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Author: leaderoftheback Three stars, 500 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 468  
Subject: Re: LWAY's bad quarter Date: 11/17/2007 2:58 PM
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Well Howard, you have touched on the greatest mystery...what drives milk prices? The answer is: all of the things that we would expect have an impact, except when they don't.

As you probably remember, 2006 saw huge increases in the cost of energy. The costs for farmers, processors, truckers all had to go up significantly. So how far up did that drive the price of milk? Not at all. In fact milk was relatively cheap all the way through December last year. That is another fact worth bearing in mind as you assess where earnings for dairy companies may go.

I find the reports from Julie slightly confounding. It's possible that I'm underestimating the percentage of organic milk usage, but 90% of the the kefir I see is conventional. They bought Helios but that's small potatas compared to the parent. I haven't noticed if what Trader Joes sells is organic or conventional. have you? I'd wager TJs is near their biggest customer. I hate to say it, but these 10-Q reports are a little too opaque. I can understand that they want to protect their trade, but I think we are missing key information or the data is being massaged.

Regarding dairy pricing in general and its relation LWAY in particular, based on a 30% top line growth and a big drop in profit, LWAY will remain a volatile stock. You got your dead cat bounce yesterday, but it will settle lower, quite possibly much lower. I would not be surprised to see it drop to between $5 and $8. If the 3rd quarter is going to be typical of the next few, 3cents earnings times 4 is 12 cents. A usually fabulous 40 multiple gets you a $4.80 stock price. Monkey with it from there. So far, the price of milk is not going down appreciably. If it took until November to hear about the impact of prices that rose like a Saturn V in January through March, continued to rise further until the end of Summer, then just leveled off; here we are at the end of the year. That's easy calculus for the company's profit prospect, barring surprise announcements. It sounds like you've had your stock for a while. Personally I think you should hang on. There is no point being a trader and the company isn't going out of business. They can certainly raise their prices if they want to. There is no reason for panic (If I was one of those that paid $20.75 for it, well, maybe I'd consult my tax attorney).

Lastly, regarding competition, Dannone owns Stonyfield, which packs a 10oz organic drinkable yogurt that sells for about two bucks. That is not significant competition, in fact it would probably help LWAY. On the other hand, you have Nancy's, which is an Oregon company, highly regarded in the natural foods biz. They are packing organic quarts and half pints. This is some competition for LWAY, but not much. Again, I'd say it would only raise the profile of kefir in general, which should be good for LWAY, too. All 3 products are distributed by UNFI, which probably distributes almost everything that doesn't go directly to Trader Joes (which does not use distributors). This is certainly true in the east and I'd be interested to know if it's true elsewhere.

oh, really lastly, I suppose I should disclose that I do not currently own the stock. I bought in before the split and sold out at about eight bucks. I've kicked myself since (I should have at least hung on to the "free" half). I do hope to own it again.

Nice "chatting" with you all,

Randy
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