Knobias Clip Report (02-22-2008)
Submitted By Knobias ClipReport
LWAY: Expands Production Which Could Be Just in Time
With the Oracle of Omaha recently announcing the acquisition of a large stake in Kraft Foods, one has to wonder what strategy this savvy investor is employing. Commodity food prices are soaring. Terrorism, ethanol, oil, dollar, and china have all been mentioned as reasons for the price hikes. And as many already know, the effect is squeezing every consumer out there. So the question remains; why would Buffet jump, head first into a Company with margins that are declining because of the rising commodity food prices?
Well, Kraft did trade at a price to book ratio of around 1.76. The Company also enjoyed a price to earnings of only 15. But more importantly, the Company sported a dividend yield of 3.5% which is much more than what people are getting at banks, money markets, and T-bills. The numbers now are a bit off after the Buffet followers drove up the price.
Besides the outside coating of the investment thesis, Buffett could also be predicting a drop in the prices of commodities. Anyone walking down the grocery isle can see that the price of milk has ripped up over 50% in the past year. The fact would leave many wondering how much higher can it go, with the answer being, not too much more.
Commodity prices can’t go up forever and that’s what Buffett is betting on. It certainly doesn’t hurt to have a 3.5% yield to fall back on not to mention the company being considered a defensive consumer staple with recession being the talk of the town. So with that in mind, smart money could be looking for other names on the landscape that could benefit from lower commodity prices similar to Kraft. One of those names is Lifeway Foods, Inc (LWAY).
The Company is engaged in the manufacturing of probiotic, cultured, functional dairy and non-dairy health food products. The company’s foundation product is Kefir, a creamy probiotic dairy beverage similar to but distinct from yogurt. Additionally, Lifeway produces Drinkable Yogurt (a line of yogurt drinks distinct from kefir); Farmer’s Cheese (a line of soft, unripened cheeses) and Basics Plus, a kefir-based dietary supplement with concentrated extracts of Colostrum, which can enhance performance of the immune system. Sixty percent of the Company’s sales are kefir and drinkable yogurt with the remainder being cheese-based products. Lifeway’s marketing promotes the verifiable nutritional characteristics, purity of product, and digestibility of its Kefir and kefir-based products.
For the trailing 12 months, the Company has reported revenue of $36.4 million and produced diluted earnings per share of 21c. Earlier this month, Lifeway announced their attempt to expand those numbers. The Company’s Morton Grove facility was the subject of a $2.5 million expansion which effectively doubled their production capacity. The project took one and a half years to complete.
If Buffett’s investment premise is correct, the timing for the completion of that expansion could not have come at a better time. With greater production, one would assume better margins from economies of scale and the adoption of latest technology. Add a predicted lowered price in their main input and anyone can see that this name could do a body/portfolio good. Investors would be wise to watch.
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