Lifeway Foods Inc. ( LWAY - Snapshot Report ) , which manufactures dairy and non-dairy health food products, posted earnings of 9 cents per share in the third quarter of 2012. The result fell short of the Zacks Consensus Estimate by a penny, but comfortably beats the year-ago quarter earnings of 6 cents per share.

Gross sales in the quarter rose 16.0% year over year to $22.5 million, driven by higher sales and increased customer acceptance for its flagship product ‘Kefir’ as well as other product lines including Bio Kefir and ProBugs organic Kefir for kids. Net sales also jumped 16.0% to $20.6 million.

During the quarter, gross profit enhanced 18% to $7.5 million and gross margin was flat at 33%, attributed to a 20% dip in conventional costs, the largest ingredient for the company, partially offset by a 10% hike in the price of milk.

Operating expense nudged up 13% year over year to $5.4 million, primarily due to higher general and administrative expenses particularly related to increased investments in marketing and advertising for brand awareness as well as increased selling and amortization expenses. However, operating income surged 31.3% to $2.1 million, aided by an increase in gross margin.

Liquidity Position

As of September 30, 2012, Lifeway Foods had cash and cash equivalents of $2.4 million versus $0.86 million at September 30, 2011. Shareholders’ equity were $38.4 million versus $35.8 million in the year ago quarter.

Our Take

Lifeway continues to focus on distributing its flagship product “Kefir” along with the growth of business. Further, the company is also making efforts to keep enhancing shareholder’s value. However, the price of milk is likely to be a headwind through the rest of 2012.

We currently retain a Zacks #3 Rank on the stock, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term ‘Neutral’ recommendation.

However, one of its peers Feihe International, Inc. ( ADY - Snapshot Report ) currently has a Zacks #1 Rank, implying a ‘Strong Buy’ rating over the short term.