Lifeway's Growth Story Lives!

Shares of Lifeway Foods (NASDAQ: LWAY  ) are on a tear, up nearly a full $1 (or 8.3%) since reporting earnings last week. But is the price spike justified? Let's find out.

Reporting on Friday, Lifeway gave investors updated information on both its fiscal fourth-quarter 2012 performance, and on full-year 2012 as well.  Let's focus on that latter report giving a broader picture of how the company's doing. In fiscal 2012, Lifeway:

Grew its sales 16% to $81.4 million Expanded its gross profit margin earned on these sales to 34% Grew operating profits 74% On the bottom line, scored $0.34 per share for full-year earnings, a "record" total -- and twice what the company earned in 2011.

Going forward, CEO Julie Smolyansky promised shareholders even stronger results in the fiscal first quarter (and the quarter having just ended, she should be pretty confident of hitting those targets). According to Smolyanksy, first-quarter 2013 sales will be up 30% over first quarter 2012, an acceleration from the 24% sales growth experienced in fourth quarter 2012.

Probably the best news Lifeway had to report, though -- at least, to this Fool's mind -- was that the company has remained true to its word about focusing on "managing expenses" and "generating cash" from its business.

No longer just rushing full-tilt after higher and higher sales numbers (but not avoiding them, either), the company has doubled down on efforts to make these sales pay. Free cash flow at Lifeway approached $5.2 million in 2012, or literally twice the $2.6 million the company threw off in 2011.

Valuation
Of course, this does still leave the company trading for a valuation of 39 times that free cash flow (or 36.5 times GAAP profit, if you prefer that flavor of "earnings"). Most analysts doubt Lifeway's ability to keep on doubling its profits year after year, and posit a 25% long-term growth rate instead. That being the case, while I applaud the company's performance, I still can't countenance the valuation on Lifeway stock today.

Long story short, the company's going great guns -- but the stock is overpriced.

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