Shares of Lifeway Foods (LWAY - $21.39) have doubled since announcing Q4 and 2023 year-end numbers back on March 20th. The other day an analyst at Lake Securities picked up coverage of this maker of drinkable kefir, yogurts, and assorted cheeses, and gifted them with a $25 price target. Is there a new dairy craze sweeping the nation and were Q4 numbers really that good?
Before taking a look at the numbers, however, a bit of a warning.
Around 75% of the company’s shares are in friendly hands, either the founding family (about 50%) or food giant Danone (24%). That leaves maybe 3.5M shares in the public float.
The daughter of the founder, Julie Smolyansky, is the current CEO, and her brother Edward is the former COO. The mother, Ludmila, is a former consultant to the company. Both Edward and Ludmila are “former” due to a family fight over control breaking out, with Ludmila and Edward banding together to oust daughter Julie to force a sale of the company, but with Danone apparently taking Julie’s side and her $1M salary in the fight. Very entertaining stuff. Julie prevailed and remains the CEO.
Having pointed that out, here are some other comments.
Revenues in Q4 2023 were up 17.5% over 2022 results, and FY 2023 revenues were up 13%, giving the appearance that revenues are accelerating which may lead to similar outsized gains in the near term. However, in Q4 2022 the company instituted a price increase on their main product that received a bit of pushback from retailers, and their main drinkable kefir product saw revenues decline sequentially by 10%, while in 2023 their sequential revenues were slightly higher. That single product line was responsible for most of the year over year gains.
Gross margins rebounded from the mid-teens level during 2022 to the 28% range at the end of Q4. Gross margins for these folks are highly reliant on the price of their primary commodity, which in the making of kefir, cheese, cream, and drinkable yogurts, happens to be milk. Milk prices currently are below their average over the last several years after hitting a high point during 2022 when the stock was stuck in the $5-$6 range.
Q1 margins are likely going to be strong as well, as the price of milk hit a low during the quarter, likely boosting gross margins. Their level, naturally, is reliant on revenue growth, so could actually decline if case volumes lag.
Lacking a price increase in 2023, revenue gains in 2024 will be reliant on growing case volumes. The company doesn’t provide any type of guidance, so revenues and profitability will be dependent on growing the market rather than relying on inflationary pressures.
While overall revenues were up 13% for the year, sales from their 2 largest customers increased 23% during the year, accounting for over $7M of the $19M increase. They never really quantify the effects from their price increase vs. higher case volumes, but I believe the increase across retailers was around 7-8% which would be about half of the revenue increase.
While the company used to have the Kefir market mainly to itself, over the past few years a few other kefir brands and companies have popped up, all vying for a piece of the growing pie.
Thinking about the Danone aspect, the Danone relationship has been there for a decade, and should Danone have wanted to make an offer, the stock was in the $1’s as recently as 2019. Danone hitting the bid at $21 would be some incredibly poor timing to say the least.
Continuing with that thought, earlier this year Danone sold their organic dairy businesses in the US to private equity, including brands Horizon Organic and Wallaby. If they really wanted to grow this vertical though a potential acquisition, that would likely not have happened.
Given that, I would think Danone is a more likely seller of their stake than any type of strategic buyer.
Overall revenues increased 19% in 2022 on the back of the acquisition of something called Glen Oaks Farms, a maker of drinkable yogurt. In 2023 we saw a 13% revenue increase with help from a price increase during Q4 2022. In 2024 the comps will be tougher and the company will have to concentrate on growing the brand among several other brands, all touting the benefits of the higher protein and probiotic content of kefir compared to regular whole milk.
The company is currently trading somewhere around 30x 2023 earnings for a company that grew 13% in 2023 and is facing some stiffer comparisons and competition in the year ahead.
For all of these reasons, LWAY is making its way back onto my next interest list at the end of June (last visit was in 2015 during their last spike above $20).