Sector Watch: Healthy investments
With consumers worldwide spending nearly $67 billion last year on nutraceuticals, Lifeway Foods (Nasdaq: LWAY) and NutraCea (OTCBB: NTRZ) might be smart investments to make within this fast-growing market.
Nutraceuticals (naturally derived products that have biologically therapeutic effects on humans and animals) provide a cost-effective health-care alternative focusing on wellness rather than illness. Unlike pharmaceuticals, which must overcome many regulatory barriers and typically require years of clinical trials and hundreds of millions of dollars in research and development spending, nutraceuticals face few such restrictions. As a result, these products can be brought to market much more quickly and far less expensively.
At present, more than 40% of Americans are using alternative medical therapies, including nutraceuticals, and these products are gaining market share from more traditional health-care sectors. Nutraceutical sales are expected to grow two-to-three times faster than the overall food industry, making both Lifeway Foods and NutraCea worth looking at.
Like other companies in the nutraceutical space, Lifeway Foods is experiencing rapid growth as a result of changing American perceptions regarding alternative health care, better understanding of the relationship between diet and disease and growing interest among baby boomers in products that can reverse the effects of aging.
Lifeway Foods is a leading supplier and marketer of organic kefir, a dairy beverage that contains active probiotic cultures thought to improve digestion and overall health. Most yogurts contain two or three of these healthful cultures; kefir contains ten.
Lifeway offers 12 different kefir flavors and markets to the Hispanic community with a drinkable yogurt called La Fruta. The company has secured distribution for its products through Whole Foods, Ruddick’s, Harris Teeter, Supervalue, Jewel, Dominick and Safeway stores.
During the first six months of 2007, Lifeway’s sales increased 51% year-over-year to $18.7 million from $12.3 million, fueled by a 29% increase in kefir sales and a gain on the sale of two non-core product lines. Net income grew 54% year-over-year to $2.5 million, or $0.15 per share, from $1.6 million, or $0.10 per share. Even more impressive was the fact that the company generated these robust profits despite near-record-high milk prices. To meet surging production, Lifeway is ramping up production and expanding its physical plant.
On Tuesday’s closing, Lifeway shares were down $0.25, or 1.48%, at $16.62. Over the last 52 weeks, shares have ranged from $6.53 to $17.75. Analysts expect this company, which has been on Fortune magazine’s 100 fastest-growing small businesses list for three consecutive years, to produce growth exceeding 45% this year and next year. Our $20 price target for Lifeway shares is 25% above the recent share price.
Another key player in the nutraceutical market, NutraCea, owns a proprietary technology for stabilizing rice bran and producing rice bran foods and supplements that provide health benefits for humans and animals. Stabilized rice bran is a good source of antioxidants as well as B-complex vitamins and beta-carotene. Rice bran, the outer brown layer of the rice kernel removed during the milling process, contains 65% of the rice’s nutritional value. However, raw unstabilized rice bran deteriorates rapidly, limiting its usefulness as a food.
NutraCea has developed a process for stabilizing rice bran and is converting millions of tons of rice bran into cash that would have been sold as animal feed or simply thrown away a few years ago.
During the first six months of 2007, NutraCea expanded revenues 89% year-over-year to $15 million from $8 million. Net income (excluding a gain on settlement) grew to $505,000 in the first six months of 2007, from $166,000 in the same period one year ago.
Global demand continues to far exceed the company’s production capacity. In the past year, the company has increased its production capacity four-fold, with plans for eight-fold capacity growth during 2008, introduced several new products and begun its international expansion through a joint venture in Southeast Asia–a region that produces ten times more rice bran than the United States and the European Union combined.
On Tuesday’s closing, shares of Nutracea were up $0.07, or 5.22%, at $1.41. Over the last 52 weeks, shares have ranged from $1.15 to $5.04. Analysts are forecasting NutraCea will experience six-fold growth next year and longer-term growth averaging 40% annually. Our $3 price target for these shares is more than twice the current share price.
