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A Toast to Vintners
10/14/2005 12:00 am EST
"The wine business—a fragmented industry made up of many small wineries— has been the subject of a great deal of merger and acquisition activity," notes Paul Tracy. "Here are my two favorites: a global leader and a small potential takeover target."
"Constellation Brands (STZ NYSE) is the world's largest winemaker with a roughly 4% global market share. The firm has built its market-leading position mainly via acquisitions over the years, including its recent purchase of Robert Mondavi. Constellation's competitive advantages are two-fold: size and portfolio of brands. On the branding front, the company owns some of the world's best-known and most respected wine labels.
"Particularly valuable is the range of super-premium, expensive wines, such as Opus One which command upwards of $200 per bottle. Not only do such wines command premium prices, but they also have a loyal following and tend to remain in high demand even during sluggish economic times. Secondly, STZ sports an impressive global marketing and distribution network. This gives the firm a real leg-up when introducing new products or expanding existing brands into new markets.
"The most obvious source of growth for Constellation will come from leveraging recent acquisitions. For example, Mondavi is a very well known in the US, but less than one-tenth of its sales came from outside the US prior to the firm's merger with STZ. This offers a tremendous growth opportunity, as Constellation can push Mondavi through its existing international sales and marketing network, giving Mondavi wines instant access to millions of additional potential customers.
"Constellation Brands is surprisingly cheap given its outstanding track record. The company trades at just 14 times next year's earnings (fiscal year ended February 2007); meanwhile long-term growth is pegged at approximately 13%. In addition, STZ wins points for its extraordinary free cash flow generation. On a trailing 12-month basis, STZ generated more than $560 million in free cash flow, equivalent to a free cash flow yield of 10%.
"Willamette Valley Vineyards (WVVI NASDAQ) is a small Oregon-based winemaker. The company has a particularly strong lineup of Pinot Noir wines, a variety of wine that's seen rapidly growing popularity in recent years. Oregon, in particular, is known for its high-quality Pinots. Willamette's main competitive advantage stems from its high-quality, well-known wines. Several of the company's vintages have received ratings of more than 90 points out of a total of 100 from influential wine publications such as Wine Spectator and Wine Enthusiast.
"In short, the company has carved out a very solid brand reputation in a fast-growing and popular niche. As one of the largest winemakers in the region, the company is well positioned to capitalize on the growing popularity of Oregon Pinot Noir. The company first focused on distributing its wines in Oregon. But that's changing. The company has started selling wines directly to consumers around the country via its Web site. In addition, the firm is expanding its network of distributors to put its wines in front of more customers around the nation.
"Willamette is a very small company and is not followed by analysts yet. As a result, consensus earnings estimates aren't even available for the firm. Over the past three years, however, the company has managed to post revenue growth of roughly 25%. Earnings have grown at an even faster clip thanks to cost savings associated with direct distribution and economies of scale. With this in mind, we believe the firm could easily post earnings growth of between 25% and 30% in the coming years.
"On a trailing 12-month basis, the stock trades at 35 times earnings. Although at first glance that might appear expensive, when you factor in the firm's incredible growth potential, WVVI's valuation looks much more reasonable. Further, the stock's $25 million enterprise value, strong growth, and relatively low debt would make it an easy acquisition target for the likes of larger vintners such as Constellation looking to grab a foothold in the burgeoning Oregon wine-producing region."
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