Will-Bill-Dann (WBD): From Russia with love

"In Russia, as in many other emerging markets, a new crop of homegrown companies is on the rise," says global expert John Christy, editor of The Forbes International Investment Report.

He says, "While relatively unknown outside their home markets, these firms have proven to be worthy competitors against much bigger multinationals." Here's a look at Wimm-Bill-Dann Foods (NYSE: WBD).

"In a research report in March, the Boston Consulting Group (BCG) called these emerging companies 'Local Dynamos'. Wimm-Bill-Dann Foods was one of just three Russian companies to qualify for BCG’s exclusive list. 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 #3 player in beverages,mainly fruit juices,and it has the #1 market share for baby food in Russia.

"In developed markets, selling baby food and fruit juice is a mature,ifnot mundane business.But in Russia,these can still be considered relatively attractive growth opportunities.

"Per-capita consumption of fruit juice in Russia is considerably low when compared to former Eastern Bloc countries like the Czech Republic,and much lower than in developed Europe. 

"In 2007, WBD’s full-year revenue rose +38% to $2.4 billion. 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 of2008,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 two significant ways.

"First, there’s the obvious cost of transportation, which is expensive when transporting fresh products like milk 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 ofits 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.

"These efforts have helped WBD limit the damage, keeping gross margins roughly flat despite higher commodity costs. These are valid concerns, but I think they may be overdone, and they’re certainly not unique to WBD.

"There are a lot of global food and beverage companies 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."