Business Operations

Two products are sold by Lifeway: kefir and farmer cheese (also known as cottage cheese). A plethora of flavor options for kefir is offered by the company, ranging from plain to hibiscus rhubarb. Customers are also provided with choices of variants such as low-fat, grass-fed, organic, and size. Fundamental changes for the drink are minimal, but the variety allows each customer to get what they want.

A child-oriented Kefir option called ProBugs is also provided by Lifeway. Packaged in a juice pouch-like container, ProBugs is made convenient for lunchtime or on-the-go. The second product in their mix is Farmer Cheese, a standard cottage cheese product.

For Q1'24, impressive numbers were reported, with nearly $45 million in sales, an 18% YoY increase, largely driven by Kefir. Gross margins were up for the quarter, attributed to higher Kefir volumes and more favorable transportation costs.

Global Outlook

The expected market growth of probiotics and kefir forms a significant part of the thesis. Since the pandemic, a heightened focus on health, including daily food choices, has been observed globally, particularly in the United States. The emphasis on probiotic foods, such as kefir, has increased.

Probiotics, microorganisms found in foods and supplements, are claimed to improve gut health by acting as food for gut microflora and enhancing infection-fighting abilities.

In 2015, the global probiotics market was valued at $41 billion, with yogurt products accounting for 75% of total consumption. By 2023, the market size had increased to $70.95 billion, reflecting a 74% growth. Expectations suggest the global probiotics market may reach up to $220 billion by 2030, although this figure may be slightly optimistic. Further research indicates that the market size could realistically reach between $115 and $128 billion by 2030.

With a CAGR of 8.6%, probiotics are expected to experience substantial growth, but the prospects for kefir are also notable. Yogurt products constitute over 75% of the probiotics market, while kefir, a fermented milk drink, is expected to see moderate growth. Mordor Intelligence and SkyQuest Technology suggest a 6.4% CAGR for kefir over the next 5 years, starting in 2024, leading to an estimated $2.4 billion in global kefir sales by 2030.

These projections highlight the potential for future top-line growth for the company. Kefir sales have been pivotal in the company’s history, and increased consumer consumption for health benefits could position Lifeway as a primary beneficiary.

For the 12 weeks ending 4/21/2024, kefir sales of approximately $37.38 million were reported by Lifeway. During the same period, total U.S.-based kefir sales were around $41.17 million, suggesting Lifeway's U.S. market share for kefir is approximately 91.04%. North America is also recognized as the fastest-growing market for kefir, which is favorable for the company. Continued strong market growth in the U.S. places Lifeway in an advantageous position to capture significant demand as the industry leader.

Valuation

A DCF model has been created for Lifeway, using analyst figures for revenues and net income. The base DCF model incorporates the following metrics:

• Revenue growth rates of 16.8%, 9.2%, 11.3%, 8.4%, and 5.4% for the years 2024, 2025, 2026, 2027, and 2028, respectively
• Shares outstanding at 14,691,000 (unchanged)
• CapEx for this year at $0.658 million, growing at 12% annually
• Debt at $2.5 million and cash at $12.025 million
• WACC of 7% and terminal growth of 2%

This model results in a fair value share price of $24.96, representing an upside potential of 113%. At this price, the company would be trading at 16x 2028 earnings and 21x one year forward. Currently, Lifeway trades at 13.6x earnings, below the industry average of 18.4x. The higher growth potential compared to many industry peers suggests a probable upward movement in share price.

Seeking Alpha has assigned an A+ growth grade to Lifeway, indicating strong performance relative to competitors. The company's low PEG ratio of 0.8x and an EV/EBITDA of 7.9x, compared to the average consumer staple company’s 15x, further highlight its attractive valuation.

Overall, Lifeway Foods presents an intriguing investment opportunity for those with a high risk tolerance. Significant growth potential, both domestically and internationally, is demonstrated by the company's increasing consumer interest in healthier probiotic-rich products. Despite recent ownership-related challenges contributing to a perception of increased risk, the estimated fair value of Lifeway Foods' shares at $24.96 suggests an undervaluation, offering an attractive entry point for investors. If the company successfully navigates these challenges, considerable appreciation potential exists.