Feeding Little Ivan and Natasha

07/21/2008 12:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John Christy, editor of Forbes International Investment Report, says Russia’s largest food and beverage company serves a vast market and offers many, many opportunities.

There’s a lot more to the Russian market than the big producers of oil, gas, and other commodities.

In Russia, as in many other emerging markets, a new crop of homegrown companies is on the rise. While relatively unknown outside their home markets, these firms have proven to be worthy competitors when matched up toe to toe against much bigger multinational companies.

Wimm-Bill-Dann Foods (NYSE: WBD) is Russia’s largest food and beverage company. It has a whopping 76% market share for dairy products like milk and yogurt. It is the number-three player in beverages, mainly fruit juices, and it has the number-one market share for baby food in Russia.

In developed markets, selling baby food and fruit juice is a mature business. But in Russia, these can still be considered relatively attractive growth opportunities. Per-capita consumption of fruit juice in Russia is much lower than in developed Europe.

In 2007, WBD’s full-year revenue rose 38% to $2.4 billion. Earnings before interest, taxes, depreciation, and amortization (EBITDA), also up 38%, came in at $301 million. Net income for the year was $140 million, a 29% increase. The momentum continued into the first quarter of 2008, with revenue up 35%, driven by a 67% surge in baby-food sales.

Despite good fundamental performance, shares of WBD are off more than 30% since January. One of the culprits has been the sharp, global rise in commodity prices. WBD feels the pinch in the obvious cost of transportation across a country the size of Russia. Less obvious, but arguably more painful for WBD, is the high price for milk itself, an essential ingredient for many of its products.

There are a few things that WBD is doing to offset the pain, including locking in long-term contracts with farmers that supply its milk; using powdered milk, and even developing its own farms.

A lot of global food and beverage companies are feeling the pinch of the commodity cycle. But how many are delivering 30%+ EBITDA growth in a low-tech business like baby food? In my mind, the long run benefits of owning a well-managed, growing company like WBD outweighs any short-term panic over milk prices. French yogurt giant Danone is also bullish on WBD’s prospects over the long haul; it owns an 18% stake in the company.

Russia can be a tough place for outsiders to understand, and political risk is always fair concern. But there’s not a whole lot of geopolitics involved in the baby food business. As long as the country’s standard of living continues to rise, Russian babies—and their parents—will be consuming a lot more of WBD’s products for many years to come. (The stock closed above $101 Friday—Editor.)

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