Willamette Valley Vineyards: Waiting For The Grapes To Grow

My two main reasons for rating microcap vineyard Williamette Valley Vineyard, Inc. (WVVI) a hold is as follows:

1. Waiting for more production to come on-line. Here is an excerpt from the 2006 Q3 10-Q filed with the SEC:

“Demand for Willamette Valley Vineyards Pinot Noir and Pinot Gris continues to exceed available inventories.”

2. Waiting for the market reaction to cool off driven from the announcement that the CEO sold 10% of his stake in the company. Throughout December 2006, Founder and CEO James Bernau sold 65,570 shares at an average price of $7.02 representing approximately 10% of his outstanding shares. After the transaction, Mr. Bernau owns 618,176 shares or 12.9% of all outstanding stock.

Company Overview

Willamette Valley Vineyards, Inc. engages in the ownership and operation of vineyards and a winery in Oregon, and production and sale of wines. It produces and sells wine under the names of Pinot Noir, Chardonnay, Pinot Gris, and Riesling and Oregon Blossom types of wines. The company markets and sells its wines through a combination of direct sales at the winery; directly and indirectly through its shareholders; self-distribution to local restaurants and retail outlets in Oregon; directly through mailing lists; and through distributors and wine brokers. Willamette Valley Vineyards was founded by Jim Bernau in 1983 and is headquartered in Turner, Oregon.

5 Year Financial Trends

For the 5 year period of 2002 to 2006 [TTM], WVVI has achieved compounded growth rates of 19.5% on revenue and a 69.1% on income, this is the type of growth and leveraging that any investor is happy to see. As mentioned earlier, the topline growth has slowed down in the last 2 quarters because of supply constraints. As noted in the 10-Q from the 3rd quarter of 2006:

“Management continues to develop both short and long term wine grape and wine supplies to address this demand. This year's harvest aided our effort by producing higher quality and volumes, approximately 20% more than expected in tonnage.”

Stock performance

If you invested $10,000 on Jan 2nd, 2002 in WVVI common stock, your portfolio balance would be worth $34,763 or a 23.1% annual return, ~6.7x higher than the S&P 500 of 3.5%. WVVI has appreciated 36% in 2006 and is down (6)% in 2007 YTD through Jan 9th, mainly due to the negative reaction of the James Bernau selling 10% of his stake at $7.02 a share.

Value scorecard

WVVI has as average value scorecard capturing a passing mark on 3 of the 8 indicators. Of the 5 failing marks, Section D (Price to Book Value) needs to be adjusted for the higher current value of the vineyard and land that WVVI currently owns, improving my valuation model by $3.0 million. Company currently does not pay a dividend.

Growth Potential

My current valuation model is resulting with the common equity of WVVI to be valued at a market cap of $28.4 Million or $5.94 per share.

Here are my assumptions:

Sales Forecast with a 2006-2011 CAGR of 5.9% in the following per year, showing an annual incremental growth rate of 3% per year:

2006 FY $15.1 Million, 10% vs. PY
2007 $15.1 Million, 0% vs. PY
2008 $15.5 Million, 3% vs. PY
2009 $16.5 Million, 6% vs. PY
2010 $17.9 Million, 9% vs. PY
2011 $20.1 Million, 12% vs. PY

WACC of 12.5%

Perpetuity Rate of 3%

Free Cash Flow as a % to Sales of 15%

Cash of $2.4 Million from Q3 2006 Long-Term Debt of 2.1 Million

Increased asset value of vineyard land from $769K to $3.8 Million for real estate appreciation of 180 acres for property owned.

Here is the sensitivity chart on annual increase per year vs. the FCF% to NTS:

Disclosure: Author does not own any shares of WVVI.

Comments

[safetymargin0]

I believe WVVI reported 8% increase in sales for last Q even though the new vinyard plantings have yet to mature. 2007 will be the first harvest of additional plantings of Pinot Gris & Riesling! More Pinot Noir will follow in 2008. I expect sales of 25 million in 2010 3x your calculated rate of sales growth! The Founder CEO & 13 % owner sold stock in 2006 due to a divorce!

[safetymargin0]

I believe WVVI reported a 8% increase in sales for 2nd Q 07 even though new plantings have yet to mature! 2007 Oct Harvest will be first harvest of additional plantings of Pinot Gris (Wine and Sprisits rating 93) & Riesling ! More Pinot Noir supply will follow in 2008! I expect that this expantion of vineyard plantings will produce sales of 25 million in 2010 3x your calculated rate The Founder CEO &13 %owner sold stock in 2006 due to a Divorce