A Taste of Fine Wine

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Nov 23, 2014
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We welcome back contributing editor Glenn Rogers who recently returned from a few days in one of my favourite places, California's beautiful Napa Valley. When he is not indulging in fine wine, Glenn is a successful businessman, entrepreneur, and investor who held senior executive positions in both Canada and the U.S. He lives with his family south of Los Angeles. Here is his report:

I just spent the last few days in California's famed Napa Valley, tasting wine, eating too much, and then tasting more wine. The weather was perfect and we had the opportunity to tour a number of the privately held smaller wineries where economics are trumped by passion and craft. One of the wineries we visited was Screaming Eagle, which normally does not offer tours or tastings and whose limited output is in such demand that there's a lengthy waiting list just for the privilege of buying a bottle. Their wines are, as you might imagine, excellent, but little-known Gargiulo Vineyards next door offers vintages that are almost as good at half the price. Tastings are available by appointment so if you plan to be in Napa make it a point to go.

It takes nearly eight years from the time the vines are planted, the grapes harvested, and the wine perfected and bottled before the owners see any chance of a return. Despite all that, a number of wealthy individuals continue to invest heavily in the equipment and real estate necessary to bring wine to market.

Just to give you an idea how much it costs to be become a wine maker, Napa wine acreage can sell for as much as $2 million per acre and that's just for raw land. It doesn't include all the necessary equipment that would-be estate owners have to acquire before they can really start making wine.

Traveling around Napa at this time of year is a great way to spend a few days and I'm going through the necessary detox so my liver can get somewhat back to normal. Just so I can prove that wasn't all fun and games, the trip got me thinking about the wine business in general and where the investable opportunities might be.

It turns out that in addition to the small batch artisanal producers there are a number of large companies that will give you significant exposure to the production of wine. The three big ones are British-based Diageo (NYSE: DEO), Brown-Forman (NYSE: BF.B), and Constellation Brands (NYSE: STZ). We have written up Diageo and Constellation here in the past but I thought I would revisit Constellation since they seem to have the broadest exposure to wine whereas the other two companies are more focused on spirits like gin, rye, Scotch etc.

The other thing I like about Constellation is that it has broad exposure to beer as well. There's an old saying in the wine business that "it takes a lot of great beer to make great wine". Sounds contrarian but it's actually quite logical. Wine making is hard work and a cold beer goes well at the end of a long day in the vineyards.

Let's start with the big picture. Last year, Morgan Stanley suggested that the wine industry would experience an under supply of nearly 300 million cases per year. That is despite the fact that there are one million wine producers globally making nearly three billion cases of wine every year, half of which comes from Europe. Global production fell by 5% last year, which is the lowest level since 1960s, due primarily to bad weather in France and Argentina.

Another fun fact from Morgan Stanley is that the United States consumes 12% of the world production but makes just 8% of the wine and U.S. consumption continues to rise at a slow but steady rate.

But the real source of new global consumption is from China. The Chinese are developing an increasingly sophisticated taste for wine although they produce very little of it domestically.

Constellation has more than 100 brands selling worldwide in nearly 100 countries. They have facilities all over the globe so there is a good spreading of risk, thus reducing exposure to any one region. You will be familiar with the number of their brands that include Robert Mondavi and Clos du Bois (both California), Inniskiliin (Ontario), Kim Crawford (New Zealand), and many others. There are a number of famous beer brands as well, most famously Corona and Pacifico. Canadians will be happy to know they also have Black Velvet Canadian Whiskey.

This is a big company with annual sales of $5.4 billion (figures in U.S. dollars), generating free cash flow of more than $600 million per year and net income of nearly $2 billion. These numbers are up significantly from the from the year before due in part to the acquisition of Crown Imports, a very large beer business, that nearly doubled the size of the company. Constellation is now the largest imported beer company in the U.S., the largest premium wine company in the world, and number one in retail dollar sales growth of all the top beverage alcohol suppliers. Their Kim Crawford brand alone sold over one million cases globally and their beer division grew market share in 48 states last year. Corona Light is the best-selling imported light beer in the U.S. with more than 13.5 million cases sold in the last calendar year.

Another thing I like about this trade is that at this time of year alcohol beverage stocks tend to outperform the general market as we go into the two big U.S. holidays of the year, Thanksgiving and Christmas. Given the dramatic decline in oil prices in the resulting drop at the gas pumps, my guess is that consumers will be celebrating with lots of beverages. Also, the generally improving economic conditions should put people in a festive mood as we go into the holidays.

Action now: We are reinstating Constellation Brands as a Buy with a target of $105. The shares closed on Friday at $93.76. This stock does not pay a dividend so this is strictly a capital gains play.