The tired old joke in the wine industry is: how do you make a million dollars in the wine industry? You start with $10 million. It’s a notoriously difficult business fraught with complex issues involving farming, weather, distribution, complex regulation, retailing, consumer tastes and much more.
Although there has been a few publicly traded wineries over the years, most notably Willamette Valley Vineyards (NASDAQ:WVVI) with more than 25 years of history in the public markets, Duckhorn Portfolio (NASDAQ:NAPA) is the latest to enter the field.
Duckhorn produces luxury and ultra-luxury wine across a portfolio of winery brands, including Duckhorn Vineyards, Paraduxx, Goldeneye, Migration, Decoy, Canvasback, Calera, Kosta Browne, Greenwing and Postmark. The firm sells its wines direct-to-consumer as well as through a network of wine distribution companies on a global basis.
Duckhorn went public in March of this year through a traditional IPO as a liquidity event for private equity holders such as TSG Consumer Partners. The IPO raised about $300 million for the company, of which $100 million went to TSG.
Wine Consumption and Marketing
Average wine consumption by Americans has seen a decent increase in recent years. Between 2005 and 2018, per capita wine consumption in the U.S. rose by 27% from 2.32 gallons per person per year to 2.95 gallons. That pales in comparison to many European countries, though; while total American wine consumption is high, its per capita consumption is only the 22nd highest in the world.
The company employs a comprehensive omni-channel sales model which drives strong margins. According to Duckhorn’s registration statement:
“We sell our wines in our wholesale channel, to distributors and directly to retail accounts in California, and to consumers in our direct to consumer (“DTC”) channel, all of which leverage long-standing relationships developed over the past forty years. Our comprehensive sales force builds deep and impactful relationships with distributors and direct to retail accounts in our wholesale channel. In addition, our DTC channel leverages our multi-winery e-commerce website, and it features our award-winning subscription wine clubs and tasting rooms. Combined, our California direct to retail accounts business and DTC channel make up 39% of our net sales, delivering strong margins and greater connectivity with consumers and retailers alike.”
NAPA Stock Valuation and Growth
Duckhorn has had an average 5 year revenue growth rate of approximately 18% and 11 years of organic growth according to the company. In what I’m sure is just a coincidence, that correlates to 11 years of economic growth in general since the 2008 financial crisis.
Average EBITDA margins over the past 5 years have hovered around 40% and have grown $56.7 million from 2015 to 2020, representing an approximately 17% CAGR.
NAPA stock is being treated like a growth stock since going public. The earnings per share consensus for the fiscal year ending July 2022 is 50 cents, representing a forward price to earnings ratio of 41. The EV/EBITDA ratio (enterprise value over earnings before interest, taxes, depreciation and amortization) is also very elevated at approximately a 23 multiple. Free cash flow in the next several years should be in the $50-$60 million range. Post IPO the company does not have significant debt leverage issues.
The reopening of bars and winery tasting rooms in California should provide a much needed boost to earnings and margins next year. Another interesting note is that the company is mostly immune to near-term inflationary pressures as most of the product to be sold has already been bottled for several years.
Duckhorn appears to be a well-managed growth stock with plenty of opportunity ahead of it. However the wine business is notoriously cyclical and when the next recession hits, that long-term growth streak will come to a screeching halt.
Wait for a cheaper entry point before buying NAPA stock in order create a better margin of safety.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.