August 02, 2010 - 8:49am EST by
2010 2011
Price: 5.83 EPS $1.00 $0.00
Shares Out. (in M): 14 P/E 3.1x 0.0x
Market Cap (in $M): 80 P/FCF 0.0x 0.0x
Net Debt (in $M): -33 EBIT 0 0
TEV ($): 48 TEV/EBIT 0.0x 0.0x

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WILC (NASDAQ): $5.80/ Net Cash per shr $2.66/LTM EPS $0.82/ Organic rev growth 15%

G. Willi-Food International is Israel's largest food importer and also distributes food in the United States (revenues 80% Israel, 20% U.S.).  As is typical in this type of business over the long term, revenues have been very stable but growth has been low.  Currently, and for the foreseeable future, WILC's profile has changed and is growing organically at 15% as a result of entry into dairy and refrigerated salad products in Israel and new demand in the U.S. for their products.

What else good do you need to know about a food company trading at 3.8x LTM earnings (ex-cash) growing the top line organically at 15%?

  • Gross margins are rapidly expanding: The decision to get into dairy products has also been a huge boon to margins. GM 1Q'10 was 29.7% up 510 bps YoY. Management believes that margins are sustainable in the high 20s.
  • Earnings power is well in excess of previous years: WILC earned $0.75 last year and is on target to earn $1 in 2010 (op inc. up 40% 1Q YoY and same trends remain in place).
  • Private label Mediterranean salads demand in U.S. will be big LT business driver: Since the Strauss (the largest Israeli food company) sold a 50% stake in its Sabra (the refrigerated humus and med salads you see in every store with the red tops) business to Pepsi there has been large growth in this category and all of the large U.S. supermarkets are searching for private label. WILC is one of the top companies that can provide this. Given the opportunity, over the next few years it is actually conceivable to see the business shift to 80/20 in favor of the U.S.
  • Geopolitical risk is a positive: While not the most fun thing to talk about, WILC sells several pieces of the standard army ration boxes to the IDF and when there is war or threat of war, their warehouse gets emptied.
  • Net cash is understated: In 1Q some cash was opportunistically put into inventory and will come back in 2Q. Real cash/share is $3.25-$3.75.
  • Management (already large owners of stock) have recently acquired additional shares in a block purchase above the market price and have quietly made known their standing bid to buy more shares (in blocks) at the same price

So why does the stock trade here (in order of relevance)?

  • This company is small and illiquid and is simply not on anyone's radar (yet): Only 13.5mm shares are outstanding for a MC of less than $100MM with 53% owned by an Israeli publicly traded investment co (WLFD) controlled by management. To wit, the recent press release that management had acquired a block of stock for 3.6% above the market in a private transaction was greeted with 40k shares of trading and a stock that was flat on the day (you don't see press releases for small cap stocks you don't know about!).
  • WILC is having a hangover from a bad secondary deal done in 1Q: WILC has been thinking about acquiring a small distributor in the U.S. to facilitate the large growth it foresees and a small investment bank convinced them it was in their best interest to raise cash ahead of this. They did a terrible deal allowing the bank to price 3.2mm shares at $6.05 (having closed the previous day at $6.98) putting the stock into flippers hands who did no work on the business. Whatever small amounts they had left has held the stock flat over the last few months (which may sound like a good outcome given the market performance and volatility, but keep in mind that this was over a period where they announced a blow-out quarter). Looking at the number of shares that have traded, this appears near an end.
  • A simple internet search will reveal a couple of lawsuits that the Company has been involved in over the last few years. A conversation with management or deeper work into the issues will reveal that these issues are resolved and have had no adverse affect on the business.

Odds and ends

  • WILC does most of their purchasing in Euros and does essentially all of their sales in Shekels or Dollars. Management believes that margins can stay at their current level at the 1.30 level on the Euro. They don't have a practice (or desire currently) to hedge the Euro so they make more if the Euro goes down or less if it goes up.
  • Their offices and distribution facility in Yavne are held on their books at $6mm (with no debt against them). There is a new train line being built in Israel with a new large stop right across from them. Management has indicated that they have recently been approached by banks to do a sale lease-back at a value in excess of $25mm (they obviously are not interested given their cash position).
  • Management is not keen to waste the cash (most of it is theirs). If they don't find the right acquisition, they have indicated that they will return the cash to shareholders.


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