Tuesday, January 09, 2007

Williamette Valley Vineyard, Inc. (WVVI) rating a hold until more grapes can be found…..

My two main reasons for rating this microcap vineyard 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 & 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

Author disclosure: I currently do not own any shares of WVVI.

Company website link
Oregon vineyard website
Yahoo finance
SEC on-line 10-K and 10-Q reports


Anonymous said...

Hello Elias, Thanks for the quantitative analysis on WVVI. I agree that a reasonable valuation on WVVI is 5.90 a share. I wonder what it's private market value will be if WVVI is successful in establishing a large market share in Pinot Noir at the 24 retail Price level, & Pinot Gris at 15 price level...I think the Wine is simply the best available in Pinot available today at any price point .....What will Kobrand or another multinational be willing to pay to consolidate there position in Pinot sales in the US? Jim Bernau the founder may simply be and excellent manager and company leader. To recommend a hold with a cursory analysis seems a disservice to your readers . This is not a bond but a dynamic company with a common stock which continues to be dismissed by wall st . It's a pitty that your analysis did not rise above the level of mundane. Regards, Tom

ETStockideas said...

On my original "Hold" position, I consider myself a "value" investor. You can see this through my value scorecard metrics that I use to screen opportunities. Occasionally I will take a peak on the "growth" side of equities, but my valuation techniques have a hard time supporting the price levels.

Regarding taking the company private, I think WVVI is in a good position to make this happen. The CEO still owns 12% of the company.