Intrinsic value of Lifeway Foods - LWAY

Previous Close

$10.56

  Intrinsic Value

$6.55

stock screener

  Rating & Target

sell

-38%

  Value-price divergence*

+177%

Previous close

$10.56

 
Intrinsic value

$6.55

 
Up/down potential

-38%

 
Rating

sell

 
Value-price divergence*

+177%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of LWAY stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  4.20
  3.20
  3.38
  3.54
  3.69
  3.82
  3.94
  4.04
  4.14
  4.23
  4.30
  4.37
  4.44
  4.49
  4.54
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.80
  4.82
  4.84
  4.86
  4.87
  4.88
  4.90
  4.91
  4.92
Revenue, $m
  124
  128
  132
  137
  142
  147
  153
  159
  166
  173
  181
  188
  197
  206
  215
  225
  235
  246
  258
  270
  283
  296
  311
  326
  341
  358
  375
  394
  413
  433
  454
Variable operating expenses, $m
 
  76
  79
  82
  85
  88
  91
  95
  99
  103
  107
  110
  115
  120
  126
  132
  138
  144
  151
  158
  166
  174
  182
  191
  200
  210
  220
  231
  242
  254
  266
Fixed operating expenses, $m
 
  46
  47
  48
  50
  51
  52
  53
  55
  56
  58
  59
  61
  62
  64
  65
  67
  68
  70
  72
  74
  76
  77
  79
  81
  83
  86
  88
  90
  92
  94
Total operating expenses, $m
  118
  122
  126
  130
  135
  139
  143
  148
  154
  159
  165
  169
  176
  182
  190
  197
  205
  212
  221
  230
  240
  250
  259
  270
  281
  293
  306
  319
  332
  346
  360
Operating income, $m
  6
  5
  6
  7
  8
  9
  10
  11
  13
  14
  16
  19
  21
  23
  25
  28
  31
  34
  37
  40
  43
  47
  51
  55
  60
  65
  70
  75
  81
  87
  94
EBITDA, $m
  9
  9
  10
  10
  11
  12
  14
  15
  16
  18
  20
  22
  24
  26
  29
  31
  34
  37
  41
  44
  48
  52
  56
  60
  65
  70
  76
  81
  87
  94
  101
Interest expense (income), $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
Earnings before tax, $m
  6
  5
  6
  7
  8
  8
  10
  11
  12
  14
  15
  19
  20
  23
  25
  27
  30
  33
  36
  39
  43
  46
  50
  54
  59
  64
  69
  74
  80
  86
  92
Tax expense, $m
  3
  1
  2
  2
  2
  2
  3
  3
  3
  4
  4
  5
  6
  6
  7
  7
  8
  9
  10
  11
  11
  12
  14
  15
  16
  17
  19
  20
  22
  23
  25
Net income, $m
  3
  4
  4
  5
  5
  6
  7
  8
  9
  10
  11
  14
  15
  17
  18
  20
  22
  24
  26
  29
  31
  34
  37
  40
  43
  46
  50
  54
  58
  63
  67

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  9
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  65
  58
  60
  62
  64
  67
  69
  72
  75
  78
  82
  85
  89
  93
  97
  102
  106
  111
  116
  122
  128
  134
  140
  147
  154
  162
  170
  178
  186
  196
  205
Adjusted assets (=assets-cash), $m
  56
  58
  60
  62
  64
  67
  69
  72
  75
  78
  82
  85
  89
  93
  97
  102
  106
  111
  116
  122
  128
  134
  140
  147
  154
  162
  170
  178
  186
  196
  205
Revenue / Adjusted assets
  2.214
  2.207
  2.200
  2.210
  2.219
  2.194
  2.217
  2.208
  2.213
  2.218
  2.207
  2.212
  2.213
  2.215
  2.216
  2.206
  2.217
  2.216
  2.224
  2.213
  2.211
  2.209
  2.221
  2.218
  2.214
  2.210
  2.206
  2.213
  2.220
  2.209
  2.215
Average production assets, $m
  24
  24
  25
  26
  27
  28
  29
  30
  32
  33
  34
  36
  37
  39
  41
  43
  45
  47
  49
  51
  54
  56
  59
  62
  65
  68
  71
  75
  78
  82
  86
Working capital, $m
  19
  11
  12
  12
  13
  13
  14
  14
  15
  15
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  30
  32
  33
  35
  37
  39
  40
Total debt, $m
  7
  7
  7
  8
  8
  9
  10
  11
  11
  12
  13
  14
  15
  17
  18
  19
  20
  22
  23
  25
  27
  28
  30
  32
  34
  36
  38
  41
  43
  46
  49
Total liabilities, $m
  17
  17
  17
  18
  18
  19
  20
  21
  21
  22
  23
  24
  25
  27
  28
  29
  30
  32
  33
  35
  37
  38
  40
  42
  44
  46
  48
  51
  53
  56
  59
Total equity, $m
  48
  41
  43
  44
  46
  48
  49
  51
  54
  56
  58
  61
  63
  66
  69
  72
  76
  79
  83
  87
  91
  96
  100
  105
  110
  115
  121
  127
  133
  140
  147
Total liabilities and equity, $m
  65
  58
  60
  62
  64
  67
  69
  72
  75
  78
  81
  85
  88
  93
  97
  101
  106
  111
  116
  122
  128
  134
  140
  147
  154
  161
  169
  178
  186
  196
  206
Debt-to-equity ratio
  0.146
  0.160
  0.170
  0.170
  0.180
  0.190
  0.200
  0.210
  0.210
  0.220
  0.230
  0.240
  0.240
  0.250
  0.260
  0.260
  0.270
  0.270
  0.280
  0.290
  0.290
  0.300
  0.300
  0.310
  0.310
  0.310
  0.320
  0.320
  0.330
  0.330
  0.330
Adjusted equity ratio
  0.696
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714
  0.714

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3
  4
  4
  5
  5
  6
  7
  8
  9
  10
  11
  14
  15
  17
  18
  20
  22
  24
  26
  29
  31
  34
  37
  40
  43
  46
  50
  54
  58
  63
  67
Depreciation, amort., depletion, $m
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  4
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  7
  7
Funds from operations, $m
  3
  7
  8
  8
  9
  10
  11
  12
  13
  14
  15
  16
  18
  20
  21
  23
  25
  28
  30
  33
  35
  38
  41
  45
  48
  52
  56
  60
  65
  69
  74
Change in working capital, $m
  -2
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
Cash from operations, $m
  5
  7
  7
  8
  9
  9
  10
  11
  12
  13
  15
  16
  17
  19
  21
  22
  25
  27
  29
  32
  34
  37
  40
  43
  47
  50
  54
  58
  63
  67
  72
Maintenance CAPEX, $m
  0
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
New CAPEX, $m
  -3
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
Cash from investing activities, $m
  0
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -8
  -8
  -8
  -8
  -8
  -9
  -10
  -10
  -11
Free cash flow, $m
  5
  4
  5
  5
  6
  6
  7
  8
  9
  10
  11
  11
  13
  14
  16
  17
  19
  21
  23
  25
  28
  30
  33
  36
  39
  42
  46
  49
  53
  57
  62
Issuance/(repayment) of debt, $m
  -1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
Issuance/(repurchase) of shares, $m
  -1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -2
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
Total cash flow (excl. dividends), $m
  3
  5
  5
  6
  6
  7
  8
  8
  9
  10
  12
  12
  14
  15
  17
  19
  20
  22
  25
  27
  29
  32
  35
  38
  41
  44
  48
  52
  56
  60
  64
Retained Cash Flow (-), $m
  -3
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
Prev. year cash balance distribution, $m
 
  8
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  11
  4
  4
  5
  5
  6
  6
  7
  8
  9
  10
  11
  12
  14
  15
  17
  19
  21
  23
  25
  28
  30
  33
  36
  39
  42
  46
  49
  53
  58
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  11
  3
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  5
  5
  5
  4
  4
  4
  4
  3
  3
  3
  2
  2
  2
  1
  1
  1
  1
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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Lifeway Foods, Inc. (Lifeway) is engaged in the manufacturing of probiotic, cultured, functional dairy health food products. The Company is engaged in the sale of fermented dairy products, which are produced and are sold to consumers through a network of distributors and retailers in the United States. Through its distributors, the Company also sells its products to retailers in Mexico, Costa Rica, Dubai, Hong Kong, China and the Caribbean. The Company's primary product is kefir, a dairy beverage similar to but distinct from yogurt, in various flavors and in various package configurations. In addition to the drinkable products, Lifeway manufactures Lifeway Farmer Cheese, a line of various farmer cheeses. Kefir also serves as a base for lower-calorie dressings, dips, marinades, soups or sauces and as a basic ingredient in other home-prepared foods. Recipes are made available through the Company's Website. The Company also markets and sells its ProBugs line of drinkable kefir.

FINANCIAL RATIOS  of  Lifeway Foods (LWAY)

Valuation Ratios
P/E Ratio 56.8
Price to Sales 1.4
Price to Book 3.6
Price to Tangible Book
Price to Cash Flow 34.1
Price to Free Cash Flow 85.3
Growth Rates
Sales Growth Rate 4.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 50%
Cap. Spend. - 3 Yr. Gr. Rate -17.8%
Financial Strength
Quick Ratio 9
Current Ratio 0
LT Debt to Equity 12.5%
Total Debt to Equity 14.6%
Interest Coverage 0
Management Effectiveness
Return On Assets 4.6%
Ret/ On Assets - 3 Yr. Avg. 3.6%
Return On Total Capital 5.6%
Ret/ On T. Cap. - 3 Yr. Avg. 4.3%
Return On Equity 6.5%
Return On Equity - 3 Yr. Avg. 5.1%
Asset Turnover 1.9
Profitability Ratios
Gross Margin 28.2%
Gross Margin - 3 Yr. Avg. 25.9%
EBITDA Margin 7.3%
EBITDA Margin - 3 Yr. Avg. 6.3%
Operating Margin 4.8%
Oper. Margin - 3 Yr. Avg. 3.9%
Pre-Tax Margin 4.8%
Pre-Tax Margin - 3 Yr. Avg. 3.9%
Net Profit Margin 2.4%
Net Profit Margin - 3 Yr. Avg. 1.9%
Effective Tax Rate 50%
Eff/ Tax Rate - 3 Yr. Avg. 50%
Payout Ratio 0%

LWAY stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LWAY stock intrinsic value calculation we used $124 million for the last fiscal year's total revenue generated by Lifeway Foods. The default revenue input number comes from 2016 income statement of Lifeway Foods. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our LWAY stock valuation model: a) initial revenue growth rate of 3.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for LWAY is calculated based on our internal credit rating of Lifeway Foods, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Lifeway Foods.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of LWAY stock the variable cost ratio is equal to 59.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $45 million in the base year in the intrinsic value calculation for LWAY stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Lifeway Foods.

Corporate tax rate of 27% is the nominal tax rate for Lifeway Foods. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the LWAY stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for LWAY are equal to 19%.

Life of production assets of 12.5 years is the average useful life of capital assets used in Lifeway Foods operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for LWAY is equal to 8.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $48 million for Lifeway Foods - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 16.277 million for Lifeway Foods is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Lifeway Foods at the current share price and the inputted number of shares is $0.2 billion.

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COMPANY NEWS

▶ 5 of the Best Stocks Under $10 for 2017   [Oct-05-17 01:57PM  Zacks]
▶ Lifeway posts 2Q profit   [Aug-14-17 11:01PM  Associated Press]
▶ Lifeway Announces Final Results of Self-Tender Offer   [Aug-02-17 01:19PM  GlobeNewswire]
▶ ETFs with exposure to Lifeway Foods, Inc. : June 8, 2017   [Jun-08-17 01:45PM  Capital Cube]
▶ ETFs with exposure to Lifeway Foods, Inc. : May 23, 2017   [May-23-17 12:56PM  Capital Cube]
▶ Lifeway posts 1Q profit   [May-18-17 06:04PM  Associated Press]
▶ Lifeway posts 4Q profit   [Apr-10-17 09:34AM  Associated Press]
▶ LD Micro Index Reconstitution as of February 1, 2017   [Feb-01-17 09:45AM  Accesswire]
▶ New Strong Sell Stocks for December 22nd   [Dec-22-16 07:44AM  Zacks]
▶ New Strong Sell Stocks for November 29th   [Nov-29-16 09:15AM  Zacks]
▶ Lifeway Foods Launches Kefir in Ireland   [Oct-17-16 08:00AM  GlobeNewswire]
▶ Top 5 Dairy Stocks of 2016 (WWAV, LWAY)   [Sep-10-16 01:00PM  at Investopedia]
▶ Stratford School Adds Lifeway Organic Kefir To Menu   [Nov-16  03:33PM  PR Newswire]
Financial statements of LWAY
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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