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Author: RexFolio Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 468  
Subject: Re: value Date: 2/18/2004 11:41 AM
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Salongi,

It's possible that future earnings will be twice what the one analyst thinks as of last December. I wouldn't consider it likely though. But I think that making assumptions that deviate so far from Lifeway's 20-25% long term growth rate would be delving into speculation, which I'd prefer not to engage in.

Consider that the market is now asking investors to pay 48.5 times free cash flow for Lifeway's enterprise value. Why should investors hold LWAY at that multiple if they can buy Quality Systems at 22 times FCF for EV, or J2 Global for 20 times FCF for EV? Both firms are growing at a similar or faster long-term rate than Lifeway, both have similar or better margins than Lifeway, and both are in attractive, asset-light industries. To boot their bigger size makes either company more established, and either company's stock more liquid with smaller bid/ask spreads. With such alternatives it's simply not worth the risk to capital to hold LWAY at the current price.

I bought LWAY between $14 and $15 expecting the stable pre-February staircase pattern in the stock to continue based on the company's steady 20% growth. Back then the stock sold for an EV/FCF multiple in the mid-20s, which was fair given the opportunities and the stock's low beta, which promised lower than average volatility (hence the staircase pattern). At $28 the stock has both priced in a good portion of the growth over the next few years AND invited a higher beta on the stock in the future, courtesy of the soon-to-arrive short sellers and impatient flippers of the stock.

From my perspective there is a cost to volatility (whether that cost is ultimately realized or not) because of the risk that at any given moment, I may not be able to recover the expected value of my investment. If we take the expected value of an investment in LWAY as $28 per share, I'd have to evaluate my risk as fairly high.

Which in the final calculation is why I sold.


Cheers,
~RF
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