G. Willi-Food International (WILC) is a company that is cheap by just about all metrics, easy to understand, obscure, sits on a huge net cash position, and does most of its business in a foreign country. All of these factors combined tend to create investment opportunities. Not here. This optimistic scenario is incredibly deceptive and ignores a poor track record and the huge benefit from exchange rates which is not exactly sustainable.
The company has growing revenue and profits. The company has introduced new products that will grow revenue and profits even more. They are a kosher food distributor mainly in Israel with a minor presence in the US and Europe that they are looking to expand. With a market cap of $101m, the company trades at 12x earnings, but has $50m in net cash, of which I'll venture $40m is excess, although that might be an understatement since a company with $100m in sales and $10m in inventory might not even need $5m in cash hanging around. Anyways, netting out the cash leaves the company trading at 7.5x earnings(6.25x if you net out all the cash), which is very low for a company that is growing and earns an 18% ROE adjusted for excess cash. Additionally, since it is 53% own by insiders, there is likely not enough liquidity to attract any large investors.
The dangle is the purported growth opportunities the company has, and the top line growth has certainly been strong over the years. Operating profit has been a lot more volatile though due to currency fluctuations since most of the products they distribute have to be imported, and Israel has had some wild currency fluctuations in the past 5 years. Net income and the cash balance have also received a huge boost from the strength of the New Israeli Shekel (NIS) as well. Bottom line growth from 2005-2010 has been helped by a 25-30% increase in the value of the shekel. While Allied Healthcare's growth was being masked by a weak GBP to the USD, G Willi's growth is partially being driven by currency fluctuations. Some might claim they like that exposure to foreign currency and diversification from the USD, but the benefit here is overstating some of the growth, which is a factor that should take precedence over currency diversification.
The cash/securities balance has definitely been helped by the exchange rate of the USD:NIS, but something else has helped the company grow its cash balance to 50% of the market cap. The ever pernicious practice of pointless share issuance. While one can quibble over the issuance of JNJ shares for Synthes or Kraft for Cadbury, there is an easy to understand explanation for it even if you disagree with the economics. In 2010, G. Willi issued 3.3m shares, increasing the share count by 32%. At $6/share, despite the stock previously trading for ~$7 prior to the announcement, it was done at a pretty steep discount to an already undervalued stock. The stated purpose was to fund working capital and general corporate expenses, but the company had no debt and $30m in cash and securities. Their reason doesn't hold up water when you compare the $30m in cash to $6m in net receivables (accounts receivable minus accounts payable) and $12m in inventory. They could have already doubled the amount of capital tied up in the business and had tons of cash left over. They didn't need an extra $19m (proceeds from 2010 issuance). They also issued shares in the 2 years from 2005-2007, raising share count from 8.6m to 10.2m through a private placement and warrants involved with that placement. Again, they had tons of excess liquidity then as well. These historical actions speak poorly of management and inspire no confidence. Additionally, WILC shares a bullish analyst research report on its website. It's by the people who underwrote the 2010 share offering and who also underwrote offerings for Universal Travel Group and China Agritech among many other dubious Chinese companies. Fool me once, shame on you. Fool me twice, shame on me.
One of the other reasons I've seen brought up for the share issuance was to acquire a US based distributor to leverage their hummus/Mediterranean food expertise. This is bunk. I'm a huge hummus fan. It's a pain in the ass to prepare on your own (you have to boil chickpeas for a while and don't even get me started on cleaning up the food processor afterwards), but tastes great with pita or crackers. I'm also a fan of using red pepper or onions, both of which have exceptional naturally occurring scoopable functionality and provide a nice flavor to contrast the hummus. I'm not sure G Willi's desire to expand into this area, my enjoyment of hummus, and the potential growth in this area can be reconciled as a reason to purchase the stock. And I think due to currency fluctuations and the fact that the company didn't earn its cash pile, one can't justify this as a "call option" for free with the stock.
Kraft owns the Athenos brand and Pepsi has a JV for its Sabra brand. They've put a lot of marketing muscle behind it. Athenos has arguably not done a good job flexing that muscle. This is more anecdotal, but Sabra has been giving out free samples + coupons at Penn Station in NYC, and doing similar promotional activity around the country. This will make the overall market bigger, but that doesn't mean WILC is going to capture any of it. I get Abraham's hummus, which doesn't have preservatives and cheaper than Sabra's ($3.99 vs. $4.49 if I recall correctly. I do know that I first tried it because it was cheaper). It's also markedly better. Hummus tastes best when it is fresh, so anything with preservatives, which I usually have nothing against, tends to be less tasty. I think that Abraham's is fairly local contributes. I wonder where WILC would fit in.
My point though is that there is plenty of competition (that link just names a few) out there in the hummus field already. Certainly WILC could get involved, but this isn't anything novel or exciting. That they would have to acquire a distributor in the US to do so already puts them at a disadvantage since I would say the field is already crowded. I'd also question the volume that could be achieved with generic brand hummus that WILC would supposedly supply. Additionally, a recent article in the WSJ will tangentially give you some additional flavor on the kosher food industry. The marketing appeal of kosher food is not something only WILC is aware of and will attempt to exploit. I'm unconvinced that kosher food is an investment angle to play, or that WILC would be a vehicle through which to do it. It's not such a tiny niche that food distributors in the US wouldn't waste their time on it. There are plenty of major brands that only produce kosher versions such as Coke. Even ignoring the fishy share issuance, I find the US/European growth potential unconvincing, although they have and will find growth from introducing new products in Israel.
When dealing with stocks that appear so dramatically and obviously undervalued, it becomes even more important to look for a reason why. I will admit that I was pretty convinced upon reading several bullish articles on the stock, but I took a moment to closely examine the stock and look at more than just the financials from the past 12 months. The share offering is doubly suspect due to the parties involved.
Previously it was my hope that by not enabling comments I would spur more substantive discussion via email with readers. It has been mildly successful, but I would prefer to engage in more dialogue with peers. As such, I've enabled comments. Keep it classy, and don't worry about offending me if you disagree. I would much prefer you disagree with me and will forgive ad hominem attacks since this is the internet after all (hopefully none of my articles have driven anyone to feel the need to attack me though).
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