It's not easy for a company when the cost of its inputs is increasing by more than 20% and there's only so much of that it can pass along to the final consumer. It's not easy for a company when the government has an established policy of using pre-existing tax, environmental or anti-monopoly laws in an exceptionally punitive fashion for the benefit of the ruling party's agenda. It isn't easy for a company when international investors are worried about your home country becoming militarily more aggressive.

Simply put, it isn't easy being Wimm-Bill-Dann (NYSE:WBD) these days.

With all of the above applying to this diversified Russian provider of dairy, juices and baby food, perhaps it's no wonder that the stock is barely hovering above its 52-week low.

Numbers Holding Up
I will grant that the stock market discounts expected future financial results, but the performance so far is still quite good. In the most recent earnings report, the company reported that revenue grew 26% in the second quarter, with growth in dairy, beverages and baby foods of 24%, 19% and 63%, respectively. Operating income rose 10% and EBITDA for the quarter rose more than 21%. (To learn more about this valuable performance measurement tool, read EBITDA: Challenging The Calculation.)

Now, it's time for the bad news. Growth slowed on a sequential basis and volumes were weak in both dairy (down about 9%) and beverages (flat). What's more, Wimm-Bill-Dann buys raw milk and juice concentrate for its products and prices of those products are rising sharply (raw milk prices were up 49% in the first half of this year). While the company has had some success in pushing along higher prices to the consumer, there's a limit to how far it can go, and there's always a risk of consumers trading down to save money.

Enter the Government
Navigating economic cycles is bad enough, but Wimm-Bill-Dann has added issues in dealing with the government. At the end of this year, a new law in Russia will force producers to stop using milk powder in drinkable milk (unless they label it "milk drink" instead of "milk"). No one knows how consumers will respond to "milk drink" on the shelves.

Second, and admittedly speculative, is the risk that Putin will seek to fight rising Russian food prices by means far less conventional than monetary or fiscal policy. In particular, investors should be wary of any official announcements of government "investigations" into pricing in the dairy, beverage or baby food markets. Investors in stocks like Yukos, Mechel (NYSE:MTL), and BP (NYSE:BP) may recall that "investigations" in Russia can have a rather different connotation than in Western countries.

A Real-Life Fear Factor
So, what's the bottom line with Wimm-Bill-Dann? On one hand, this company has the leading share in dairy in Russia, with Danone in second place; and this market is growing strongly. Wimm-Bill-Dann also offers a level of candor and disclosure that is superior to many American companies. In this company we also have a business that has been producing very solid returns on capital and trades at a pretty reasonable valuation.

On the flip side, there are the aforementioned problems with inflation and the risk of government interference. There's also an issue with competition, as Coca-Cola (NYSE:KO) and Pepsico (NYSE:PEP) are buying their way into the Russian juice market and Danone sits just behind the company in market share in the dairy business.

Bottom Line
Even with the prospect of larger players getting more involved in Russia, it's hard for me not to like the idea of Wimm-Bill-Dann shares around this level. There's no question that there are risks here, but the opportunities are substantial and the whole point of owning a diversified portfolio is to mitigate some of the idiosyncratic risks of individual stocks.

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  9. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  10. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!