less than 5 million shares.

The company was recently named Fortune Small Business' 97th Fastest Growing Small Business. It's one of only four companies to ever be named to the Fortune list four straight years.

Possible Strategy: buy at $14 or less with a sell stop at $11.99 and a short-term target of $17-$20.

Disclosure: Author has no position in companies named