Crimson Wine Group (OTCQB:CWGL) is a producer of high end wines through its ownership of five wine estates. Crimson is unique in that it is the only publicly traded pure play luxury wine company. The largest US wine company, Constellation Brands (STZ), revenue per case is about $40 while Crimson's revenue per case was over $180 last year.
Crimson was spun out of Leucadia (LUK), before its merger with Jefferies. Spinning out Crimson allowed Leucadia's management to keep a greater than 18% interest in Crimson rather than diluting their ownership via the merger.
There are two ways to approach the valuation of Crimson Wine Group, on an earnings power basis or by valuing the individual wine estates. Regardless of which approach one uses the stock of Crimson Wine Group is significantly undervalued.
In March Crimson President and CEO Erle Martin told the Napa Valley Register that he plans to double in size to half a million cases and roughly $100 million in sales by 2016. In the most recent quarter (Q2) Crimson reported 31% revenue growth over the previous year, which is well ahead of its plan to double revenue in four years. This was especially impressive because the rest of the industry did poorly as record bad weather hurt wine sales in the second quarter. Crimson is especially sensitive to weather as they rely on visits to their wineries to drive sales. Thus far weather has been excellent in the third quarter and it would not be surprising to see the sales momentum continue or even accelerate.
In the longer term I expect gross margins to head from 51% in 2012 towards 60% as Crimson utilizes is full capacity. While 60% is unheard of for traditional wine companies it is the norm for well run, high end wineries (see NYT article and WVVI 10-Q). Crimson plans to increase production this year by 36% at existing facilities. This incremental production should have very high gross margins due to higher capacity utilization. The benefits of this increased production on gross margins should begin to be realized by the end of 2014.
Crimson has shown tremendous leverage on SG&A. Sales grew by 31% in the second quarter while SG&A expenses excluding public company costs rose by a mere 5%.
Crimson's $100 Million Goal
Crimson's goal of $100 million in revenue by 2016 seems conservative given recent growth rates. At $100 million in revenue Crimson should be able to earn at least $30 million in EBITDA and possibly as much as $35 million. If Crimson trades at its peers valuation the stock could reach $20 or higher.
Valuing Crimson Based On Assets
Crimson has a stated book value of $7.90. However, this does not take into account the value of two of Crimson's most valuable estates. Crimson acquired Pine Ridge in 1991 and Archery Summit was started in 1993. These two estates are carried for next to nothing on Crimson's book due to GAAP accounting. In 2001 these two estates were put on the market for $150 million as seen in this Wine Spectator article. It makes little sense that they are assigned almost no value.
Napa Valley estates trade at record prices and at significantly higher prices today than they did in 2001. It is estimated that the Araujo Estate in Napa recently sold for over $100 million. Araujo has 38 acres and produces approximately 6,000 cases a year. A second estate in Napa, Inglewood Estate, recently sold for an estimated $20 million. Inglewood has 30 acres and produces 5,500 cases. Pine Ridge, which is also located in Napa currently produces 80,000 cases a year and has 168 acres. Pine Ridge has an additional 46,000 cases of capacity. Archery Summit is the premiere estate in Willamette, Oregon. Archery Summit has 100 acres and produces 15,000 cases a year. I believe that $150 million is a conservative estimate for the combined value of Pine Ridge and Archery Summit.
Crimson's purchased its three other estates in recent years. Seghesio was bought for $86,000,000 in May 2011. Chamisal was bought for $19,200,000 in August of 2008. The purchase price of Double Canyon in 2005 and 2006 was undisclosed but I estimate it to be worth at least $10,000,000. The table below summarizes the value of Crimson's wineries:
Pine Ridge / Archery Summit
Seghesio Family Vineyards
By assigning a value of $265.2 million to Crimson's property & equipment and zero value to its intangible assets the book value becomes $329.3 million or $13.46 cents a share.
Crimson offers a generous margin of safety through its ownership in five valuable wine estates, with the upside of a rapidly growing high end wine business. If Crimson reaches its conservative goal of $100 million in sales it could be worth over $20. The downside is protected by over $13 a share in asset value.