Why I Bought Shares in Lifeway Foods

Why I Am Long Probiotics

Published on:
August 17, 2018
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

In Nutrition Made Clear, Professor Roberta Anding tells how important a healthy digestive system is to our overall well being. There are over 4,000 different types of micro organisms in our gut flora and these little creatures boost our immune system and help us to fight bacteria. Mesmerized by her class and teaching style, I also learned that unless we are actively eating fermented food and seeking products that contain probiotics, our modern diet is weakening our immune system.

As I was reading how antibiotic medicine kills these essential micro organisms, Lifeway Foods, a company that fights the war against the modern diet, had appeared on the list of the companies that are trading at a 52-week low. A serendipitous encounter, I thought to myself and downloaded Lifeway Foods’ most recent public filings. I was intrigued to find out more about the company and why the stock price had recently halved in price.

The stock biography

LWAY traded hands as low as $5 and as high as $22 over the past decade. The average stock price range was between $8 to $16 during this time . Compare that to the current stock price of little less than $4. And since the December 2017 stock price of $10, LWAY stock value has sharply declined. 

I attributed the loss in market capitalization to an overreaction by Mr Market due to the 2017 reported loss of $346,000 or $0.02 per share. It was the first reported loss in over a decade.

It does not take a financial wizard to understand why the company reported a loss in 2017. Sales declined from $124 million to $119 million while the cost of sales had not changed (in both 2016 and in 2017, cost of sales were $86 million). And it seems management is slow to change its operating expenses as the general and administrative expenses were $14 million in both 2017 and 2016.

Free cash flow

While capital markets focused on the decline in revenue and reported loss, I looked for the normalized free cash flow. Defined as cash flow from operations less the cost of debt and fixed capital expenditures, the 2017 normalized free cash flow was not materially different compared to prior years. In 2017 management reported on a loss in free cash flow of $1.3 million and in 2013 it had reported an even steeper loss in free cash flow of $2.5 million.

But in 2013, while showing a loss in free cash flow, the company’s income statement reported earnings of $5 million or $0.31 per share. Unsurprisingly - because capital markets focus on earnings per share at the expense of free cash flow - the stock traded hands in the range of $24 and $32 during that year.

But in 2017 the loss in free cash flow coincided with a reported loss in the income statement. This infuriated Mr. Market and consequently the stock price was severely hit.

To me, both accounts are nonsensical. The loss in free cash flow in both years was due to abnormally high capital expenditures and not because of a fundamental change in the business of selling kefir. I estimated that the annual, normal capital expenditures are $3 million. But in 2013 they were $8.5 million and in 2017 they were $5.4 million.

13D filings

Submitted to the SEC within ten days by anyone who has more than 5% of any class of publicly traded stock in a public company, 13 D filings should not be overlooked.

Visit the 13D for LWAY and you will read that the Smolyansky family owns about a half of the outstanding shares of the company. And that in 2017 Lydia Smolyansky, who is the majority shareholder and owns of a third of the company, gifted to her two brothers 1.5 million shares from her own pocket. I viewed that as a positive sign.

LWAY's coverage ratio

LWAY's ability to pay back debt was excellent as of its recent public filling. The cash flow from operations to interest expense ratio was over 15 times. Between 2017 and 2013, the ratio ranged from 15 times to 37 times, a remarkably conservative ratio.

LWAY finances its operations prudently. Over the past four years, the average book value was $48 million, and outstanding total liabilities were $18 million, resulting in debt to asset ratio of less than 40 percent.

The company holds enough cash to pay about 20 years of the current interest payments. A praiseworthy achievement.


"This is one of the most important things you can do to increase your overall health," notes Doctor Ax, a YouTuber. "And if you can increase the amount of good bacteria and balance the level of microorganisms in your body, it can have tremendous benefits. Probiotics are essential to healing any condition out there today."

If you learned one thing from this essay, I hope it is a new appreciation of the gastrointestinal tract and an awareness of our need for probiotics. If you would like to know more about the benefits of probiotics and which foods contain them, I suggest that you read Probiotics Benefits, Foods and Supplements - a Vital Part of Any Diet and 7 Kefir Benefits and Nutrition Facts that Boost Immunity & Heal the Gut.

Another excellent article I found was written by The Academy of Nutrition and Dietetics and you can read an article about priobiotics by clicking here. Doctor Patricia Hibberd of the National Center for Complementary and Integrative Health has a free lecture on the topic.

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