Lifeway Comes Back From the Dead

Once upon a time, I liked Lifeway Foods (NAS: LWAY) quite a lot. A fast-growing small cap, flush with cash and generating piles more moola with each passing quarter, the stock looked poised for takeoff. (And take off it did).

But somewhere along the way, Lifeway lost its way. From 2007 through 2011, its signature "kefir" dairy drink gained increasing popularity, and sales at Lifeway surged. Yet translating these extra sales into profits proved an elusive task. Sales nearly doubled over the five-year timespan, but profits actually declined 10%, from $3.2 million to $2.9 million. That's not the way "growth stories" are supposed to play out, and as a result, it's been more than a year since I last saw any reason to write much of anything about Lifeway...

Until now.

It's alive!
On Tuesday, Lifeway delivered the first truly good news we've seen in a while, confirming that in Q2:

  • Gross sales grew 14% to $22.7 million, while cost of goods sold actually declined.

  • As a result, profits leaped a heady 550% to hit $0.13 per share.

  • Best of all, Lifeway generated so much cash in the quarter that its free cash haul for the first half of 2012 now stands at $3.6 million -- the most cash Lifeway has generated in a six-month period... ever.

When combined with the $2.5 million in free cash generated in H2 2011, the company is now collecting cash at the rate of $6.1 million per year. And its price-to-free-cash-flow ratio -- formerly sky-high -- is now just 26.0, and right in line with analysts' projected 25% long-term growth rate. Still a small cap, the company is growing more in line with "healthy drinks" maker Jamba Juice (NAS: JMBA) and energy drinks maker Monster Beverage (NAS: MNST) . And at its current valuation, Lifeway's stock finally looks buyable again.

But will it stay that way?
That's the $64,000 question for investors. Sure, Lifeway is generating cash today, but can it keep it up? Lifeway thinks so, saying it feels "positive" about the state of cash flows today. While still very eager to grow revenues, management says it's also focusing on "managing our expenses" and "generating cash."

Whether Lifeway succeeds is an open question, but taking management at its word, I've decided to close out my negative CAPScall against Lifeway. The bet's paid off to-date, but if Lifeway sticks to its new way of doing business, I think the stock just might outperform the market going forward.

Another beverage company, this one coffee-oriented, will also need to come to terms with a new way of doing business once key patents expire later this year. The stock is Green Mountain Coffee Roasters, and in this brand new premium research report our analyst dives into all of the key opportunities and threats facing the company today. There's a lot of moving parts with Green Mountain, so make sure you stay up to date by claiming your copy now.

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Fool contributor Rich Smith holds no position in any company mentioned, but Motley Fool newsletter services have recommended buying shares of Monster Beverage.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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