Friday, November 20, 2009

Long Idea: G. Willi Foods (Ticker WILC), It Ain't Just Kishka

What they do: G. Willi develops and distributes kosher food, mostly in Israel but is starting to grow in the United States. They also own 51% of Shamir Salads which makes hummus and is the #3 market share humus maker in Israel.

Look, before we go on I know you're all thinking "What a stupid name for a fucking company" but need I remind you of Yahoo! and Dick's? Sure G. Willi sounds like something a 12 year old says when he gets boner for no reason (and yes I am starting off this analysis with a joke about adolescent penis, so it may be too high brow for most of you, but stick with me), but it comes from the founder/CEO's name which is Williger. Just be lucky his last name wasn't Whizzberg or Fuckfacestein.

As an aside, Money McBags is going to be making many Jewish jokes in the proceeding paragraphs but he is Jewish so it is allowed (His great great grandparents changed their name from McBagberg simply to McBags when they reached Ellis Island), just like Chris Rock is allowed to make african-american jokes and Robin Williams is allowed to make gay jokes. You can make fun of your own kind, so please keep that in mind.

Why Money McBags likes them:

1. Oy vey are they are cheap, we're talking wholesale prices: Honestly, this stock is cheaper than an AIDS ridden whore in a bangkok brothel (and Money McBags loves any destination that is also a command). WILC has an equity market value of $59MM (Money McBags will be using $US figures), $29.5MM in cash and equivalents, and no debt. So an enterprise value of $30MM.

In the first six months of this year they earned $.27 per share. This past quarter, they earned ~$.33 per share (using $1/3.785 New Israel Shekels to translate). However, that $.33 is a bit misleading. Included in their income statement was a one-time capital gain of ~$1.38MM. If you take that one time gain out, their EPS was really closer to $.17. Still, it means they have earned $.44 in 9 months.

If you take the current run rate of $.17 and say there is no seasonality (the company says there isn't), and assume the company is in steady state (which it isn't, more on that later (huhuhuh, I said moron)), that is an annual run rate of $.68. The stock is at $6 including the 50% cash. So it's trading at ~8.5x earnings or ~4.5x earnings not including the cash. Honestly, that is so cheap it's like buy one get one free and you know how us yids like things wholesale. Most packaged goods companies trade at ~14x-15x eps so this is a huge discount (and as you'll see later, there probably should be a discount, but not to these levels).

But let's not just look at EPS, let's look at EBITDA which is a better measure of the company's operating cash flow without having to worry about financing decisions. In the first 9 months of the year, the company has earned ~$5.7MM in operating income. Adding back depreciation of ~$300k per Q, you get EBITDA of ~$6.6MM in the first 9 months. Assuming that is a base case run rate, that is ~$8.8MM annual EBITDA and remember the enterprise value is ~$30MM. I am no maffmatecian (though I will flaunt my Finance MBA when the negotiations for "happy endings" come up), but that is about 3.5x EV/EBITDA. You know what else sells at 3.5x EV/EBITDA? Dirt.

2. It's not just kosher food, it's for fat people, and there are alot of fat fucking people: First of all, I know what you're all thinking, the kosher food market has to be smaller than Lindsay Lohan's panty drawer because Jews make up less than 1% of the world's population. While the Jews are a very small population, they are not the only ones who eat kosher food.
First of all the company estimates the kosher food market in Israel is ~$13B and growing in mid-single digits whereas the kosher food market opportunity in the US is at $14B with global growth of 15%.

Secondly, only 20% of their US customers are Jewish. The rest are Muslim, 7th day adventists, Scientologists, and Mickey Rourke (perhaps not scientologists, but there is no real data). People perceive kosher food as being better quality, I mean after all a rabbi blesses the food and you've never met a dirty rabbi, have you? Kosher food is playing in to the whole organic/food quality craze and it's just starting to grow shelf-space.

And here's the best part. G Willi is different because their food is both Kosher and low fat. They have engineered their food to take the fat out of it, something other kosher food providers have not done. The example they like to give is that parmagiano cheese requires some sort of pork enzyme to make it parmagiano (and to be clear, Money McBags is anti-porking enzymes, but to each their own). So in order to make parmagiano cheese kosher, they had to re-engineer it and by re-engineering it, they also made it non-fat.

So not only do you get to play the better food craze, but you get to play the "there are a lot of fat fucking people craze." Most of the US health care costs are caused by fat people, they're everywhere and their weak little hearts keep giving way under the intense pressure of bloated internal organs and ginormous intestines. It's a fact. So not only does G. Willi address this growing segment of people (pun intended) but no other kosher food company in the US does so. Go to your local Supermarket and if you are not in the midwest or the south, you'll likely see a small kosher section and all it will have are the classic Jewy foods that no one eats (except Money McBags) like Gifelte Fish, Matzo, and horseradish. There is a wide open opportunity for G. Willi to come in with regular food that is perceived to be better (because it is kosher) and non-fat. Even the nazis would probably be ok with that.

and here is where it gets good...

3. They are negotiating private label deals with 4 to 5 large US supermarkets: They just put their noodle soups in over 700 US grocery stores, but for the past year they have been negotiating with 5 major carriers (Whole Foods is one that has been mentioned) for those stores to private label G. Willi's low fat kosher products. The stores love it because they get better margins as they can charge a premium price for kosher food and G. WIlli loves it because they don't have to pay any kind of slotting fee or do any advertising. Hey Whole Foods, you want a store brand kosher parmagiano cheese? Cut me a check and it's all yours. Done and done.

Management thinks that by the end of 2010 deals like this will cause US sales to be 50% of company sales. US sales are currently 10% and the company estimates their Israel business will grow mid single digits, so if you stop and think about it, they are estimating sales to double by the end of 2010. From point 1 we saw they are cheap at their current run rate, but if they sign these deals to near double revenue (and they say the net profit margins will be the same or better), then you have a doubly cheap company. And what is double really fucking cheap? I think it's really really fucking cheap. Or maybe really fucking fucking cheap.

4. Hummus hummus everywhere: Have you been to your local supermarket store lately? There are now like 5 hummus brands. One of them, Sabra Salads, Pepsi bought 50% of two years ago. Management from G. Willi has estimated that Pepsi paid $100MM for Sabra and Sabra was the #1 market share in Israel with ~45% share. G. Willi recently took a 50% stake in Sabra competitor Shamir Salads and paid only ~$2MM for a company that has ~7% market share in Israel. There is obviously a big difference between 45% market share and 5%-10% market share and it's not 100% clear if Pepsi paid $100MM for Sabra or that is what they paid for 1/2 of Sabra or what the exact deal was, but the numbers are directionally correct. So G. Willi got a seemingly good deal on company in a market where there is alot of growth as Pepsi wouldn't be buying in if they didn't think people liked themselves some hummus (and by the way, if you say "hummers" with a thick Boston accent, it sounds like hummus, just an fyi in case you are a lady and run into a Boston meathead asking for a hummer. Hint, you might want to leave the pita bread in the cupboard). The point is, G. Willi now has this hummus brand which they are intent on bringing to US supermarkets in the next 1 to 2 years, and they probably bought it on the cheap.

5. Management is with you and fixing their margins: Management owns 70% of the company and is focused on the bottom line. They recently divested two subsidiaries, one a danish cheese/milk provider as they were simply "schlepping" product for them (and yes on the call, the CEO said they are not schleppers. And if you're keeping score at home, he had me at "Schlep"). Those subsidiaries were impacting gross margins so they were sold for the same price at which they were purchased. As a result gross margins have gone up from low 20% to 32% (though 25%-27% is the stated run rate).

6. The Protocols of the Elders of Zion: Ok, Money McBags is 99.6% sure this is fictitious, as he has never been asked to join, but in the .4% chance it is real, wouldn't it be good to have them on our side?

Why you need to be wary:

1. It's an Israeli company: Like all foreign companies, who the fuck knows what is really going on there. Plus as a Jew, Money McBags feels confident to say that doing business with Israelis is the worse than having your balls licked by a woman suffering from xerostomia (though not as bad as doing business with Mormons). Not only that, but war breaks out in Israel more often than Dane Cook tells an unfunny joke, so one can never be too sure about WILC's operations being safe. This company should really be private but they feel that the US listing helps them get US business.

2. It's not just Israeli, it's small and illiquid: You know what no one gives a shit about other than tennis? $50MM companies with no float. WILC trades fewer than 5k shares per day so it is hard to build a position for anyone other than a small investor. It's less liquid than a burrito shit.

3. They aren't known by the street and need to figure out how to communicate with investors: There is no sellside coverage, which Money McBags usually likes but this company is also very green at reporting. Money needed a magnifying glass and a fucking translator to figure out exactly how much money WILC earned in $US this last Q. Hey guys, just fucking give me all of the quarterly numbers in $US and take out the fucking one-timers like the capital gains.  Seriously, they communicate worse than an armless Helen Keller (quick oldie but goodie:  Why was Helen Keller's leg yellow?  Her dog was blind too.  Thanks, I'll be here all day).  Oh yeah, their topline shows a revenue decline of 2% but when prodded on the call, management said Q3 2008 included $10MM in revenue from a subsidiary they no longer have. It's unclear why this wasn't in discontinued operations, but it's also unclear why people listen to country music, so fuck if I know. Either way this should have been made clear in the release. The other thing they didn't make clear in the release and marginally clarified on the call was the gross margin improvement. 6% of the improvement was due to the dollar decreasing against the shekel, the other 6% was selling off lower margin subsidiaries and some cost improvement. So instead of the 32% gross margin they earned this Q, a 25% to 27% is more of a steady state (should the dollar appreciate back to where it was). It would be great if this had all been in the fucking release instead of making me do actual work. I get paid to ask questions, not to fucking have to think, you got that G Willi Willger?

Downside Scenario:

Let's assume the five things that could go wrong for this company do go wrong:
1. The dollar immediately appreciate and the exchange rate goes back to 4.2 NI/$1, causing gross margins to drop to 26%.
2. Their deals with US Supermarkets never materialize, like all of Money McBags hopes and dreams.
3. They spend $5MM on a distribution plant in the US for Shamir Salads and that has less success than Dexter Manley in a spelling bee.
4. No growth in israel.
5. War breaks out in Israel.

Well the downside for point 5 is probably $0, but war could break the fuck out anywhere so Money McBags is going to turn a blind eye to that (assuming he can find Stevie Wonder and have him slightly turn his head).

As for the other four occurences, if those happen, WILC will likely earn somewhere around $.05 per share a quarter or $.20 annualized. Assuming they blow $5MM on a plant, that would leave them with ~$2.40 a share in cash and if they trade at 10x (a 33% discount to peers), that would yield them an equity value of $2.00 + $2.40 in cash for a $4.40 price. So our worst case scenario downside (assuming no war) is ~25% but the likelihood of that is less than 5%

Base Case Scenario:

1. Dollar appreciates a bit (though with about a gajillion dollars having recently been printed, the dollar has as much chance of appreciating as Vern Troyer does of winning the high jump at the 2012 Olympics) thus bringing margins down slightly.
2. US sales don't begin until late 2010.
3. Israel has modest growth.
4. They spend $5MM on buying a US facility for Shamir Salads.

In this scenario, they should be able to earn at least what they did last Q with a decrease in margins being made up for by Israeli growth and some US private label business coming to them. So let's say they can earn at a $.17-$.20 quarterly rate which we'll call $.75 annually.

Throw a 12x multiple on that (discounting them because they are small and Israeli, and Money McBags will keep his Golda Meir jokes to himself) and add back the cash and you get a stock worth ~$11.50 or almost twice it's current price.

Upside Scenario:

1. Margins stay where they are.
2. The US business grows to be 50% of revenues by the end of 2010
3. Israel business grows 8%
4. Shamir Salads takes off.

If that happens, this is lobster tails and blow jobs for everyone involved. That is the valuation.


WILC is a ridiculously underpriced company that only needs business to remain as it is to double from it's current valuation. You can simply view their growth prospects as an option and give Money McBags some love when you cash out 2x richer. Mazel Tov bitches.

Note: For purposes of full disclosures, Money McBags has a personal long position in WILC as of this post (he also would like to have a personal long position in Faye Reagan). For other purposes of full disclosure, Money McBags loves vagina. And as always, while Money McBags loves making money, everyone is wrong from time to time (some just less frequently than others), so do your own work.

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