I'll Drink to This Company

05/14/2013 9:00 am EST

Focus: GLOBAL

This Canadian wine business is booming, but there's still room for investors to get their fill, writes John Deman of the Investment Reporter.

Andrew Peller (Toronto: ADW-A) is a beverage stock we regularly examine on The Back Page.

Since we published our December 14 issue, the shares have jumped by 22.5%. Even so, the producer of Canada's top-selling wines remains a nicely-priced buy for more long-term gains and attractive dividends that occasionally rise.

In the nine months to December 31, Andrew Peller earned $15.6 million, or $1.12 per Class A share. This was up by 14.3% from $13.6 million, or 98 cents a Class A share, a year earlier. Sales grew more than all costs as a group. President and chief executive officer John Peller says, "We expect to see another record year of growth and profitability."

Andrew Peller did less well if you exclude after-tax gains and losses on derivative financial instruments and other expenses. In this case, the company earned $14.7 million in the first nine months-up by only 2.8% from $14.3 million a year earlier.

In the first nine months of fiscal 2013, the company's sales climbed by 4.4%, to $226 million. It notes that its sales have risen in 41 of the last 43 quarters (or 10.75 years). Andrew Peller credits the sales increase to a number of factors:

  • A licensing agreement with the Wayne Gretzky winery
  • The acquisition of Cellar Craft
  • New product launches such as Skinnygrape, Canada's first low-calorie wine
  • Higher sales of premium wine through provincial liquor boards
  • Growth in sales at its own stores
  • Strong export sales of its award-winning ice wines. New business with Sunwing Vacations is raising its exports to the tune of 284,000 bottles over the winter months.

In the first nine months, costs as a group rose by 3.5% to $204 million. The cost of goods sold and administration rose more than sales. But this was offset by lower amortization of plant and equipment used in production plus lower interest costs and other financing costs. Selling costs rose less than sales. With costs up less than sales, the company's earnings increased.

Cash flow rose by 5.9% to $31.3 million. This exceeds total net investment of $9.8 million and dividend payments of $3.8 million. The excess cash flow gives the company the means to service and repay its debt. Its somewhat aggressive net-debt-to-cash-flow ratio of 4.6 times is likely to come down.

Peller says, "We expect continued strong growth going forward." This partly reflects the launch of new products-like its new Crush wine. Also, wine sales are on the rise. Some studies have found that moderate wine consumption may reduce the incidence of heart attacks and cancer.

In the year to March 31, we expect Andrew Peller to earn about $1.15 a share. That's up sharply from 93 cents a share last year. It remains a buy for long-term gains and attractive dividends that can occasionally rise. With so much of management's money in the company, it's in its own interests to remain successful.

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