Three-minute pitch #1
Introducing a new format for ideas
Hello readers! Today I want to introduce a new idea format: the three-minute pitch. The objective here will be to introduce ideas that are more timely or event-driven, without having to do a full pitch that might take a week or two to put together. The objective here is speed because I think these ideas will play out more quickly. These are “bonus” ideas that do not count for the ~10 full pitches.
Without further ado, let me introduce an opportunity that popped up yesterday as the company released very strong earnings.
The idea today is Lifeway Foods ($LWAY). As I write this, the stock is trading at $7.73 per share. The company has a market cap of $117m and an EV of $114m. The company has roughly $3m of net cash on its balance sheet. The company also owns real estate worth approximately $10m.
Lifeway is the category leader in the US in the yogurt-based drink Kefir. Kefir is a drink that has health benefits, as the drink contains live and active cultures. The company sells its drinks in most major stores, including Trader Joe’s, Whole Foods, and others. In 2022, the company generated $142m in sales.
If you have heard about this company, you have likely heard the event-driven angle. The quick story is that the founder of the company passed away in the early 2000s, and the daughter and son took over the business. The daughter, Julie Smolyansky, became the CEO at age 27. The brother, Edward, worked in the business but no longer does. Fast forward to the present day. Edward and his mother, Ludmilla, who together own ~31% of the business, are not happy with Julie’s management of the company. After several back-and-forth lawsuits, the company announced in mid-June that it had hired Kroll Securities to evaluate strategic alternatives. There is some good background reading here.
More importantly, however, the company reported Q2 results yesterday morning that were mind-bogglingly good. Gross margin improved +700bps sequentially, and the company generated an operating income of $4.8m (a 12% EBIT margin). On an annualized basis (sales are not seasonal), operating income is run-rating at close to $20m per year.
So let’s get into the core of the thesis.
A combination of reduced milk prices (the #1 cost input), lower transportation costs, and increased volumes have helped gross margins normalize at a much higher level. Below we can see that the company struggled throughout 2021/2022 given much higher milk prices which have now come down meaningfully.
As the family drama continues, there is a good likelihood that Lifeway could be sold as a result of the strategic review process. Julie holds 17% of the company, and the mom and brother own ~31%. However, Danone has been a long-time investor and holds another 20% of the stock. Danone could prove to be the wildcard in the process.
I believe there could be interest from a strategic or financial buyer as there is a lot of fat to cut, which would make the opportunity even more attractive. Between Julie’s excessive salary and that of her husband, who is on the payroll, you could easily cut ~$1m in costs, which would fall directly to the bottom line. The company has been undermanaged for a long time, as David Kanen points out in a letter he wrote to the company (below).
The valuation is really low for a niche-category leader in a defensible category. On a run-rate basis, the company will generate approximately ~$20m in EBIT over the next twelve months on a current EV of ~$115m, which puts this at a 6.0x EBIT multiple. Obviously, this is not the right multiple for a staple. As a price target, I put a 15x P/E multiple and think the stock could be worth ~$14 per share, a hair under a double from here.
Putting it all together, you have a nice, defensible niche-business trading at a ~6x EBIT that is currently undergoing strategic alternatives (possible sale). The stock is pretty neglected - it is quite small, and doesn’t trade much (ADV ~$70k/day); there is one analyst estimate out there which is also really stale (modeling 2023 EPS at $0.34, while Q2 had $0.22).
I like the risk/reward from here but keep in mind that there are risks: 1) management is not good, 2) there is no guarantee of a sale, 3) we could see higher commodity inflation.
That is the 3-minute pitch! Let me know if it’s helpful or not. I put this together very quickly so please excuse any grammar issues / typos.
Here’s the quick model, in case it’s helpful:
Compelling idea. Google search queries have started to rebound as well, from a slump that started in 2015. Presumably due to a new product?
Love this new format - fun idea!